UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
001-13836
(Commission File Number)
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
| Bermuda (Jurisdiction of Incorporation) | 98-0390500 (IRS Employer Identification No.) | |||
Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda (Address of registrant's principal executive office) | ||||
441-292-8674 (Registrant's telephone number) | ||||
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class Common Shares, Par Value | Name of each exchange on which registered New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ý Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of voting common shares held by nonaffiliatesnon-affiliates of the registrant was approximately $54,132,579,729 as of March 31, 2006.30, 2007 was approximately $61,353,813,918 or $24,060,223,857, as adjusted for the one for four reverse stock split and Separation described herein. The beneficial common share holdings of all executive officers and directors of the registrant as of October 2, 2006, have been deemed, solely for the purpose of the foregoing calculation, to be holdings of affiliates of the registrant.
The number of common shares outstanding as of December 6, 2006November 22, 2007 was 1,988,853,457.494,815,892.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with the registrant's 20072008 annual general meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
See pages 7887 to 8491 for the exhibit index.
| | | Page | ||
|---|---|---|---|---|
| Part I | ||||
Item 1. | Business | 1 | ||
Item 1A. | Risk Factors | |||
Item 1B. | Unresolved Staff Comments | |||
Item 2. | Properties | |||
Item 3. | Legal Proceedings | |||
Item 4. | Submission of Matters to a Vote of Security Holders | |||
Part II | ||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||
Item 6. | Selected Financial Data | |||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||
Item 8. | Financial Statements and Supplementary Data | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||
Item 9A. | Controls and Procedures | |||
Item 9B. | Other Information | |||
Part III | ||||
Item 10. | Directors, | |||
Item 11. | Executive Compensation | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||
Item 14. | Principal Accountant Fees and Services | |||
Part IV | ||||
Item 15. | Exhibits and Financial Statement Schedules | |||
Signatures | ||||
Index to Consolidated Financial Statements | ||||
i
Item 1. Business
General
Effective June 29, 2007, Tyco International Ltd. ("we,(hereinafter referred to as "we," "Tyco" or the "Company" or "Tyco") iscompleted the spin-offs of Covidien and Tyco Electronics, formerly our Healthcare and Electronics businesses, respectively, into separate, publicly traded companies (the "Separation") in the form of a diversified manufacturingdistribution to Tyco shareholders. The distribution was made on June 29, 2007, to Tyco shareholders of record on June 18, 2007, the record date. Each Tyco shareholder received 0.25 of a common share of each of Covidien and service company that, through its subsidiaries:
Tyco International Ltd., which is organized underElectronics for each Tyco common share held on the laws of Bermuda, was created asrecord date. As a result of the July 1997 acquisitiondistribution, the operations of Tyco International Ltd., a Massachusetts corporation,Tyco's former Healthcare and Electronics businesses are now classified as discontinued operations in all periods presented.
In connection with the Separation, we realigned our management and segment reporting structure. The segment data presented reflects the new segment structure. The Company reports financial and operating information in the following five segments, effective March 31, 2007:
We also provide general corporate services to our segments and these costs are reported as Corporate and Other.
References to the lawssegment data are to the Company's continuing operations. Prior period amounts have been reclassified to exclude the results of Bermuda, at which time ADT Limited changed its name to Tyco International Ltd.discontinued operations.
Net revenue by segment for 2007 is as follows ($ in billions):
| | Net Revenue | Percent of Total Net Revenue | Key Brands | ||||
|---|---|---|---|---|---|---|---|
| ADT Worldwide | $ | 7.6 | 41 | % | ADT, Sensormatic | ||
| Fire Protection Services | 3.5 | 19 | SimplexGrinnell, Wormald | ||||
| Flow Control | 3.8 | 20 | Keystone, Vanessa | ||||
| Safety Products | 1.8 | 9 | Scott, Ansul | ||||
| Electrical and Metal Products | 2.0 | 11 | Allied Tube & Conduit, AFC Cable | ||||
| Corporate and Other | 0.1 | — | |||||
| $ | 18.8 | 100 | % | ||||
Unless otherwise indicated, references in this Annual Report to 2007, 2006 2005 and 20042005 are to Tyco's fiscal year ended September 28, 2007, September 29, 2006 and September 30, 2005, and September 30, 2004, respectively.
StrategyCompetitive Strengths
As previously reportedWe believe that we have the following competitive strengths:
also believe that several of the industrial products and services (the "Proposed Separation"). After thorough reviews of strategic options with our Board of Directors,end markets in which Flow Control operates will achieve growth rates higher than the U.S. Gross Domestic Product. For example, we believe that this strategy is the best waywater market will continue to positiongrow globally due to both the increasing demand for potable water in emerging markets and the need to upgrade distribution infrastructures in mature markets. We also believe that the oil and gas and petrochemical industries will experience increasing investment levels.
Consummationmaintenance services, which generate predictable annual revenue in excess of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board$3.5 billion. In addition, we have a substantial amount of Directors, receipt of certain tax rulings, necessary opinions of counsel, the filingrepeatable revenue from ongoing service and effectiveness of registration statementsmaintenance activities in our Fire Protection Services business.
We are also focused on growing profitability within each of these companies so that each may be well positioned for long-term growth as independent businesses. Following the Proposed Separation, we expect that all three companies will be dividend-paying companies. As we prepare for the Proposed Separation, we remain committed to returning excess cash to shareholders and will complete the
remainder of the $2.0 billion share repurchase program that was approved by the Board of Directors in May 2006.
We are a high-quality, low-cost producer and provider in eachknowledge of the markets in which we serve.operate and have established relationships with our customers.
Strategy
Our goal is to build upon our position as a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. We promoteoperate in a number of highly fragmented markets where we believe we have a number one or two market position that translates into a relatively small market share. We believe we have opportunities to increase our leadership positionsmarket share and accelerate revenue growth by investing inexpanding our customer base and by generating new business from our existing businesses and developing new markets.customers. In addition, we believe we have opportunities to improve our margins. Our business strategy focusesincludes the following strategic priorities:
to identify customers that operate in limited geographic expansion.regions and that can benefit from services and products that we do not currently market in those regions. We have implementedexpect to increase the global penetration of our leading brands among our existing customers.
Over the past several years, the Company has engaged in a series of restructuring programs through which we have made our operations more efficient, including exiting certain non-core businesses or business lines and streamlining general operations.low-cost manufacturing regions. During 2006, we completed the sale of our Plastics and Adhesives segment and entered into a definitive agreement to sell the Printed Circuit Group ("PCG") business, a business of the Electronics segment. As such, the operations of the Plastics and Adhesives segment and PCG are reflected as discontinued operations in the Consolidated Financial Statements.
To further improve operating efficiency, during the first quarter of 2007, we have launched a restructuring program across all segments, including the corporate organization, which will streamline some of the businesses and reduce our operational footprint. We expect to incur charges of approximately $600 million over the next two years, of which $500 million is expected to be incurred in 2007. We expect that the total cash expenditures for this program will be approximately $450 million, of which $250 million is expected in 2007. We believe this restructuring program will strengthen our competitive position over the long term.
In addition, we will continue to evaluate our existing operations on a regular basis in order to identify and potentially dispose of businesses or product lines that we conclude do not meet either our long-term return criteria or our strategic direction. For example, in July 2007, the Board of Directors approved the divestiture of Infrastructure Services, which was previously reported as part of Corporate and Other. As a result, Infrastructure Services is reflected as discontinued operations in all periods presented.
History and Development
Tyco International Ltd.
Tyco International Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda, and its telephone number at that address is (441) 292-8674. Its management office in the United States is located at 9 Roszel Road, Princeton, New Jersey 08540. Tyco is the public company resulting from the business combination on July 2, 1997 of Tyco International Ltd., a Massachusetts corporation, and ADT Limited, a Bermuda company. Effective June 29, 2007, Tyco completed the spin-offs of Covidien and Tyco Electronics, formerly our Healthcare and Electronics businesses, respectively, into separate, publicly traded companies in the form of a distribution to Tyco shareholders.
Segments
See Note 2321 to the Consolidated Financial Statements for certain segment and geographic financial data relating to our business.
I. ElectronicsADT Worldwide
Tyco isOur ADT Worldwide segment designs, sells, installs, services and monitors electronic security systems to residential, commercial, industrial and governmental customers around the world. We are one of the world's leading supplierlargest providers of passive electronic components.security systems and services. We have a significant market presence in North and South America, Europe and the Asia-Pacific region. With 20062007 net revenue of $12.7$7.6 billion, our Electronics businesses comprise 31%ADT Worldwide segment comprises 41% of our consolidated net revenue. In 20052006 and 2004,2005, net revenue totaled $11.8$7.2 billion or 30%42% of our consolidated net revenue and $11.4$7.1 billion or 30%43% of our consolidated net revenue, respectively. The group's products and services include:
Tyco Electronics consists of four business units: Electronic Components, Wireless, Power Systems and Submarine Telecommunications.
With the exception of Submarine Telecommunications, these businesses design, manufacture and market a broad range of electronic, electrical and electro-optic passive and active devices and a number of interconnection systems and connector-intensive assemblies, as well as wireless products including radar sensors, global positioning satellite systems components, private radio systems, silicon and gallium arsenide semiconductors and microwave sub-systems. These products have potential uses wherever an electronic, electrical, computer or telecommunications system is involved. Products are sold under the
AMP, AGASTAT, AXICOM, AUGAT, CRITCHLEY, DULMISON, ELO-TOUCH SYSTEMS, M/A-COM, RAYCHEM and TYCO ELECTRONICS trade names, among others.Strategy
SalesWe intend to expand our commercial customer base by focusing our sales and marketing are done via directefforts on key vertical markets such as retailer, banking, governmental, educational, oil and gas and transportation. By adopting a vertical market-focused approach, we believe we can effectively target those market segments where ADT Worldwide can differentiate its core capabilities and customize security solutions specific to its customers' needs. We intend to increase the number of commercial and residential customers by more effectively generating leads and by driving productivity in our sales force through improved incentives and distributorsperformance management systems. We also plan to customers including original equipment manufacturersincrease our customer base by acquiring additional accounts from our network of authorized dealers. Further, we expect to continue improving our customer account attrition rates through enhanced retention and their subcontractors, utilities, government agencies, value-added resellers and those who install, maintain and repair equipment. In 2006, the group's direct sales represented 85% of net revenue while the remaining net revenue was via distributors. Their customers are foundre-sale programs, albeit at a more moderate rate than in the automotive, communications equipment manufacturing, telecommunications service, computer, aerospace, military, household appliance, industrial machinery and equipment, instrumentation, consumer electronics, energy and networking industries. In total, these businesses serve over 250,000 customers locatedpast few years.
ADT Worldwide operates in over 150 countries and maintain a strong local presence in the geographic areas in which they operate,many regions including the Americas,North America, Europe, Middle East, Africa, Asia, Australia and Latin America. Operating performance can vary region to region for a number of reasons, including the Asia-Pacific region.mix of revenues between residential and commercial customers as well as the mix of higher-margin contractual revenue vs. lower-margin product installation revenue. We have identified certain strategic actions that we are executing to improve our operating performance in certain regions that are currently underperforming. These actions include consolidating certain administrative functions and executing field productivity initiatives, particularly in Europe.
Tyco Submarine Telecommunications is a leading provider of services for undersea fiber optic networks. Tyco Submarine Telecommunications' productsWe will pursue opportunities in attractive emerging markets where we believe we can leverage the skills and services include designing, manufacturingtechnologies that we have developed in the markets we currently serve. We will complement these initiatives by continuing to work with our Safety Products segment to develop new technologies and installing undersea cable communications systemsexplore potential partnerships and servicingacquisition opportunities that will allow ADT Worldwide to strengthen its service offerings, enhance its market positions or expand into higher-growth, adjacent markets.
Services and maintaining major undersea cable networks.
Tyco Electronics operates in highly competitive markets. The competition experienced across product lines from other companies ranges in size from large, diversified manufacturers to small, highly specialized manufacturers. Competition is on the basis of breadth of product offering, product innovation, price, quality and service.
II. Fire and SecurityProducts
Tyco isADT Worldwide supplies and installs electronic security systems to the world's leading providerresidential, commercial, industrial and governmental markets. A significant portion of boththe mechanical components used in our electronic security systems are manufactured by our Safety Products segment. We also provide electronic security services, and fire protection contracting and services. With 2006 net revenue of $11.7 billion, our Fire and Security businesses comprise 28% of our consolidated net revenue. In 2005 and 2004, net revenue totaled $11.5 billion or 29% of our consolidated net revenue and $11.5 billion or 30% of our consolidated net revenue, respectively. The group's principal products and services include:
Tyco Fire and Security consists of two business units: Worldwide Electronic Security Services and Worldwide Fire Protection Contracting and Services.
Worldwide Electronic Security Services
We are the world's leading provider of electronic security services, which includes theincluding monitoring of burglar alarms, fire alarms medical alert systems, and other activities where around-the-clock monitoring and response are required. We offer regular inspection and maintenance services to ensure that systems will function properly and can be upgraded as technology or risk profiles change. We are also a leading supplier of electronic security product solutions to the retail, commercial and government markets, offering anti-theft, video surveillance, access control, electronic asset protection and security management systems, products and services. These and other security services are provided principally through our ADT operating companies.
Electronically monitored security systems are tailored to our customers' specific needs and involve the installation of devices designed for intrusion detection and access control,life safety conditions as well as reactionmaintaining electronic security systems.
Our electronic security systems business involves the installation and use of security systems designed to various occurrences or conditions, such asdetect intrusion, control access and react to movement, fire, smoke, flooding, environmental conditions, industrial processes and other hazards. These electronic security systems comprise detection devices that are connected to microprocessor-based
control panels, which communicate to one of oura monitoring centers (located remotely from the customer's premises) wherecenter that receives and records alarm and supervisory signals are received and recorded. Insignals. For most systems, control panels can identify the nature of the alarm and the areas withinwhere a building where the sensor was activated. Depending upon the type of servicetriggered. Our electronic security systems include: access control systems for which the subscriber has contracted, monitoring center personnel respond to alarms by relaying appropriate information to the local fire or police departments, notifying the customer or taking other appropriate action,sensitive areas such as dispatchingoffices or banks; video surveillance systems, designed to deter theft and fraud and help protect employees and customers; and asset protection and security management systems, designed to monitor and protect physical assets as well as proprietary electronic data. Our electronic security systems also include anti-theft systems utilizing labels and tags in the customer's premises. In some instances,retail industry. Many of the customer may monitor the system at its own premises or the system may be connectedworld's leading retailers use our Sensormatic anti-theft systems to local fire or police departments.protect against shoplifting and employee theft.
Whether systems are monitored by the customer at its premises or connected to onePurchasers of our intrusion security systems typically contract for ongoing security system monitoring centers, we usually provide support and maintenance through service contracts.at the time of initial equipment installation. Systems installed at customers' premises may be owned by us or by our customers.
We market our electronic security services Monitoring center personnel may respond to commercial and residential customers through both a direct sales force and an authorized dealer network. A separate national accounts sales force services large commercial customers. We also utilize advertising,alarms by relaying appropriate information to local fire or police departments, notifying the Internet and direct mailcustomer or taking other appropriate action. In some instances, alarm systems may be connected directly to market our services.
We provide residential and commercial electronic security services primarily in North America, Latin America, Europe, South Africa and the Asia-Pacific region. Our commercial customers include financial institutions, industrial and commercial businesses, federal, state and local governments, retailers, and health care and educational facilities.fire or police departments.
Our customers often are often prompted to purchase security systems by their insurance carriers, which may offer lower insurance premium rates if a security system is installed or require that a system be installed as a condition toof coverage. Some municipalities are requiring verification as a prerequisite for police response to intrusion alarms. It has been our experience that the majority of commercial and residential monitoring contracts are renewed after their initial terms. In general, relocations account for the largest number of residential discontinuances while business closures comprise the largest single factor impacting commercial contract attrition.
Customers
We are alsoADT Worldwide sells to residential, commercial, industrial and governmental customers. Our residential customers typically include owners of single-family homes or multi-family apartment complexes. Our commercial customers include among others retail businesses, financial institutions, commercial/industrial facilities and health care facilities. Our governmental customers include federal, state and local governments, defense installations, schools and mass transportation providers. In addition to advertising, direct mailings and the leader in anti-theft systems. The majority of the world's leading retailers useinternet, we market our systems to protect against shoplifting and employee theft. We manufacture these SENSORMATIC electronic article surveillancesecurity systems and generally sell themservices to these customers through oura direct sales force in North and, South America, Europewith respect to certain residential customers, through an authorized dealer network. A separate sales force services large commercial and the Asia-Pacific region. A growing trend in the loss protection industry is for security labels to be applied to goods at the point of manufacture. In most cases, we sell these labels directly to the manufacturers or their packaging agents.governmental customers and focuses on key vertical markets such as retailer and banking.
We also develop and distribute a full line of access control and video surveillance systems, which are sold through direct and distributor/integrator channels. These products range from access control systems designed for small businesses to integrated solutions used by some of the world's largest global enterprises.
We manufacture certain alarm, detection and activation devices and central monitoring station equipment both for installation by us and for sale to other installers. We also outsource some of the electronic components we install.Competition
The electronic security services business in North America is highly competitive and fragmented with a number of major firms and some 10,000thousands of smaller regional and local companies. Similarly, Tyco competes with several national companiesCompetition is based primarily on price in relation to quality of service. Rather than compete purely on price, we emphasize the quality of our electronic security service, the reputation of our brands and several thousand regional and local companies in Europe, Asia-Pacific, Latin America and South Africa.our knowledge of our customers' security needs.
Worldwide Fire Protection ContractingServices
Our Fire Protection Services segment designs, sells, installs and services fire detection and fire suppression systems. We believe we are one of the largest providers of these systems and services, with 2007 net revenue of $3.5 billion. Our Fire Protection Services segment comprises 19% of our consolidated net revenue. In 2006 and 2005, net revenue totaled $3.3 billion and $3.2 billion, respectively, which represents 19% of our consolidated net revenue in both years.
Strategy
We intend to grow our customer base and deepen our market penetration by focusing our sales and marketing efforts across global accounts and along key vertical markets, such as healthcare, governmental, educational, lodging, manufacturing and commercial/industrial. By combining this vertical market approach with increased focus on the delivery and responsiveness of our service offerings, we believe we can differentiate our offerings to better serve our customers' needs. We also plan to aggressively pursue recurring revenue opportunities with existing customers. We intend to expand our product offerings in high-growth, emerging markets where we believe we can capitalize on the skills and technologies that we have developed in our existing markets. By working closely with our Safety Products segment, we intend to develop offerings that address key technologies driving customer demand, such as mass notification, as well as new business generated from changes and expansions in fire and life-safety codes and standards. We will continue to promote operational excellence by standardizing internal processes across business units and consolidating back office capabilities.
Services and Products
We design, fabricate,sell, install and service automatic fire sprinkler systems, fire alarm and fire detection systems, automatic fire sprinkler systems and special hazard suppression systems in buildings, industrial plants and off-shore installations, as well as respiratory systems and other life-saving devices. Tyco's fire protection businesses utilize a
worldwide network of sales offices, operating globallysystems. Fire Protection Services operates under various leading trade names, including SIMPLEXGRINNELL, WORMALD, DONG BANG, ANSUL, SCOTT, SABRESimplexGrinnell, Wormald, Mather & Platt, Total Walther, Dong Bang, Zettler and TYCO.
We installTyco. A significant portion of the mechanical components used in our fire protection systems in both new and existing buildings. Our fire protectiondetection systems are purchasedmanufactured by owners, construction engineers and mechanical or general contractors. In recent years, the retrofitting of existing buildings has grown asour Safety Products segment.
We offer a result of legislation mandating the installationwide range of fire protectionalarm and fire detection systems. These alarm and detection systems especially in hotels, healthcare facilities, educational establishmentsinclude fire alarm control panels, advanced fire alarm monitoring systems, smoke, heat and other buildings accessible to the general public.carbon monoxide detectors, voice evacuation systems and emergency lighting systems. We continue to focus on system maintenance and inspection, which have become more significant partsalso offer a wide range of our business.
The majority of the fire suppression systems, installed by Tycothe majority which are water-based. However,water-based sprinkler systems. In addition, we are also the world's leading provider ofprovide custom designed special hazard fire protectionsuppression systems, which incorporate specialized extinguishing agents such as foams, dry chemicals and gases, in addition to spill control products designed to absorb, neutralize and solidify spills of hazardous materials. These systems are often especially suited to fire protectionsuppression in certain manufacturing, power generation, petrochemical, offshore oil exploration, transportation, data processing, telecommunications, commercial food preparation, mining and marine applications.
We manufactureinstall fire detection and distribute SCOTTfire suppression systems in both new and SABRE breathingexisting buildings. These systems for usetypically are purchased by firefightersowners, construction engineers and other first respondersmechanical or general contractors. In recent years, retrofitting of existing buildings has grown as a result of legislation mandating the installation of fire detection and for industrial applications. Military forces from various countries usefire suppression systems, especially in hotels, healthcare facilities and educational establishments. We continue to focus on system maintenance and inspection, which have become increasingly significant parts of our breathing apparatusbusiness.
Customers
Fire Protection Services' customers include commercial enterprises, governmental entities, airports, commercial shipping companies, fire departments, transportation systems, owners of petrochemical facilities and more than one million U.S. firefighters rely onhomeowners. We market our SCOTT AIR-PAK brandfire detection and fire suppression systems to the majority of self-contained breathing apparatus. SCOTT and SABRE products are sold globallythese customers through a network of distributors and are subject to government funding availability. SCOTT is considered the world leader in respiratory protection innovation for first responders.direct sales force.
In Asia and Europe, Tyco designs, installs and maintains integrated systems which monitor and manage urban traffic control systems, as well as lighting, ventilation, fire detection, surveillance and traffic control for bridges, tunnels, railways and mines.
A significant portion of the mechanical components (and, in North America, a high proportion of the pipe) used in our fire protection systems are purchased from Tyco Engineered Products and Services. We use computer-aided-design technology that reduces the time required to design systems for specific applications and coordinates the fabrication and delivery of system components.Competition
Competition in the fire protection contractingdetection and fire suppression business varies by region. In North America, Tyco competeswe compete with thousandshundreds of smaller contractors on a regional or local basis for the installation of fire protection, alarmdetection and detectionfire suppression systems. In Europe, Tyco competeswe compete with many regional or local contractors on a country-by-country basis. In Asia, Australia and New Zealand, and Asia, we compete with a few large fire protectiondetection and fire suppression contractors, as well as with many smaller regional orand local companies. Tyco competesWe compete for fire protectiondetection and fire suppression systems contracts primarily on the basis of price, service and quality.
III. HealthcareFlow Control
TycoOur Flow Control segment designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for the water and wastewater markets, the oil, gas and other energy markets along with general process industries. The global flow control market is highly fragmented, consisting of many local and regional companies and a few global leadercompetitors. We believe we are the world's leading manufacturer of flow control products. We believe our market share in the medical products industry.global water, process, and energy-related markets is approximately 5%. With 2006, 2005 and 20042007 net revenue of $9.6$3.8 billion, $9.5our Flow Control segment comprises 20% of our consolidated net revenue. In 2006 and 2005, net revenue totaled $3.1 billion and $9.1 billion, respectively, our Healthcare businesses comprised 24%or 18% of our consolidated net revenue in each year. The group's products include:
Tyco Healthcare consists of three business units: Medical Devices & Supplies, Pharmaceuticals and Retail.
Medical Devices & Supplies
Medical Devices & Supplies consists of five primary divisions: Medical, Surgical, Respiratory, Imaging and International.
Medical
The Medical Division manufactures and markets a broad range of wound care products, needles and syringes, sharps disposables, vascular therapy products, electrodes, operating room kits and trays, urological care products, enteral feeding products, incontinence care products, and nursing care products. These products are marketed via a combination of direct sales representatives and third-party distributors to hospitals, surgi-centers, alternate care facilities and homes worldwide.
The Medical Division consists of many market-leading brands such as KERLIX and CURITY wound care dressings, WINGS adult incontinence products, SCD compression devices, T.E.D. anti-embolism stockings, MONOJECT MAGELLAN safety needles and syringes, KANGAROO enteral feedings systems, DEVON O.R. surgical kits, and MEDI-TRACE diagnostic and monitoring electrodes.
Surgical
The Surgical Division develops, manufactures and markets a broad spectrum of widely recognized surgical products that are used around the world in operating rooms, emergency rooms, surgi-centers and physician offices.
U.S. Surgical is a market leader in innovative wound closure products and advanced surgical devices. Its Auto Suture business offers a complete line of surgical devices and laparoscopic instruments for general and specialty procedures. The SYNETURE business is the evolution of U.S. Surgical/Davis & Geck from a product-driven suture organization to one focused on clinical solutions for wound closure with advanced suture and biosurgery therapies. Valleylab is a leading manufacturer and marketer of a wide array of electro-surgical, ultrasonic and radiation ablation devices. Among its leading brand names are VALLEYLAB, the FORCE FX electro-surgical generator, the LIGASURE vessel occlusion system and the COOL-TIP RF (radio frequency) system.
Respiratory
The Respiratory Division develops, manufactures and markets an extensive line of products and services that monitor oxygen saturation levels in the blood (pulse oximetry), help facilitate and monitor anesthesia, diagnose and treat respiratory disease, and provide life support for critically ill patients. These products are sold around the world under the NELLCOR and PURITAN BENNETT brands and are used in the hospital and the home.
NELLCOR continues to drive advancements in pulse oximetry technology with the introduction of the OXIMAX pulse oximetry system. For critically ill patients or for those undergoing surgery, the MALLINCKRODT endotracheal and SHILEY tracheostomy tubes are industry leaders. PURITAN BENNETT is known around the world for its critical care ventilators and the HELIOS portable liquid oxygen system for respiratory impaired patients.
Imaging
The Imaging Division is devoted to improving the diagnostic sciences of X-ray, magnetic resonance imaging (MRI) and nuclear medicine. By developing, manufacturing, and marketing contrast agents, radiopharmaceuticals and delivery systems, Mallinckrodt Imaging helps enhance the utility and quality of images obtained via these procedures. Mallinckrodt's Imaging Division partners with radiologists, cardiologists and nuclear medicine physicians to improve the quality of diagnosis in multiple disease states through well known branded diagnostic pharmaceuticals, including OPTIRAY X-ray contrast media, OPTIMARK MRI contrast media, thallium, technetium, TECHNESCAN MAG3 radiopharmaceutical and NeutroSpec. The MALLINCKRODT family of imaging products is sold into hospitals, radiopharmacies and alternate site imaging centers throughout the world.
International
The International Division is responsible for the marketing, distribution and export of all Tyco Healthcare Group products (excluding Pharmaceuticals and Retail products) outside of the United States. The International Division markets directly to hospitals and medical professionals, as well as through independent distributors with a worldwide presence. Although the mix of product lines offered varies from country to country, its operations are organized primarily into four geographic regions: Europe/Middle East/Africa, Japan, the Asia-Pacific region and Latin America.
Pharmaceuticals
The Mallinckrodt Pharmaceutical Division is comprised of three businesses—Bulk Pharmaceuticals (active pharmaceutical ingredients), Dosage Pharmaceuticals and Specialty Chemicals. The Bulk Pharmaceuticals business is the largest producer of both medicinal narcotics and acetaminophen worldwide. Ninety-five percent of these products are used within the pharmaceutical industry to manufacture dosage form drugs. The Dosage Pharmaceuticals business has four distinct divisions: generic narcotic pharmaceuticals, branded central nervous systems products, addiction treatment products and contract pharmaceutical manufacturing for third parties. These products are sold to major wholesalers and drug store chains primarily in the United States. The Specialty Chemicals business includes a wide array of specialty chemicals targeted at research and development and analytical laboratories; process materials used to manufacture biopharmaceuticals; and specialty chemicals used to manufacture semiconductor chips, many of which are sold under the J.T. BAKER name in the United States.
Retail
The Retail Division is the industry leader for retail brand adult incontinent care, infant care and feminine hygiene products within continental North America. This division develops, manufactures and markets a wide variety of retail brand products for the North American retail markets supplying a broad majority of retail mass merchandisers, food stores and drug stores. Through our "first-to-market" approach, the Retail Division helps retailers such as Wal-Mart, Target, Kroger, Albertson's, CVS, Loblaw, Dollar General and Family Dollar manage their categories and build their own store brand presence with the high-quality products consumers demand.
Tyco Healthcare's competitors include Johnson & Johnson, Becton Dickinson and C.R. Bard, among others, and competition is based on breadth of product offerings, quality of product, service and price.
IV. Engineered Products and Services
Tyco is the world's leading manufacturer of industrial valves and controls. With 2006 net revenue of $7.0 billion, our Engineered Products and Services businesses comprise 17% of our consolidated net
revenue. In 2005 and 2004, net revenue totaled $6.5$2.8 billion or 17% of our consolidated net revenue, respectively.
Strategy
We intend to further align with our customers' needs by focusing our sales and $6.0 billion or 16% of our consolidated net revenue, respectively. The group's products and services include:
continuing to invest in our service and repair capabilities, we expect to capitalize on strong industry demand for parts and after-market services in our recurring revenue business. We intend to leverage the breadth of our product portfolio and our geographic capabilities to enhance our ability to meet customer requirements for global projects. We intend to capitalize on growth opportunities in key emerging markets by accelerating our investment in sales and marketing. We also intend to focus on improving profitability through the optimization of our manufacturing footprint and product offerings.
Services and Products
Flow Control designs and manufactures a wide variety of valves, actuators, controls, pipes, fittings and heat tracing products. Valve products solutions;
Tyco Engineered Products and Services is comprised of three business units:market, Flow Control and Fire & Building Products, Electrical & Metal Products and Infrastructure Services.
Flow Control and Fire & Building Products
Flow Control
Tyco Flow Control manufactures both standard and highly specialized valves inoffers a wide variety of configurations, body types, materials, pressure ratingspipes, valves, hydrants, house connections and sizes. Itfittings for water transmission and distribution applications. Flow Control is also manufactures related equipment, instrumentation and products such as valve actuators, gauges, positioners, valve control systems and vapor control products, as well as a full lineglobal provider of thermal heat tracing services and products. In addition to these core products, Flow Control makes a variety of specialty heatersproducts for environmental (emissions monitoring, water flow and relatedquality monitoring, dust filter cleaning systems), instrumentation (manifolds, enclosures, isolation valves) and other applications. We manufacture these products and turnkey installation services. These products are manufactured in Tyco Flow Control's facilities located in North America, Europe, South America andthroughout the Asia-Pacific region. Tycoworld.
Flow Control'sControl products are used in variousmany applications including power generation, chemical, petrochemical, oil and gas, water distribution, wastewater, pulp and paper, commercial irrigation, mining, food and beverage, plumbing and other industrial process applications. TycoHVAC. Flow Control also provides engineering, design, inspection, maintenance repair and commissioningrepair services for flow control and heat tracing applications.
Tyco'sits valves and related products.
Flow Control products are sold under many trade names, including among others, KEYSTONE, GRINNELL, VANESSA, CROSBY, ANDERSON GREENWOOD, TYCO THERMAL CONTROLSAnderson Greenwood, Biffi, Crosby, Keystone, KTM, Raychem, Sempell, Tracer and TRACER. TycoVanessa. Flow Control sells valvesits services and related products in most geographic areasregions directly through its internal sales force and in some geographic areascases through a network of independent distributors and manufacturers' representatives.
Customers
Flow Control's customers include businesses engaged in a wide range of industries, including power generation, oil production and refining, chemical and petrochemical, pharmaceutical, food and beverage, gas, water, marine and shipbuilding and related process industries. Customers include end users as well as engineering, procurement and construction companies, contractors, OEMs and distributors. Flow Control operates an extensive network of sales, service and distribution centers to serve our wide range of global customers. Flow Control is a global company with 40% of sales in Europe and the Middle East, 25% from the Americas, 22% from the Pacific region and 13% from Asia.
Competition
The valveflow control industry is highly fragmented and wefragmented. We compete against a number of international, national and local manufacturers of industrial valves as well as against specialized manufacturers on the basis of price, delivery,product capability, product quality, breadth of product line, delivery and specialized product capability.price. Our major competitors vary by region.
Safety Products
Safety Products designs, manufactures and sells fire protection, security and life safety products, including fire suppression products, breathing apparatus, intrusion security, access control and video management systems. In addition, Safety Products manufactures products installed and serviced by
ADT Worldwide and Fire Protection Services. We are a major provider of safety products, including fire suppression, breathing apparatus, video and access control and intrusion security products. With 2007 net revenue of $1.8 billion, our Safety Products segment comprises 9% of our consolidated net revenue. In both 2006 and 2005, net revenue totaled $1.7 billion or 10% of our consolidated net revenue.
Fire & BuildingStrategy
We intend to accelerate our revenue growth by implementing the following strategies: leveraging our product development pipeline, which features enhancements and newer technologies in Internet Protocol, integrated access control, intrusion solutions and new fire suppression technologies; expanding our presence in emerging markets, such as China, Eastern Europe and India; and pursuing strategic partnerships and acquisitions in key product areas. We intend to improve our recurring revenue stream by further integrating our product portfolio with logical security systems and communications services, as well as by enhancing the inter-operability of our intrusion security, access control, video systems and fire detection products. We plan to improve our profitability by continuing to move our manufacturing footprint to low-cost countries and by driving operational excellence and strategic sourcing initiatives.
Services and Products
Tyco Fire & Building Products manufacturesWe manufacture fire suppression products, including water sprinkler systems, portable fire extinguishers, commercial suppression systems for special hazards including: gas, powder and sellsfoam agents, forestry and hose products used to fight wildfires, and fire-fighting foam and related delivery devices. We manufacture self-contained breathing apparatus designed for firefighter, industrial and military use, supplied air respirators, air-purifying respirators, thermal imaging cameras, gas detection equipment and gas masks. Our breathing apparatus are used by the military forces of several countries and many U.S. firefighters rely on our Scott Air-Pak brand of self-contained breathing apparatus.
We design and manufacture integrated video surveillance and access control systems to enable businesses to manage their security and enhance business performance. Our global access control solutions include: integrated security management systems for enterprise applications, access control solutions for mid-size applications, alarm management panels, door controllers, readers, keypads and cards. Our global video system solutions include: digital video management systems, matrix switchers and controllers, digital multiplexers, programmable cameras, monitors and liquid crystal displays. Our intrusion security products provide advanced security products for homes and businesses ranging from burglar alarms to a wide varietyfull range of security systems including alarm control panels, keypads, sensors and central station receiving equipment used in security monitoring centers.
We also manufacture a number of products tofor Fire Protection Services and ADT Worldwide for incorporation into their electronic security systems and fire protection contractorsdetection and fabricators of fire protectionsuppression systems. These products include a complete linewide range of our fire detection and fire suppression products, security video and access control products, electronic article surveillance and intrusion products.
Customers
Safety Products sells its products primarily through indirect distribution channels around the world. These business partners sell to customers including contractors that install fire suppression, security and theft protection systems. Some of our partners are integrators and install the products themselves; others act as dealers and sell to smaller fire and security contractors. Our end customers for our breathing apparatus include fire departments, municipal and state governments and military forces. Customers for our fire sprinkler devices, specialty valves, plastic pipeproducts include distributors, commercial builders and pipe fittingscontractors. Residential builders, contractors and ductile iron pipe couplings. Tyco Fire & Building Products manufactures thesedevelopers are emerging customers for our sprinkler products in the United States, United Kingdom, Germany, China and Malaysia and sells them under the TYCO, GEM, STAR, CENTRAL, GRINNELL and CENTRAL SPRAYSAFE brand names. In North America, a complete line of steel sprinkler pipe is manufactured by Tyco Electrical & Metal Products (Allied Tube & Conduit), thus enabling Tyco to offer a complete line of fire protection systems and services. Tyco Fire & Buildinggiven changing regulatory dynamics.
Our Safety Products also producesbusinesses utilize a complete lineworldwide network of specialty fastening products for the building industry that are manufactured in the United Kingdomsales offices and operate globally under thevarious trade names, of LINDAPTERincluding Scott, Ansul, Grinnell, SoftwareHouse, American Dynamics, DSC and ANCON and metal framing and support products that are manufactured in the United Kingdom and Germany.Bentel.
Tyco Fire & Building Products sells fire protection products in North America, Central America, South America and the Asia-Pacific region through a network of company-owned distribution facilities as well as through independent distributors. In Europe and the Middle East, we operate a number of company-owned distribution facilities which stock and sell a full line of fire protection, mechanical and building products.Competition
Competition for the manufacture and sale of fireour products is based on price, delivery,specialized product capacity, breadth of product line, price, training and specialized product capability.support and delivery. The principal competitors are specialty products manufacturing companies based in the United States, with other smaller competitors in Europe and Asia.
Electrical &and Metal Products
TycoOur Electrical &and Metal Products segment designs, manufactures and sells galvanized steel tubing and relatedpipe products, in North Americaas well as cable products, including pre-wired electrical cables, and Brazil. Its products include steel electrical conduit, pre-wired armored cable, flexible electrical conduit,support and metal framing systems, cable tray and cable ladder and related products utilized in the construction, industrial and original equipment markets.systems. In North America, theour Allied Tube & Conduit ("Allied") business is thea leading manufacturer of electrical steel electrical conduit, and our AFC Cable Systems division is thea leading manufacturer of steel and aluminum pre-wired armoredelectrical cable. Electrical and Metal Products also manufactures and sells steel tubes, tiles, plates and other specialty formed steel products in Brazil. With 2007 net revenue of $2.0 billion, our Electrical and Metal Products segment comprises 11% of our consolidated net revenue. In 2006 and 2005, net revenue totaled $1.9 billion and $1.8 billion, respectively, which represents 11% of our consolidated net revenue in both years.
The Georgia Pipe business manufactures plastic conduit. Allied manufacturesmarket prices of key raw materials such as steel and copper have a significant impact on the segment's operating results. The segment's operating margins are significantly affected by steel and copper spreads which are the difference between what the company paid for these raw materials and the selling price charged to customers for the range of products manufactured from these raw materials.
Strategy
We intend to maintain our market position in key end markets by continuing to take advantage of our low-cost manufacturing base, technical leadership and brand recognition. We also plan to increase our product offerings to address opportunities in specific industries, such as comprehensive metal framing and support systems and electrical cable tray and cable ladders in North America and sells them undersolutions for the POWERSTRUT, UNISTRUT and T.J. COPE trade names.non-residential construction industry. In addition, Allied manufactures and distributes welded steelour tubular products business, we intend to diversify into new OEM markets and offer complementary products in North America. In Brazil,our existing markets.
Services and Products
Electrical and Metal Products designs and manufactures galvanized steel tubing and pipe products that include electrical conduit, fire sprinkler pipe, light gauge steel tube, is manufacturedfence pipe and automotive tubular components. These steel tube and pipe products are sold under the brand names Allied Tube & Conduit, Century Tube and Tectron Tube.
We also design and manufacture cable products including pre-wired armored and metal-clad electrical cable as well as flexible and non-metallic conduit. These cable products are sold under the brand names AFC Cable Systems, Eastern Wire and Kaf-Tech. In addition, we manufacture various electrical support system products including strut channel and cable tray systems and associated fittings, sold under the brand names Unistrut and TJ Cope.
Customers
The majority of the products manufactured by Electrical and Metal Products are used by trade namescontractors in the construction and modernization of FREFERnon-residential structures such as commercial office buildings, institutional facilities, manufacturing plants and DINACO. These businesses servewarehouses, shopping centers and multi-family dwellings. Nearly 90% of these products are sold through wholesale distribution to trade contractors; the remaining 10% of sales are sold to smaller contractors and homeowners through home improvement retailers.
The other major customer segment, representing approximately 25% of revenue, is the OEM market. Steel tubing supplied by Electrical and Metal Products is ultimately used as a wide spectrumcomponent for OEM products in automotive, commercial or industrial end markets. Steel tubular products are sold direct to OEMs or, in the case of customersautomotive components, to suppliers.
Competition
The market for electrical conduit and applications ranging from automotive,wiring and supports, fire protection and security products and safety containment, recreational equipment, commercial construction and traffic control systems. Electrical & Metal Products competes with multiple national and international competitors on the basis of price, availability and breadth of product line.
Infrastructure Services
Tyco Infrastructure Services providessteel tubing includes a broad range of environmental, consultingcompetitors. Our principal competitors range from national manufacturers to smaller regional players. Our customers purchase from us because of the quality and engineering services through its EARTH TECH business. Earth Tech's principal services consistbreadth of a full-spectrum of water, wastewater, environmental and hazardous waste management services. Earth Tech also provides infrastructure and transportation design and construction services for institutional, civic, commercial and industrial clients; design, construction management, project financing and facility operating services for water and wastewater treatment facilities for municipal and industrial clients; and transportation engineering and consulting. Earth Tech operates through a network of offices in North America, Europe, South Americaour product line and the Asia-Pacific region. Earth Tech competes with a numberavailability of international, national, regionalour products.
Foreign suppliers, especially those in China, Turkey and local companies onIndia, also aggressively pursue the basis of pricesprinkler pipe and the breadth and quality of services.fence pipe market through their standard pipe offerings.
Backlog
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for information relating to our backlog.
Intellectual Property
Patents and other proprietary rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including patents and patent applications, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and monitor the intellectual property claims of others.
We own a portfolio of patents that principally relates to: electronic security systems; fire detection systems; suppression systems; fire extinguishers and related products; integrated systems for surveillance and control of public transportation and other public works; fire protection sprinklers and related systems and products; structural and electrical tubing and conduit; building structural members, panels and related fixtures; concrete reinforcing products; fire-rated and armored electrical cabling; heat tracing and floor heating systems; security wire and fencing; and flow control products, including valves, actuators and controllers and airflow control and sensing products. We also own a portfolio of trademarks and are a licensee of various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks.
While we consider our patents and trademarks to be valuable assets, we do not believe that our overall competitive position is dependent on patent or trademark protection or that our overall operations are dependent upon any single patent or group of related patents.
Research and Development
Tyco-sponsoredWe are engaged in research and development in an effort to introduce new products, to enhance the effectiveness, ease of use, safety and reliability of our existing products and to expand the applications for which the uses of our products are appropriate. We continually evaluate developing technologies in areas that we believe will enhance our business for possible investment or acquisition. Our research and development expense by segment for the years ended September 29,was $121 million in 2007, $112 million in 2006, September 30, 2005 and September 30, 2004 is as follows ($$113 million in millions):
| | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Electronics | $ | 504 | $ | 454 | $ | 441 | |||
| Healthcare | 263 | 232 | 209 | ||||||
| Fire and Security | 122 | 119 | 101 | ||||||
| Engineered Products and Services | 25 | 28 | 27 | ||||||
| $ | 914 | $ | 833 | $ | 778 | ||||
Approximately 6,200 full-time scientists, engineers and other technical personnel were engaged in our product research and development activities as of September 29, 2006.
Research activity at Electronics focuses specifically on new product development and a continuous expansion of technical capabilities. Healthcare focuses on technologies to complement existing product lines and applying expertise to refine and successfully commercialize such products and technologies and on acquiring rights to new products. Research activity in Fire and Security relates mostly to the design of fire and intrusion alarm products, video and access control products, as well as products related to electronic article surveillance. Engineered Products and Services focuses on improvements in hydraulic design, which controls the motion of fluids, resulting in new fire protection devices and flow control products.2005.
Raw and Other Purchased Materials
We are a large buyer of steel in the United States. We are also a large buyer ofmetals and other commodities, including resin, copper, brass, gold, paper, pulp and cotton.gas. Certain of the components used in the Fire Protection Services business, principally certain valves and fittings, are purchased for
installation in fire protection systems or for distribution. Materials are purchased from a large number of independent sources around the world. There have been no shortages in materials which have had a material adverse effect on our businesses. However, significant increases in certain raw material costs may have an adverse impact on costs and operating margins. We enter into long-term supply contracts, using fixed or variable pricing to manage our exposure to potential supply disruptions.
PatentsGovernmental Regulation and TrademarksSupervision
We own a portfolio of patents, which principally relateOur operations are subject to electricalvarious federal, state and electronic products, healthcare products, firelocal consumer protection, devices, electronic security systems, flow control products, tubinglicensing and building and cable products. We also own a portfolio of trademarks and are a licensee of various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon nationalother laws and regulations. Most states in which we operate have licensing laws directed specifically toward the alarm and fire suppression industries. Our ADT Worldwide business currently relies primarily upon the use of the marks. All capitalized product names throughout this document are trademarks owned by, or licensedwireline telephone service to the Company or its subsidiaries. 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 trademark would not materially affect the conduct of the business in any of our segments.
Tyco employed 238,200 people at September 29, 2006, of which 86,900 are employedcommunicate signals. Wireline telephone companies in the United States are regulated by both the federal and 151,300 are outside the United States.state governments.
We have collective bargaining agreements with labor unions covering 38,800 employees at certainconduct our businesses through subsidiaries worldwide. Changes in legislation or government policies can affect our worldwide operations. For example, governmental regulation of fire safety codes can impact our North American, European and Asia-Pacific businesses. We believe that our relations with the labor unions are generally good.Fire Protection Services business.
Environmental Matters
We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things, the generation, storage, use and transportation of hazardous materials; emissions or discharges of substances into the environment; and the health and safety of our employees. The cost of compliance with environmental laws, however, has not had, and based on current information and applicable laws, is not expected to have, a material adverse effect upon our capital expenditures, earnings or competitive position.
Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notification from the United StatesU.S. Environmental Protection Agency and from state environmental agencies that conditions at a number of sites where we and others disposed of hazardous substances require cleanup and other possible remedial action and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and/or for natural resource damages. We have projects underway at a number of current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations.
Given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods, the ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict. Based upon our experience, current information and applicable laws, we believe that it is probable that we would incur remedial costs in the range of approximately $124$36 million to $406$63 million. As of September 29, 2006,28, 2007, we believe that the best estimate within this range is approximately $184$40 million, of which $34$11 million is included in accrued expenses and other current liabilities and $150$29 million is included in other long-term liabilities on the Consolidated Balance Sheets. In view of our financial position and reserves for environmental matters, of $184 million, we believe that any potential payment of such estimated amounts will not have a material adverse effect on our financial position, results of operations or cash flows.
Employees
As of September 28, 2007, we employed approximately 118,000 people worldwide, of which approximately 45,000 are employed in the United States and 73,000 are outside the United States. We have collective bargaining agreements with labor unions covering approximately 17,000 employees and believe that our relations with the labor unions are generally good.
Available Information
Tyco is required to file annual, quarterly and special reports, proxy statements and other information with the SEC. Investors may read and copy any document that Tyco files, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 450 Fifth100 F Street, N.W.N.E., Room 1580, Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site athttp://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Tyco's SEC filings.
Our Internet website iswww.tyco.com. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, we have posted the charters for our Audit Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee, as well as our Board Governance Principles and Guide to Ethical Conduct, on our website under the heading "Our Commitment—"Corporate Responsibility—Governance." These charters and principles are not incorporated in this report by reference. We will also provide a copy of these documents free of charge to shareholders upon request.
Item 1A. Risk Factors
You should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical events, climate change and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity.
Risks Relating to the Proposed Separation
The cost to complete the transaction could be significant.
Management estimates that the total net economic cost to complete the Proposed Separation is expected to approximate $1.0 billion and that the corresponding income statement charges would be larger than net economic cost. However, actual costs could exceed that estimate and could have a material adverse effect on our results of operations and cash flows.
We may be unable to complete the transaction.
There is no guarantee that the Proposed Separation will be finalized. Completion of the Proposed Separation is subject to a number of factors and conditions, including:
Increased demands on our management team as a result of the Proposed Separation could distract management's attention from operating the business.
Management expects to file Registration Statements in connection with the Proposed Separation during the second quarter of 2007. The complexity of the transaction will require a substantial amount of management and operational resources, as well as the use of several cross-functional project teams. Our business or results of operations may be adversely affected during the transition period.
Each of the independent companies resulting from the completion of the Proposed Separation may be unable to achieve some or all of the benefits that we expect will be achieved from the separation transactions.
Each of the independent companies may not be able to achieve the full strategic and financial benefits we expect will result from the separation of two of Tyco's segments into independent companies or such benefits may be delayed or may not occur at all. For example, there can be no assurance that analysts and investors will regard the corporate structures of each of the independent companies as more clear and simple than the current Tyco corporate structure or place a greater value on the sum of each of the independent companies as compared to Tyco.
If certain internal restructuring transactions and the distribution relating to the Proposed Separation are determined to be taxable for U.S. federal income tax purposes, we and our shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.
We anticipate that certain internal restructuring transactions will be undertaken in preparation for the Proposed Separation. These transactions are complex and could cause us to incur significant tax liabilities. We have an initial private letter ruling regarding these transactions and the distribution from the IRS noting that they qualify for favorable tax treatment. We have also requested or may request supplemental rulings regarding these transactions and, in addition, we expect to obtain an opinion of tax counsel confirming the favorable tax treatment of these transactions. The ruling and the opinion rely or will rely on certain facts, assumptions, representations and undertakings, from us regarding the past and future conduct of our businesses and other matters. If any of these are incorrect or not otherwise satisfied, then we and our shareholders may not be able to rely on the ruling or the opinion and could be subject to significant tax liabilities. Notwithstanding the ruling and the opinion, the IRS could determine on audit that the distribution or the internal restructuring transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or if the distributions should become taxable for other reasons, including as a result of significant changes in stock ownership after the distribution.
Risks Relating to Actions of Tyco's Former Senior Corporate Management
Pending litigation could have a material adverse effect on our liquidity and financial condition.
As a result of actions taken by our former senior corporate management, Tyco, some members of our former senior corporate management, current and former members of our Board of Directors and our current Chief Executive Officer, former Chief Financial Officer and current General Counsel are named defendants in a number of purported class actions alleging violations of certain disclosure provisions of the federal securities laws. Tyco, certain of our current and former employees, some members of our former senior corporate management and some former members of the Board of Directors of Tyco International (US), Inc. also are named as defendants in several ERISA class actions. We are generally obligated to indemnify our directors and officers and our former directors and officers who are also named as defendants in some or all of these matters to the extent required by Bermuda
law. In addition, our insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and liability, in some or all of these matters. We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.
Continued scrutiny resulting from ongoing governmental investigations may have an adverse effect on our business.
We and others have received subpoenas and requests from the SEC, the United States Department of Labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. Certain current and former employees in Fire and Security received subpoenas from the SEC's Division of Enforcement seeking testimony related to past accounting practices regarding the ADT dealer connect fees. As previously reported in our periodic filings, these practices have been discontinued. The United States Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. At this time, we cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government instrumentalities (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. We cannot provide assurance that the effects and results of these or other investigations will not be material and adverse to our business, financial condition, results of operations or cash flows.
Examinations and audits by tax authorities, including the IRS, could result in additional tax payments for prior periods.
The Company and its subsidiaries' income tax returns are periodically examined by various tax authorities. In connection with such examinations, tax authorities, including the United States IRS, have raised issues and proposed tax adjustments. We are reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies that management has assessed as probable and estimable have been recorded through the income tax provision, equity or goodwill, as appropriate. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional income taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.
In connection with the IRS audits for the years 1997 through 2000, the Company submitted to the IRS proposed adjustments to its 1997 through 2000 U.S. federal income tax returns. During 2006, the IRS accepted substantially all of the proposed adjustments. These adjustments did not have a material impact on the financial condition, results of operations or cash flows of the Company.
During 2006, the Company has developed amendments to U.S. federal income tax returns for additional periods. On the basis of previously accepted amendments, the Company has determined that
acceptance of these adjustments is probable and accordingly has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows.
Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness.
We estimate that our available cash and our cash flow from operations will be adequate to fund our operations and service our debt for the foreseeable future. In making this estimate, we have not assumed the need to make any material payments in connection with our pending litigation or investigations. Any material adverse legal judgments, fines, penalties or settlements arising from our pending investigations and litigation could require additional funding. If such developments require us to obtain additional funding, we cannot provide assurance that we will be able to obtain the additional funding that we need on commercially reasonable terms or at all, which could have a material adverse effect on our results of operations and cash flows.
Such an outcome could have important consequences to you. For example, it could:
Additional negative publicity may adversely affect our business.
As a result of actions taken by our former senior corporate management, Tyco was the subject of continuing negative publicity focusing on these actions. This negative publicity contributed to significant declines in the prices of our publicly traded securities in 2002 and brought increased regulatory scrutiny upon us. Additional negative publicity related to former senior corporate management's actions could have a material adverse effect on our results of operations and cash flows and the market price of our publicly traded securities.
Our senior corporate management team is required to devote significant attention to matters arising from actions of prior management.
We replaced our senior corporate executives with a new team during 2002 through 2004, and all of the former members of our Board of Directors determined not to stand for reelection in March 2003. A new Board of Directors was elected at our annual general meeting of shareholders in March 2003. We cannot provide assurance that this major restructuring of our Board of Directors and senior
management team, and the accompanying distractions related to matters arising from the actions of prior management will not adversely affect our results of operations.
Risks Relating to Our Businesses
Cyclical industry and economic conditions have affected and may continue to adversely affect our financial condition, and results of operations.operations or cash flows.
Our operating results in some of our segments arecan be adversely affected adversely by the general cyclical pattern of thecertain industries in which theywe operate. For example, demand for theour services and products and services of Fire and Security and Engineered Products and Services is significantly affected by levelsthe level of commercial construction, andthe amount of discretionary consumer and business discretionary spending. Also,spending and the electronic components business within Electronics is heavily dependent onperformance of the end markets it serves and therefore can be affected by the demand patternshousing market, each of which historically has displayed significant cyclicality. A downturn in any of these markets, whichindustries or the deterioration in general global economic conditions could have a negative impact the margins in this business. This cyclical impact can be amplified because someon our financial condition, results of our businesses purchase products from other of our businesses. For example, Fire and Security purchases certain products sold by Engineered Products and Services. Therefore, a drop in demand for our fire prevention products due to lower new residentialoperations or office construction or other factors can cause a drop in demand for certain of our products sold by Engineered Products and Services.cash flows.
Our operations expose us to the risk of material environmental liabilities, litigation and violations.
We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:
There can be no assurances that we have been or will be at all times in compliance with environmental and health and safety laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators.
Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at
properties at which they have disposed of hazardous substances. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
We have received notification from the United States Environmental Protection Agency and from state environmental agencies, that conditions at a number of sites where we and others disposed of hazardous substances require cleanup and other possible remedial action and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and /or for natural resource damages. We have projects underway at a number of current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations. These projects relate to a variety of activities, including:
These projects involve both remediation expenses and capital improvements. In addition, we remain responsible for certain environmental issues at manufacturing locations previously sold by us.
The ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon our experience, current information and applicable laws, we believe that it is probable that we would incur remedial costs (including asset retirement obligations of $111 million) of approximately $295$40 million, of which $34$11 million is included in accrued expenses and other current liabilities and $261$29 million is included in other long-term liabilities on the Consolidated Balance Sheets. Environmental laws are complex, change frequently and have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with such laws, we cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our financial condition, and results of operations or cash flows or that we will not be subject to additional environmental claims for personal injury or cleanup in the future based on our past, present or future business activities.
We may be required to recognize additional impairment charges.
Pursuant to accounting principles generally accepted in the United States, we are required to periodically assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures the Proposed Separation plan and market capitalization declines may result in additional charges for goodwill and other asset impairments. We assessed the recoverability of goodwill upon the realignment of our business in connection with the Separation, which resulted in a $46 million charge for goodwill. Future impairment charges could substantially affect our reported earnings in the periods of such charges. In addition, such charges would reduce our consolidated net worth and our shareholders' equity, increasing our debt-to-total-capitalization ratio. Such reduction in consolidated net worth and increase in debt as a percentage of total capitalization could result in a default under our credit facilities.
Foreign currency exchange rate, commodity price and interest rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, commodity pricesfinancial condition and interest rates. See Part II Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our net revenue derived from sales in non-U.S. markets for 2006 was 51.2% of our total net revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion of our net revenue. Therefore, when the U.S. Dollar strengthens in relation to the foreign currencies of the countries where we sell our products, such as the Euro, our U.S. Dollar reported revenue and income will decrease. Changes in the relative values of currencies occur from time to time and may, in some instances, have a significant effect on our results of operations. Our financial statements reflect recalculations of items denominated in non-U.S. currencies to U.S. Dollars, our functional currency.
We are a large buyer of steel in the United States. We are also a large buyer of other commodities, including resin, copper, brass, gold, paper, pulp and cotton. Volatility in the prices of these commodities could increase the costs of our products and services. We may not be able to pass
on these costs to our customers and this could have a material adverse effect on our results of operations and cash flows.
We monitor these exposures as an integral part of our overall risk management program. In some cases, we purchase hedges or enter into contracts to insulate our results of operations from these fluctuations. Nevertheless, changes in currency exchange rates, commodity prices and interest rates may have a material adverse effect on our results of operations and financial condition.
We are named as a defendant toin a variety of litigation in the course of our business that could cause a material adverse effect on our financial condition, results of operations and financial condition.or cash flows.
In the ordinary course of business, we are named as a defendant in a significant amount of litigation, including claims for damages arising out of the use or installation of our products, litigation alleging the infringement of intellectual property rights, litigation alleging anti-competitive behavior, and product liability litigation.litigation, employee matters and commercial disputes. In certain circumstances, patent infringement and anti-trust laws permit successful plaintiffs to recover treble damages. In addition, our Healthcare business is subject to regulation and potential litigation. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could cause a material adverse effect
on our financial condition, and results of operations.
Our Healthcare business is subject to extensive regulation by the government and failure to comply with those regulations could have a material adverse effect on our results of operations and financial condition.or cash flows. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against potential loss exposures.
The United States Food and Drug Administration regulatesSome of the approval, manufacturing and sale and marketing of many oflawsuits outstanding against us relate to actions taken by our healthcare products. Failure to comply with current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines could lead, and have led, to temporary manufacturing shutdowns, product recalls, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issuesformer senior corporate management. On May 14, 2007, we entered into a proposed settlement with respect to most of the class actions and deposited $2.975 billion into an escrow accounts pending final settlement of such class actions. We do not believe that it is feasible to predict or determine the final outcome or resolution of the unresolved proceedings. A failure to consummate the proposed settlement on the agreed terms or an adverse outcome from the unresolved proceedings or liabilities or other proceedings could materially and adversely affect our productsfinancial condition, results of operations or cash flows.
In addition, we could leadface liability for failure to product recalls, withdrawalsrespond adequately to alarm activations. The nature of the services we provide potentially exposes us to risks of liability for employee acts or declining sales.omissions or system failures. In an attempt to reduce this risk, our alarm monitoring agreements contain provisions limiting our liability in such circumstances. We cannot assure you, however, that these limitations will be enforced. Losses from such litigation could be material to our financial condition, results of operations or cash flows.
Our ADT business may experience higher rates of customer attrition, which may reduce our future revenue and has causedcause us to change the estimated useful lifelives of accounts,assets related to our security monitoring customers, increasing our depreciation and amortization expense.
Attrition rates for customers in our ADT Worldwide Electronic Security Services business were 13.8%12.3%, 14.8%14.2% and 15.1%15.0% on a trailing 12-month basis as of September 28, 2007, September 29, 2006 and September 30, 2005, and 2004, respectively. Although the attrition rate has been declining,rates have decreased, if attrition rates were to trend upward, ADT's recurring revenue and results of operations will be adversely affected. Tyco amortizes the costs of ADT's contracts and related customer relationships purchased through the ADT dealer program based on the estimated life of the customer relationships. Internally generated residential and commercial account pools are similarly amortized.depreciated. If the attrition rates were to rise Tyco may be required to accelerate the depreciation and amortization of the costssubscriber system assets and intangible assets, which could cause a material adverse effect on our financial condition or results of operations and cash flows.operations.
Our reputation andfuture growth is largely dependent upon our ability to do business may be impaireddevelop new technologies that achieve market acceptance with acceptable margins.
Our businesses operate in global markets that are characterized by improper conductrapidly changing technologies and evolving industry standards. Accordingly, our future growth rate depends upon a number of factors, including our ability to: identify emerging technological trends in our target end-markets; develop and maintain competitive products; enhance our products by any ofadding innovative features that differentiate our employees or agents orproducts from those of our subsidiaries.competitors; and develop, manufacture and bring products to market quickly and cost-effectively. Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as we anticipate. For example, on February 18, 2008, the Federal Communications Commission will allow its mandate to wireless cellular carriers requiring them to maintain analog cellular service to expire. As a result, we expect the cellular communicators in certain of our security systems to become obsolete. We have begun the process of upgrading the affected devices to digital technology, which has resulted in additional expenses in our fiscal fourth quarter, and we expect to incur additional expenses in the future. If we fail to complete this upgrade, it could result in the loss of customers. Moreover, the failure of our technology or products to gain market acceptance or their obsolescence could
significantly reduce our revenues, increase our operating costs or otherwise adversely affect our financial condition, results of operations or cash flows.
Our failure to satisfy International Trade Compliance regulations may adversely affect us.
Tyco's global operations require importing and exporting goods and technology across international borders on a regular basis. From time to time, Tyco and its subsidiaries operateobtains or receives information alleging improper activity in many parts of the world that have experienced governmental corruption to some degree, including, but not limited to, Asia, India, Latin America and Europe.connection with imports or exports. Tyco's policy mandates strict compliance with the United States Foreign Corrupt Practices Act, as amended,U.S. and local laws prohibiting corrupt paymentsforeign international trade laws. When Tyco receives information alleging improper activity, its policy is to government officials.investigate that information and respond appropriately, including, if warranted, reporting its findings to relevant governmental authorities. Nonetheless, we cannot provide assurance that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees that would violate U.S. and/or foreign laws, including the laws governing payments to government officials.laws. Such improper actions could subject the Company to civil or criminal penalties, including substantial monetary fines, as well as disgorgement of profits or other monies, against usadverse actions including denial of import or our subsidiariesexport privileges, and could damage our reputation and, therefore, our ability to do business.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
From time to time Tyco obtains or receives information alleging improper conduct of Tyco employees, agents, and/or distributors, including conduct involving potentiallyThe U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign government officials. Tyco's policy isnon-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to investigatesome degree and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that informationour internal control policies and respond appropriately, including, if warranted, taking remedial control measuresprocedures always will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and reporting its findings to relevant law enforcement authorities.result in a material adverse effect on our financial condition, results of operations or cash flows.
Covenants in our debt instruments may adversely affect us.
Our bank credit agreements contain financial and other covenants, such asincluding a limit on the ratio of debt to earnings before interest, taxes, depreciation, and amortization minimum levels of net worth, and limits on incurrence of liens.liens and subsidiary debt. Our outstanding indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions.
Although we believe none of these covenants are presentlyconsidered restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control, and we cannot provide assurance that we will meet those tests. A breach of any of these covenants could result in a default under our credit agreements or indentures. Upon the occurrence of an event of default under any of our credit facilities or indentures, the lenders or trustees could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient assets to repay our credit facilities and our other indebtedness. Acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations. See "Liquidity and Capital Resources—Capitalization".
DowngradesChanges in legislation or governmental regulations or policies can have a significant impact on our financial condition, results of our debt ratings would adversely affect us.operations or cash flows.
Certain downgradesWe operate in regulated industries. Our U.S. operations are subject to regulation by Moody'sa number of federal, state and S&Plocal governmental agencies with respect to safety of operations and equipment, labor and employment matters and financial responsibility. Intrastate operations in the United States are subject to regulation by state regulatory authorities, and our international operations are regulated by
the countries in which they operate. We and our employees are subject to various U.S. federal, state and local laws and regulations, as well as non-U.S. laws and regulations, including many related to consumer protection. Most states in which we operate have licensing laws covering the monitored security services industry and the construction industry. Our business relies heavily upon wireline telephone service to communicate signals, and wireline telephone companies are regulated by both the federal and state governments. Changes in laws or regulations could require us to change the way we operate, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of our operating permits and licenses. If laws and regulations changed or we failed to comply, our financial condition, results of operations or cash flows could be materially and adversely affected.
Legislative and other measures that may be taken by U.S. governmental authorities could materially increase our tax burden or otherwise adversely affect our financial conditions, results of operations or cash flows.
We continue to assess the impact of various U.S. federal and state legislative proposals, and modifications to existing tax treaties between the United States and foreign countries, that could result in a material increase in our U.S. federal and state taxes. In October 2004, the U.S. Congress enacted legislation affecting the tax treatment of U.S. companies that have undertaken certain types of expatriation transactions. Such legislation did not, however, retroactively apply to the 1997 acquisition of Tyco International Ltd. by ADT Limited. More recently, several proposals have been introduced in the U.S. House of Representatives that, if ultimately enacted by the U.S. Congress, would have limited treaty benefits on certain payments made by our U.S. subsidiaries to non-U.S. affiliates. We cannot predict the outcome of any specific legislative proposals. However, if such proposals were to be enacted, or if modifications were to be made to certain existing tax treaties, the consequences could have a materially adverse impact on Tyco, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations or cash flows.
We could face product liability claims relating to products we manufacture or install. These claims could result in significant costs and liabilities and reduce our profitability.
We face exposure to product liability claims in the event that any of our products results in personal injury or property damage. In the event that any of our products prove to be defective, we may be required to recall or redesign such products, which could result in significant unexpected costs. Any insurance we maintain may not be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Any claim or product recall could result in adverse publicity against us, which could adversely affect our financial condition, results of operations or cash flows.
We have significant foreign operations, which are subject to political, economic and other risks inherent in operating in foreign countries.
We have significant operations outside of the United States. We currently operate in approximately 60 countries. We generated 53% of our net revenue outside of the United States in 2007. We expect net revenue generated outside of the United States to continue to represent a significant portion of total net revenue. Business operations outside of the United States are subject to political, economic and other risks inherent in operating in certain countries, such as:
Changes in the political or economic environments in the countries in which we operate could have a material adverse effect on our financial condition, results of operations or cash flows.
Volatility in currency exchange rates, commodity prices and interest rates may adversely affect our financial condition, result of operations or cash flows.
We are exposed to a variety of market risks, including the effects of changes in currency exchange rates, commodity prices and interest rates. See Part II Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our net revenue derived from sales in non-U.S. markets for 2007 was 53% of our total net revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion of our net revenue. Therefore, when the U.S. dollar strengthens in relation to the currencies of the foreign countries where we sell our products, our U.S. dollar reported revenue and income will decrease. Changes in the relative values of currencies occur regularly and in some instances, may have a significant effect on our results of operations. Our financial statements reflect recalculations of items denominated in non-U.S. currencies to U.S. dollars, our functional currency.
We are a large buyer of metals and other commodities, including gas, the prices of which have fluctuated significantly in recent years. Volatility in the prices of these commodities could increase the costs of manufacturing our products and providing our services. We may not be able to pass on these costs to our customers and this could have a material adverse effect on our financial condition, results of operations or cash flows.
We monitor these exposures as an integral part of our overall risk management program. In some cases, we purchase hedges or enter into contracts to insulate our results of operations from these fluctuations. Nevertheless, changes in currency exchange rates, commodity prices and interest rates may have a material adverse effect on our financial condition, results of operations or cash flows.
If we cannot obtain sufficient quantities of materials, components and equipment required for our manufacturing activities at competitive prices and quality and on a timely basis, or if our manufacturing capacity does not meet demand, our financial condition, results of operations or cash flows may suffer.
We purchase materials, components and equipment from third parties for use in our manufacturing operations. If we cannot obtain sufficient quantities of these items at competitive prices and quality and on a timely basis, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed or our material or manufacturing costs may increase. In addition, because we cannot always immediately adapt our cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements. Any of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our financial condition, results of operations or cash flows.
Divestitures of some of our businesses or product lines may materially adversely affect our financial condition, results of operations or cash flows.
We continue to evaluate the performance of all of our businesses and may sell businesses or product lines. For example, in July 2007, the Board of Directors approved for divestiture Infrastructure Services. Any divestiture could result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, financial condition and results of operations. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business and the potential loss of key employees. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line.
We have disclosed a material weakness in our internal control over financial reporting relating to our accounting for income taxes which could adversely affect our ability to report our financial condition, results of operations or cash flows accurately and on a timely basis.
In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified a material weakness in our internal control over financial reporting relating to our accounting for income taxes as of September 29, 2006. For a discussion of our internal control over financial reporting and a description of the identified material weakness, see "Management's Report on Internal Control over Financial Reporting" under Item 9A, "Controls and Procedures."
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. We have determined that further improvements are required in our tax accounting processes before we can consider the material weakness remediated. Management's procedures and testing identified errors that, although not material to the consolidated financial statements, led management to conclude that control deficiencies exist related to tax effecting consolidating entries, analysis and reconciliation of taxes receivable and taxes payable in non-U.S. jurisdictions, certain aspects of deferred taxes, and procedures with respect to classification of tax amounts in the consolidated balance sheet. As a result of these deficiencies, it is reasonably possible that internal controls over financial reporting may not have prevented or detected errors from occurring that could have been material, either individually or in the aggregate.
A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. While considerable actions have been taken to improve our internal controls in response to the identified material weakness related to certain aspects of accounting for income taxes, and further action steps to strengthen controls have been taken, additional work continues to address and remediate the identified material weakness. If we are unsuccessful in implementing or following our remediation plan, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or maintain effective internal controls over financial reporting. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and the New York Stock Exchange, including a delisting from the New York Stock Exchange, securities litigation, debt rating agency downgrades or rating withdrawals, any one of which could adversely affect the valuation of our common stock and could adversely affect our business prospects.
Risks Relating to Actions of Tyco's Former Senior Corporate Management
Pending litigation could have a material adverse effect on our liquidity and financial condition.
As a result of actions taken by our former senior corporate management, Tyco, some members of our former senior corporate management, former members of our Board of Directors and our former General Counsel are named defendants in a number of purported class actions alleging violations of certain disclosure provisions of the federal securities laws. Tyco, certain of our current and former employees, some members of our former senior corporate management and some former members of our Board of Directors also are named as defendants in several ERISA class actions. On May 14, 2007, we entered into a proposed settlement with respect to most of the class actions and deposited $2.975 billion into an escrow account pending final settlement of such class actions.
We generally are obligated to indemnify our directors and officers and our former directors and officers who are also named as defendants in some or all of these matters to the extent required by Bermuda law. In addition, our insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and liability, in some or all of these matters. We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial position, results of operations or cash flows. At this time, we cannot estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of all of these matters or from a failure to consummate the proposed settlement on the agreed terms.
Continued scrutiny resulting from ongoing governmental investigations may have an adverse effect on our business.
We and others have received various subpoenas and requests from the SEC, the U.S. Department of Labor, state departments of labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. Certain current and former employees in ADT Worldwide received subpoenas from the SEC's Division of Enforcement seeking testimony related to discontinued accounting practices regarding ADT dealer connect fees. The U.S. Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. Similarly, several of our businesses periodically are the subject of state or local government wage and hour investigations. At this time, we cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with governmental instrumentalities, which in turn could negatively impact our business with non-governmental customers, or suffer other penalties or adverse impacts, each of which could have a material adverse effect on our business. We cannot predict whether the effects and results of these or other investigations will have a material and adverse impact on our financial condition, results of operations or cash flows.
Examinations and audits by tax authorities, including the Internal Revenue Service, could result in additional tax payments for prior periods.
The Company and its subsidiaries' income tax returns periodically are examined by various tax authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments. We are reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies and related interest that management has assessed as probable and estimable have been recorded through the income tax provision, equity or goodwill, as appropriate. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent
to which, additional income taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and circumstances. Due to the complexity of some of these uncertainties, however, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.
In 2004, in connection with the IRS audit of the 1997 through 2000 years, the Company submitted to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the proposed adjustments. Also during 2006, the Company developed proposed amendments to U.S. federal income tax returns for additional periods through 2002. The Company has yet to complete proposed amendments to its U.S. federal income tax returns for periods subsequent to 2002, which will primarily reflect the roll forward through 2006 of the amendments for the periods 1997 to 2002. When the Company's tax return positions are updated additional adjustments may be identified and recorded in the Consolidated Financial Statements. While the final adjustments cannot be determined until the income tax return amendment process is completed, the Company believes that any resulting adjustments will not have a material impact on its financial condition, results of operations or cash flows.
Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness.
We estimate that our available cash, our cash flow from operations and amounts available to us under our revolving lines of credit will be adequate to fund our operations and service our debt for the foreseeable future. In making this estimate, we have not assumed the need to make any material payments in connection with pending litigation or investigations. Any material adverse legal judgments, fines, penalties or settlements arising from our pending investigations and litigation could require additional funding. If such developments require us to obtain additional funding, we cannot provide assurance that we will be able to obtain the additional funding that we need on commercially reasonable terms or at all, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Such an outcome could have important consequences to you. For example, it could:
Additional negative publicity may adversely affect our business.
As a result of actions taken by our former senior corporate management, Tyco was the subject of negative publicity focusing on these actions. This negative publicity contributed to significant declines in the prices of our publicly traded securities in 2002 and brought increased regulatory scrutiny upon us. Additional negative publicity related to former senior corporate management's actions could have a material adverse effect on our results of operations or cash flows and the market price of our publicly traded securities.
Our senior corporate management team is required to devote significant attention to matters arising from actions of prior management.
As a result of the actions of prior management, we replaced our senior corporate executives with a new team during 2002 through 2004, and a new Board of Directors was elected at our annual general meeting of shareholders in March 2003. We cannot provide assurance that the distractions related to matters arising from the actions of prior management will not adversely affect our financial condition, results of operations or cash flows.
Risks Relating to the Separations
If the distribution of Covidien and Tyco Electronics common shares to our shareholders or certain internal transactions undertaken in connection with the Separation are determined to be taxable for U.S. federal income tax purposes, we could incur significant U.S. federal income tax liabilities.
We have received private letter rulings from the U.S. Internal Revenue Service regarding the U.S. federal income tax consequences of the distribution of Covidien and Tyco Electronics common shares to our shareholders substantially to the effect that the distribution of such shares, except for cash received in lieu of fractional shares, will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986. The private letter rulings also provided that certain internal transactions undertaken in anticipation of the Separation would qualify for favorable treatment under the Code. In addition to obtaining the private letter rulings, we have obtained opinions from the law firm of McDermott Will & Emery LLP confirming the tax-free status of the distribution and certain internal transactions. The private letter rulings and the opinions relied on certain facts and assumptions, and certain representations and undertakings, from Tyco, Covidien and Tyco Electronics regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the private letter rulings and the opinions, the Internal Revenue Service could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or that the distributions should be taxable for other reasons, including as a result of significant changes in stock or asset ownership after the distribution. If the distribution ultimately is determined to be taxable, we would recognize gain in an amount equal to the excess of the fair market value of the Covidien and Tyco Electronics common shares distributed to our shareholders on June 29, 2007 over our tax basis in such common shares, but such gain, if recognized, generally would not be subject to U.S. federal income tax. However, we would incur significant U.S. federal income tax liabilities if it ultimately is determined that certain internal transactions undertaken in connection with the Separation should be treated as taxable transactions.
In addition, under the terms of the Tax Sharing Agreement that we have entered into with Covidien and Tyco Electronics in connection with the Separation, in the event the distribution or the internal transactions are determined to be taxable and such determination was the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result thereof. If such determination is not the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, then we, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%, respectively, of any taxes imposed on us, Covidien or Tyco Electronics as a result of such determination. Such tax amounts could be significant. In the event that any party to the Tax Sharing Agreement defaults in its obligation to pay distribution taxes to another party that arise as a result of no party's fault, each non-defaulting party would be responsible for an equal amount of the defaulting party's obligation to make a payment to another party in respect of such other party's taxes.
We continue to be responsible for a portion of our contingent and other corporate liabilities following the Separation, primarily those relating to shareholder litigation.
Under the Separation and Distribution Agreement and other agreements, subject to certain exceptions contained in the Tax Sharing Agreement, we, Covidien and Tyco Electronics have agreed to assume and be responsible for 27%, 42% and 31%, respectively, of certain of our contingent and other corporate liabilities. All costs and expenses associated with the management of these contingent and other corporate liabilities will be shared equally among the parties. These contingent and other corporate liabilities primarily relate to consolidated securities litigation and any actions with respect to the separation plan or the Separation brought by any third party. Contingent and other corporate liabilities do not include liabilities that are specifically related to one of the three separated companies, which are allocated 100% to the relevant company.
If any party responsible for such liabilities were to default in its payment, when due, of any of these assumed obligations, each non-defaulting party would be required to pay equally with any other non-defaulting party the amounts in default. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of the assumed obligations related to such contingent and other corporate liabilities including associated costs and expenses.
Many lawsuits are outstanding against Tyco, some of which relate to actions taken by its former senior corporate management. On May 14, 2007, we entered into a proposed settlement with respect to most of the class actions. We do not believe that it is feasible to predict the final outcome or resolution of the unresolved proceedings. Although we will share any costs and expenses arising out of this litigation with Covidien and Tyco Electronics, a failure to consummate the proposed settlement on the agreed terms or an adverse outcome from the unresolved proceedings or liabilities or other proceedings for which we will assume joint and several liability under the Separation and Distribution Agreement could be material with respect to our financial condition, results of operations or cash flows in any given reporting period.
We share responsibility for certain of our, Covidien's and Tyco Electronics' income tax liabilities for tax periods prior to and including June 29, 2007.
Under the Tax Sharing Agreement, we share responsibility for certain of our, Covidien's and Tyco Electronics' income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. More specifically, we, Covidien and Tyco Electronics share 27%, 42% and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to our, Covidien's and Tyco Electronics' U.S. income tax returns, certain income tax liabilities arising from adjustments made by tax authorities to intercompany transactions or similar adjustments, and certain taxes attributable to internal transactions undertaken in anticipation of the Separation. All costs and expenses associated with the management of these shared tax liabilities will be shared equally among the parties. We are responsible for all of our own taxes that are not shared pursuant to the Tax Sharing Agreement's sharing formula. In addition, Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Covidien's and Tyco Electronics' tax liabilities.
We might not be able to engage in desirable strategic transactions and equity issuances following the Separation because of restrictions relating to U.S. federal income tax requirements for tax-free distributions.
Our ability to engage in significant equity transactions could be limited or restricted after Separation in order to preserve for U.S. federal income tax purposes the tax-free nature of the distribution. In addition, similar limitations and restrictions will apply to Covidien and Tyco Electronics. The distribution of common shares of Covidien and Tyco Electronics to our shareholders may result in corporate level taxable gain to us under Section 355(e) of the Code if 50% or more, by vote or value, of our common shares, Covidien's common shares or Tyco Electronics' common shares are acquired or issued as part of a plan or series of related transactions that includes the distribution. For this purpose, any acquisitions or issuances of our common shares within two years before the distribution, and any acquisitions or issuances of our common shares, Covidien's common shares or Tyco Electronics' common shares within two years after the distribution, generally are presumed to be part of such a plan, although we, Covidien or Tyco Electronics may be able to rebut that presumption. We are not aware of any such acquisitions or issuances of our common shares within the two years before the distribution. If an acquisition or issuance of our common shares, Covidien's common shares or Tyco Electronics' common shares triggers the application of Section 355(e) of the Code, we would recognize taxable gain as described above, but such gain generally would not be subject to U.S. federal income tax. However, certain subsidiaries of Covidien or Tyco Electronics or subsidiaries of ours would incur significant U.S. federal income tax liabilities as a result of the application of Section 355(e) of the Code.
Under the Tax Sharing Agreement, there are restrictions on our ability to take actions that could cause the distribution or certain internal transactions undertaken in connection with the Separation to fail to qualify as tax-free or tax-favored transactions, as the case maybe, including entering into, approving or allowing any transaction that results in a change in ownership of more than 35% of our common shares, a redemption of equity securities, a sale or other disposition of a substantial portion of our assets, an acquisition of a business or assets with equity securities to the extent one or more persons would acquire 35% or more of our common shares, or engaging in certain internal transactions. These restrictions apply for the two-year period after the distributions, unless we obtain the consent of the other parties or we obtain a private letter ruling from the Internal Revenue Service or an unqualified opinion of a nationally recognized law firm that such action will not cause the distribution or the internal transactions undertaken in connection with the Separation to fail to qualify as tax-favored transactions and such letter ruling or opinion, as the case may be, is acceptable to the parties. Covidien and Tyco Electronics are subject to similar restrictions under the Tax Sharing Agreement. Moreover, the Tax Sharing Agreement generally provides that a party thereto is responsible for any taxes imposed on any other party thereto as a result of the failure of the distribution or certain internal transactions to qualify as tax-favored transactions under the Code if such failure is attributable to certain post-distribution actions taken by or in respect of the responsible party or its shareholders, regardless of whether the actions occur more than two years after the distribution, the other parties consent to such actions or the responsible party obtains a favorable letter ruling or opinion of tax counsel as described above. For example, we would be responsible for a third party's acquisition of us at a time and in a manner that would cause such failure. These restrictions may prevent us from entering into transactions which might be advantageous to our shareholders and noteholders.
Continuing demands on our management team as a result of the Separation could distract management's attention from operating the business.
The complexity of the Separation has required and will continue to require a substantial amount of management and operational resources. Our management team must devote continued time and attention to fulfilling Tyco's obligations under the Separation and Distribution Agreement and the Tax Sharing Agreement, including the defense and settlement of litigation related to shared contingent and other corporate liabilities of Tyco, Covidien and Tyco Electronics and the administration of the U.S. tax audit for periods up to June 29, 2007. At the same time, our management team must successfully implement administrative and operational changes necessary to achieve reductions in corporate expense following the Separation. These and related demands on our administrative resources may distract management from the day-to-day operation of Tyco's business. As a result our financial condition, results of operations or cash flows may be adversely affected.
We may be unable to achieve some or all of the benefits that we expect will be achieved from the Separation.
We may not be able to achieve the full strategic and financial benefits we expect will result from the separation of two of Tyco's segments into independent companies or such benefits may be delayed or may not occur at all. For example, there can be no assurance that analysts and investors will regard Tyco's post-Separation corporate structure as more clear and simple than its pre-Separation corporate structure or place a greater value on the businesses remaining with Tyco post-Separation than they placed on those businesses pre-Separation.
Risks Related to Corporate Governance
We are subject to governmental investigations that might have serious consequences.
We are now, and believe that in light of the current U.S. governmental contracting environment we will continue to be, the subject of one or more U.S. governmental investigations. If we or one of our business units were charged with wrongdoing as a result of any U.S. governmental investigations, including violation of certain environmental or export laws, we could be suspended from bidding on or receiving awards of new U.S. governmental contracts pending the completion of legal proceedings. If convicted or found liable, we could be subject to fines, penalties, repayments and treble and other damages. Any contracts found to be tainted by fraud could be voided by the U.S. government. The U.S. government also reserves the right to prohibit a contractor from receiving new governmental contracts for fraudulent, criminal or other seriously improper conduct. Independently, failure to comply with U.S. laws and regulations related to the export of goods and technology outside the United States could result in civil or criminal penalties and suspension or termination of our export privileges.
Risks Relating to Our Jurisdiction of Incorporation
Legislation and negative publicity regarding Bermuda companies could increase our tax burden and affect our operating results.financial condition, results of operations or cash flows.
Legislation Relating to Government Contracts
We continue to assess the potential impact of various U.S. federal and state legislative proposals that would deny government contracts to U.S. companies that move their corporate location abroad. The legislative proposals could cover the 1997 acquisition of Tyco International Ltd., a Massachusetts corporation, by ADT Limited (a public company that had been located in Bermuda since the 1980's with origins dating back to the United Kingdom since the early 1900's), as a result of which ADT changed its name to Tyco International Ltd. and became the parent to the Tyco group.
In addition, the U.S. federal government and various other states and municipalities have proposed or may propose legislation that would deny government contracts to U.S. companies that move their corporate location abroad. We are unable to predict with any level of certainty the likelihood or final form in which any such proposed legislation might become law, the nature of regulations that may be promulgated under any future legislative enactments, or the financial impacteffect such enactments and increased regulatory scrutiny may have on our business.
Tax Legislation
The United States Congress has in the past considered legislation affecting the tax treatment of U.S. companies that have undertaken certain types of expatriation transactions. In October 2004, the United States Congress enacted such legislation, which did not, however, retroactively apply to the 1997 acquisition of Tyco International Ltd. by ADT Limited. Legislation passed by the U.S. Senate on November 18, 2005 would modify parts of the American Jobs Creation Act of 2004, but would not retroactively apply to the 1997 acquisition of Tyco International Ltd. by ADT Limited. We expect various U.S. Treasury Department studies to be released and tax proposals to be introduced in the United States Congress in the future and cannot provide assurance that these proposals would not have adverse effects on Tyco if enacted. Such adverse effects could include substantially reducing the tax benefits of our corporate structure, materially increasing our tax burden or otherwise adversely affecting our business.
Negative Publicity
There is continuing negative publicity regarding, and criticism of, U.S. companies' use of, or relocation to, offshore jurisdictions, including Bermuda. As a Bermuda company, this negative publicity could harm our reputation and impair our ability to generate new business if companies or governmentgovernmental agencies decline to do business with us as a result of theany perceived negative public image of Bermuda companies or the possibility of our customers receiving negative media attention from doing business with a Bermuda company.
Bermuda law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
We are organized under the laws of Bermuda. It may not be possible to enforce court judgments obtained in the United States against us in Bermuda based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some doubt as to whether the courts of Bermuda would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers
based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Bermuda.
As a Bermuda company, Tyco is governed by the Companies Act 1981 of Bermuda, which differs in some material respects from laws generally applicable to United States corporationsU.S. companies and shareholders, including, among others, differences relating to interested director and officer transactions, shareholder lawsuits and indemnification. Likewise, the duties of directors and officers of a Bermuda company are generally owed to the company only. Shareholders of Bermuda companies do not generally have a personal right of action against directors or officers of the company and may only exercise such rights of action on behalf of the company in limited circumstances. Under Bermuda law, a company may also agree to indemnify directors and officers for any personal liability, not involving fraud or dishonesty, incurred in relation to the company. Thus, holders of Tyco securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the United States.
Item 1B. Unresolved Staff Comments
None.
Our operations are conducted in facilities throughout the world aggregating approximately 10739 million square feet of floor space, of which approximately 5816 million square feet are owned and approximately 4923 million square feet are leased. These facilities house manufacturing, distribution and warehousing operations, as well as sales and marketing, engineering and administrative offices.
Fire and SecurityADT Worldwide operates through a network of offices located in North America, Central America, South America, Europe, the Middle East, the Asia-Pacific region and South Africa. Our ADT Worldwide manufacturing facilities are located in North America, and Europe. The group occupies approximately 6 million square feet, of which 1 million square feet are owned and 5 million square feet are leased.
Fire Protection Services operates through a network of offices located in North America, Central America, South America, Europe, and Securitythe Asia-Pacific region. Our Fire Protection Services manufacturing facilities are located in North America, Europe and the Asia-Pacific region. The group occupies approximately 186 million square feet, of which 41 million square feet are owned and 145 million square feet are leased.
Electronics has manufacturing facilities in North America, Central and South America, Europe, Asia and Australia. The group occupies approximately 31 million square feet, of which 20 million square feet are owned and 11 million square feet are leased.
Healthcare has manufacturing facilities in North America, Europe, the Middle East and Asia. The group occupies approximately 22 million square feet, of which 13 million square feet are owned and 9 million square feet are leased.
Engineered Products and ServicesFlow Control has manufacturing facilities, warehouses and distribution centers throughout North America, South America, Europe, and the Asia-Pacific region and Central and South America.region. The group occupies approximately 3612 million square feet, of which 216 million square feet are owned and 156 million square feet are leased.
Safety Products operates through a network of offices located in North America, South America, Europe, and the Asia-Pacific region. Our Safety Products manufacturing facilities are located in North America, Europe and the Asia-Pacific region. The group occupies approximately 6 million square feet, of which 3 million square feet are owned and 3 million square feet are leased.
Electrical and Metal Products has manufacturing facilities, warehouses and distribution centers throughout North America, South America, Europe, and the Asia-Pacific region. The group occupies approximately 7 million square feet, of which 5 million square feet are owned and 2 million square feet are leased.
In the opinion of management, our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. See Note 1816 to Consolidated Financial Statements for a description of our lease obligations.
Item 3. Legal Proceedings
In the ordinary course of business, we are subject to various legal proceedings and claims, including product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, we operate in an industry susceptible to significant patent legal claims. At any given time in the ordinary course of business, we are involved as either a plaintiff or defendant in a number of patent infringement actions. If infringement of a third party's patent were to be determined against us, we might be required to make significant royalty or other payments or might be subject to an injunction or other limitation on our ability to manufacture or sell one or more products. If a patent owned by or licensed to us were determined to be invalid or unenforceable, we might be required to reduce the value of the patent on our balance sheet and to record a corresponding charge, which could be significant in amount.
In connection with the Separation, we entered into a liability sharing agreement regarding certain class actions that were pending against Tyco prior to the Separation. Subject to the terms and conditions of the Separation and Distribution Agreement, we will manage and control all the legal matters related to assumed contingent liabilities as described in the Separation and Distribution Agreement, including the defense or settlement thereof, subject to certain limitations. A description of the liability sharing provisions of the Separation and Distribution Agreement regarding these class actions can be found in Tyco's Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 6, 2007.
Securities Class Actions
As previously reported in our 2005 Form 10-K,periodic filings, Tyco and certain of our former directors and officers have been named as defendants in over 40 purported securities class actions.action suits. We stipulated, pursuant to a court order, that each party to the Separation and Distribution Agreement would be primarily liable for a portion of the obligations arising from such litigation. The stipulation also
provides that if any party defaults on its obligations, the other parties would be jointly and severally liable for those obligations. Most of the securities class actions have now been transferred to the United States District Court for the District of New Hampshire by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings. On January 28, 2003, a consolidated securities class action complaint was filed in these proceedings. On January 7, 2005, the Company answered the plaintiffs' consolidated complaint. On January 14, 2005, lead plaintiffs made a motion for class certification, which the Company opposed on July 22, 2005. On July 5, 2005, the Company moved for revision of the Court'scourt's October 14, 2004 order in light of a change in law, insofar as the order denied the Company's motion to dismiss the consolidated complaint for failure to plead loss causation. On December 2, 2005, the Courtcourt denied the Company's motion. On April 4, 2006 plaintiffs filed a partial motion for summary judgment that was denied without prejudice to its later renewal. On June 12, 2006, the Courtcourt entered an order certifying a class "consisting of all persons and entities who purchased or otherwise acquired Tyco securities between December 13, 1999 and June 7, 2002, and who were damaged thereby, excluding defendants, all of the officers, directors and partners thereof, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which any of the foregoing have or had a controlling interest." On June 26, 2006, Tyco filed a petition for leave to appeal the class certification order to the United States Court of Appeals for the First Circuit. Separately, onOn September 22, 2006, the United States Court of Appeals for the First Circuit denied Tyco's petition.
Class Action Settlement
On May 14, 2007, we entered into a Memorandum of Understanding with plaintiffs' counsel in connection with the settlement of 32 purported securities class action lawsuits. The actions previously had been consolidated and transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of New Hampshire and includeWilliams v. Tyco International Ltd.,Brazen v. Tyco International Ltd., et al.,Philip Cirella v. Tyco International Ltd., et al.,Hromyak v. Tyco International Ltd., et al.,Myers v. Tyco International Ltd., et al.,Goldfarb v. Tyco International Ltd., et al.,Rappold v. Tyco International Ltd., et al.,Mandel v. Tyco International Ltd., et al., andSchuldt v. Tyco International Ltd., et al. and 23 other consolidated securities cases.
The Memorandum of Understanding does not resolve the following securities cases, which remain outstanding:Stumpf v. Tyco International Ltd.,New Jersey v. Tyco International Ltd., et al.,Ballard v. Tyco International Ltd.,Jasin v. Tyco International Ltd., et al., andHall v. Kozlowski, et al. The proposed settlement does not release claims arising under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1001, et seq. ("ERISA"), which are not common to all Class Members, including any claims asserted inOverby, et al. v. Tyco International Ltd., Civil Action No. 02-MD-1357-PB.
Under the terms of the Memorandum of Understanding, the plaintiffs agreed to release all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco to the certified class and assignment to the class of any net recovery of any claims possessed by Tyco and the other settling defendants against Tyco's former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers was not a settling defendant and is not a party to the memorandum. However, PricewaterhouseCoopers subsequently agreed to participate in the settlement as a settling defendant, and in consideration of a release of all claims against it by the parties to the Memorandum of Understanding, agreed to make a payment of $225 million. We and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions.
Pursuant to the terms of the Memorandum of Understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign
to Tyco all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, we will agree to pay to the certified class 50% of any net recovery against these defendants.
The parties to the Memorandum of Understanding have applied to the court for approval of the settlement agreement. On July 6, 2006,13, 2007, the lead plaintiffsU. S. District Court in Concord, New Hampshire granted preliminary approval of the settlement. On November 2, 2007, the final fairness hearing for the class settlement was held. The Court indicated it would approve the settlement and stated a formal ruling would be issued in a few weeks. If the settlement agreement does not receive final court approval, the Memorandum of Understanding will be null and void. By December 28, 2007, class participants must file their proofs of claim demonstrating their right to recovery under the class settlement.
The deadline for deciding not to participate in the class settlement was September 28, 2007. As of such date, Tyco had received opt-out notices from individuals and entities totaling approximately 4% of the shares owned by class members. These individuals and entities may pursue their claims separately against Tyco and any judgments resulting from such claims would not reduce the settlement amount. One entity, Franklin Mutual Advisers, LLC, has filed a complaint against Tyco on September 24, 2007 in an action styledFranklin Mutual Advisers, LLC v. Tyco International Ltd. in the United States District Court for the District of New Hampshire a motion for a permanent injunction against prosecutionJersey alleging violations of Section 11 of the classSecurities Act of 1933, 15 U.S.C. Sec. 77(b), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(b), and Rule 10b-5 promulgated thereunder and Section 18 of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(k) in connection with the plaintiffs' purchases and sales of Tyco securities between June 4, 2001 and April 30, 2002. The plaintiffs seek unspecified compensatory damages and reasonable attorneys' fees and costs. Tyco has requested that this action styledBrazen v. Tyco International Ltd. that was certified by the Circuit Court for Cook County, Illinois. On October 26, 2006, the Court denied Plaintiffs' motion for injunction release without prejudice.
As previously reported in our periodic filings, a class action complaint,Ezra Charitable Trust v. Tyco International Ltd., was filed in the United States District Court for the Southern District of Florida on May 28, 2003. The Judicial Panel on Multidistrict Litigationbe transferred the action to the United States District Court for the District of New Hampshire. Thereafter,Tyco intends to vigorously defend this litigation. It is not possible at this time to predict the final outcome or to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of theFranklin matter or other unasserted claims from individuals that have opted-out.
Under the terms of the Separation and Distribution Agreement entered into in connection with the Separation, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full amount of the class action settlement and any judgments resulting from opt-out claims. Additionally, under the Separation and Distribution Agreement, the companies will share in the liability and related escrow accounts, with Tyco assuming 27%, Covidien 42% and Tyco Electronics 31% of the settlement amount.
Tyco incurred a charge to expense, for which no tax benefit is available, and a current liability of $2.975 billion in 2007. The Company has also recovered or expects to recover certain of these costs from insurers. As such, the Company movedrecorded $113 million of recoveries in connection with the class action settlement in its Consolidated Statements of Operations. Tyco borrowed under its unsecured bridge and credit facilities to dismissfund the complaint. On December 22, 2004, plaintiff moved to amendliability and placed the complaint. The proposed amendment asserts causes of action under Section 10(b)proceeds in escrow for the benefit of the Securities Exchange Act of 1934class. In connection with the Separation, Covidien and Rule 10b-5 promulgated thereunder against Tyco International Ltd. and Edward Breen, our current Chief Executive Officer, and seeks to add as defendants David FitzPatrick, our former Chief Financial Officer, and PricewaterhouseCoopers LLP, our former independent auditors. As against defendants Breen and FitzPatrick, the complaint asserts a cause of action under Section 20(a)Electronics assumed their portion of the Securities Exchange Act of 1934. On March 25, 2005, the United States District Court for the District of New Hampshire granted plaintiff's motion to amend. Plaintiff filed an amended complaintrelated borrowing. The escrow accounts will earn interest that day. On March 28, 2005, the Court denied defendants' motion to dismiss the original complaint, without prejudiceis payable to the defendants' abilityclass. Interest is also accrued on the class action settlement liability. Based on the Separation and Distribution Agreement, at September 28, 2007, Tyco had a receivable from Covidien and Tyco Electronics for their portion of the liability of $1,257 million and $927 million, respectively, and a payable to move againstCovidien and Tyco Electronics for their interest in the amended complaint. On April 25, 2005, defendants movedescrow accounts. Receivables and payables that pertain to dismissthe class action settlement and related escrow accounts with the same counterparty are presented net in the consolidated amended class action complaint. Onbalance sheet. Tyco's portion of the liability is $808 million. Additionally, Tyco has paid $73 million and recorded payables of $9 million at September 2, 2005,28, 2007, with an offset to shareholders' equity for amounts due to Covidien and Tyco Electronics for their portion of the United States District Court forinsurance recovery.
If the District of New Hampshire entered a Memorandum and Order dismissingproposed settlement were not consummated on the amended complaint. On October 18, 2005, plaintiff filed a noticeagreed terms or if the unresolved proceedings were to appeal inbe determined adversely to Tyco, it is possible that the United States District Court for the District of New Hampshire. On September 27, 2006, the United StatesCompany will be required
Courtto pay judgments or settlements and incur expenses, in excess of Appeals forany insurance coverage, in aggregate amounts that would have a material adverse effect on its financial position, results of operations or cash flows. At this time, it is not possible to estimate the First Circuit affirmed the District Court's dismissalamount of the amended class action complaint.loss or probable losses, if any, that might result from an adverse resolution of these matters.
Securities Class Action Proceedings
As previously reported in our periodic filings, an action entitledHess v. Tyco International Ltd., et al., was filed on June 3, 2004 in the Superior Court of the State of California for the County of Los Angeles against certain of our former directors and officers, our former auditors and Tyco. The complaint asserts claims of fraud, negligent representation, aiding and abetting breach of fiduciary duty, tortious interference with fiduciary relationship and conspiracy arising out of an underlying settlement of litigation brought by shareholders in Progressive Angioplasty Systems, Inc. where the plaintiffs received our stock as consideration. The claim seeks unspecified monetary damages and other relief. On October 25, 2006, the Court lifted its previous order staying the case during the pendency of a related arbitration to which Tyco was not a party. NowOn December 26, 2006, Tyco filed a demurrer seeking dismissal of the action on the ground that the stay has been lifted, Tyco intendscomplaint failed to askallege facts sufficient to state causes of action. Before argument could be heard on the demurrer, the plaintiffs notified the Court that they would file an amended complaint. The amended complaint was filed on July 9, 2007. The amended complaint asserts claims of fraud, negligent representation, aiding and abetting breach of fiduciary duty, and breach of fiduciary duty in connection with, and subsequent to, dismissan underlying settlement of litigation brought by shareholders in Progressive Angioplasty Systems, Inc. where the action.plaintiffs received our stock as consideration. The amended complaint alleges collective losses of not less than $20 million and seeks compensatory and punitive damages. On September 13, 2007, Tyco filed its answer to the complaint. The parties have also begun to engage in discovery, serving document requests and interrogatories.
As previously reported in our periodic filings, the United States District Court for the District of New Jersey granted one plaintiff's motion for appointment as lead plaintiff inon October 30, 2003,Stumpf v. Tyco International Ltd., an action originally filedwas transferred to the District Court of New Hampshire by the Judicial Panel on Multidistrict Litigation. The complaint asserts claims against Tyco based on Section 11 of the Securities Act of 1933, 15 U.S.C. Sec. 77(k), Section 15 of the Securities Act, 15 U.S.C. Sec. 77(o), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Sec. 20(a) of the Exchange Act, 15 U.S.C. Sec. 78t(a). In orders dated September 2, 2005 and January 6, 2005, the Court denied Tyco's motion to dismiss. On June 12, 2007, the Court certified a purported class consisting of "all persons or entities who purchased TyCom stock, either pursuant to a July 28, 200326, 2000, Registration Statement andO'Loughlin v. Tyco International Ltd., an action originally filed Prospectus for TyCom's initial public offering, or on September 26, 2003. On December 13, 2004, lead plaintiff Mark Newby filed a consolidated securities class action complaint purporting to represent a class of purchasers of TyCom securitiesthe open market between July 26, 2000 and December 17, 2001. Plaintiff names as defendants Tyco International Ltd., TyCom, Ltd., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc., (the "Underwriters") along with certain former" On June 26, 2007, Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 offiled a Rule 23(f) Petition seeking leave to appeal the Securities Act of 1933 and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, Goldman Sachs, Merrill Lynch, Citigroup and certain former Tyco and TyCom executives. The complaint alleges the TyCom registration statement and prospectus relating to the sale of TyCom securities were inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation, Tyco's and TyCom's finances and TyCom's business prospects. On February 18, 2005, the Company moved to dismiss the consolidated securities class action complaint.certification order. On September 2, 2005,13, 2007, the United States District Court of Appeals for the District of New Hampshire granted in part andFirst Circuit denied in part the Company's motion to dismiss. The Court granted the Company's motion to dismiss allegations that the TyCom registration statement and prospectus were misleading to the extent that they failed to disclose alleged looting of Tyco by former senior executives, accounting fraud, analyst conflicts and the participation by James Brennan in the offering, because plaintiffs failed to plead that those alleged omissions were disclosed during the class period, with a resultant drop in the value of TyCom stock. However, the Court denied the Company's motion to dismiss with respect to other allegations. On September 19, 2005, plaintiff filed a motion for reconsideration of the Court's September 2, 2005 ruling with respect to Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc. On January 6, 2006, the Court held that the Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc. should remain in the case on the claim concerning TyCom's business prospects, but that the Section 11 claim related to alleged looting of Tyco by former senior executives was dismissed as to both the Tyco defendants and the Underwriters because the affirmative defense of lack of loss causation was apparent on the face of the complaint. On January 13, 2006, Tyco International Ltd. and TyCom answered the consolidated securities class action complaint. On March 8, 2006, the plaintiff filed a motion for class certification. That motion has been fully briefed and is still pending.Tyco's petition.
As previously reported in our periodic filings, on November 27, 2002 the State of New Jersey, on behalf of several state pension funds, filed a complaint,New Jersey v. Tyco International Ltd., et al., in the United States District Court for the District of New Jersey against Tyco, our former auditors and certain of our former officers and directors. OnThe complaint was amended on February 11, 2005, plaintiffs filed a Second Amended Complaint against Tyco, our former auditors, and certain of our former directors and officers.2005. As against all defendants, the amended complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, for common law fraud, aiding and abetting common law fraud, conspiracy to commit fraud and negligent misrepresentation. Claims are asserted against the individual defendants under Section 20(a) of the Securities Exchange Act of 1934, Section 15 of the Securities Act of 1933, Section 24(d) of the New Jersey Uniform Securities Law, SectionsSection 421-B:25(II) & (III)25(III) of the New Hampshire Uniform Securities Law, and for breaches of fiduciary duties. Claims are also asserted against certain of the individual defendants under Section 20A of the Securities Exchange Act of 1934, and for violation of the New Jersey RICO statute;
against Tyco under Section 12(a)(2) of the Securities Act of 1933, Section 24(c) of the New Jersey Uniform Securities Law, Section 421-B:25(II) of the New Hampshire Uniform Securities Law, and for violation of, aiding and abetting violation of, and vicarious liability under the New Jersey RICO statute; against Tyco and certain of the individual defendants under Section 14(a) of the Securities Act of 1933 and Rule 14a-9 promulgated thereunder, and for conspiracy to violate the New Jersey RICO statute; against Tyco, ourits former auditors, and certain of the individual defendants under Section 11 of the Securities Act of 1933, and for violation of, and conspiracy to violate the New Jersey RICO statute; and against our former auditors and certain of the individual defendants for aiding and abetting violation of the New Jersey RICO statute. Finally, claims are asserted against the individual defendants and our former auditors for aiding and abetting the individual defendants' breaches of fiduciary duties. The Second Amended Complaint assertsPlaintiffs assert that the defendants violated the securities laws and otherwise engaged in fraudulent acts by making materially false and misleading statements and omissions concerning, among other things, the following: unauthorized and improper compensation of certain of our former executives; their improper use of our funds for personal benefit and their improper self-dealing in real estate. The plaintiffs seek unspecified monetary damages and other relief. On June 10, 2005, the CompanyTyco moved to dismiss in part the Second Amended Complaint, whichamended complaint. On June 11, 2007, the court granted in part and denied in part Tyco's motion remains pending beforeto dismiss. Many of the Court.above plaintiffs' claims remain pending. On July 24, 2007, the plaintiffs moved for leave to amend their complaint again. Tyco responded in opposition to the motion on August 10, 2007, and the court has not yet ruled on the plaintiffs' motion.
As previously reported in our periodic filings, the Company appealed to the United States Court of Appeals for the First Circuit the decision of the United States District Court for the District of New Hampshire to remandBrazen v. Tyco International Ltd., et al.to the Circuit Court for Cook County, Illinois andHromyak v. Tyco International Ltd., et al., Goldfarb v. Tyco International Ltd., et al., Mandel v. Tyco International Ltd., et al., Myers v. Tyco International Ltd., et al., Rappold v. Tyco International Ltd., et al., andSchuldt v. Tyco International Ltd., et al. to the Circuit Court for Palm Beach County, Florida. Plaintiffs moved to dismiss the Company's appeal. On December 29, 2004, the United States Court of Appeals for the First Circuit granted plaintiffs' motion and dismissed the Company's appeal. On April 28, 2005, theThe Company moved in the Circuit Court for Palm Beach County, Florida to stay and to strike the class allegations inGoldfarb,Mandel,Myers,Rappold, andSchuldt. Also on April 28, 2005, the Company moved in the Circuit Court for Palm Beach County, Florida to dismissHromyak. On July 8, 2005, the Court granted in part and denied in part the motion to stay and to strike the class allegations inGoldfarb,Mandel,Myers,Rappold, andSchuldt. On August 23, 2005, theThe Circuit Court granted Tyco's motion to dismissHromyak. TheHromyak plaintiffs filed a notice of appeal on September 20, 2005 and briefing has been completed. On December 6, 2006, the Florida District Court of Appeal affirmed the dismissal. These cases were included in the proposed settlement of the Securities Class Action, which is contingent upon these cases being dismissed.
As previously reported in our periodic filings, after filing an initial complaint on March 10, 2005,June 26, 2002, plaintiff Lionel I. Brazen filed an amended class action complaint, on March 10, 2005, in the Circuit Court for Cook County, Illinois purporting to represent a class of purchasers who exchanged shares of Mallinckrodt, Inc. common stock for shares of Tyco common stock pursuant to the Joint Proxy Statement and Prospectus, and the Registration Statement in which it was included, in connection with the October 17, 2000 merger of Tyco and Mallinckrodt, Inc. Plaintiff names as defendants Tyco International Ltd., and certain former Tyco executives and asserts causes of action under Section 11, 12(a)(2) and 15 of the Securities Act of 1933. The amended class action complaint alleges that the defendants made statements in the Registration Statement and the Joint Proxy Statement and Prospectus that were materially false and misleading and failed to disclose material adverse facts regarding the business and operations of Tyco. The amended class action complaint seeks unspecified monetary damages and other relief. On April 21, 2005, the Company moved in the Circuit Court for Cook County, Illinois to dismiss or stay or, in the alternative, to strike the class allegations. On July 22, 2005, the Court denied the Company's motion. Also, on July 22, 2005, the Court granted the motion to dismiss individual defendants Michael A.
Ashcroft, Joshua M. Berman, Richard S. Bodman, John F. Fort, III, Stephen W. Foss, James S. Pasman Jr., W. Peter Slusser and Frank E. Walsh, Jr. On August 2, 2005, Tyco filed a motion for a finding pursuant to Supreme Court Rule 308(a), which was denied on August 16, 2005. On August 19, 2005, Tyco filed an interlocutory appeal of the Circuit Court for Cook County Illinois' July 22, 2005 memorandum and order. On December 27, 2005, the Appellate Court of Illinois, First Judicial District, denied Tyco's interlocutory appeal. On January 31, 2006, the Company filed a petition for leave to appeal the decision of the appellate court, but that petitionorder, which was subsequently denied. On January 6, 2006, the plaintiff, joined by an additional named plaintiff Nancy Hammerslough, filed a renewed motion for class certification which was granted. On February 14, 2006, Tyco filed its answer to the complaint. On July 5, 2006, plaintiffs filed a partial motion for summary
judgment which was denied on November 8, 2006. On November 22, 2006, plaintiffs filed a motion to reconsider the denial of their motion for summary judgment. BriefingOn January 25, 2007, the Court denied plaintiffs' motion to reconsider. This case was included in the proposed settlement of the Securities Class Action, which settlement is ongoing.contingent upon this case being dismissed.
As previously reported in our periodic filings, on April 29, 2005, an action was filed against Tyco in the United States District Court for the Southern District of Florida,Stevenson v. Tyco International Ltd., et.et al. Plaintiff namesnamed as additional defendants our current Chief Executive Officer, Edward Breen, our former Chief Financial Officer, David FitzPatrick, our currentformer Executive Vice President and General Counsel, William Lytton, current members of Tyco's Board of Directors including Dennis Blair, Bruce Gordon, John Krol, Carl McCall, Mackey McDonald, Brendan O'Neill, Sandra Wijnberg, and Jerome York, as well as former members of Tyco's Board of Directors, including Michael Ashcroft, Joshua Berman, Richard Bodman, John Fort, Steven Foss, Wendy Lane, James Pasman, Peter Slusser and Joseph Welch. The complaint asserts causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint allegesalleged that defendants made material misrepresentations that resulted in artificially deflated stock prices. The Judicial Panel on Multidistrict Litigation has transferred thisthe action to the United States District Court for the District of New Hampshire. On March 31, 2007, Tyco filed a motion to dismiss the complaint and the Court granted the motion to dismiss on June 13, 2007.
On January 31, 2003 a civil action was filed by three plaintiffs in the United States District Court for the District of New Jersey,Cirella v. Tyco International et al. Plaintiff namesnamed as defendants Tyco International Ltd., Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick. Plaintiff Philip M. Cirella alleges that he was a shareholder in CIT who received common shares of Tyco when it acquired CIT in 2000, and later purchased additional Tyco shares with Marguerite Cirella. Plaintiffs assert a cause of action against all defendants for violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and a cause of action against the individual defendants for violation of Section 20(a) of the Exchange Act. The complaint alleges that the defendants failed to disclose related-party transactions, including the following: providing interest free loans, forgiving personal loans, purchasing personal properties, using company funds to purchase personal items, selling individual Tyco shares while concealing information from investors, and failing to disclose an ongoing criminal investigation of Kozlowski, all of which resulted in an artificially inflated share price. Plaintiffs seek compensatory damages and costs against all defendants and punitive exemplary damages against the individual defendants. The Judicial Panel on Multidistrict Litigation has transferred the action to the United States District Court for the District of New Hampshire. This case was included in the proposed settlement of the Securities Class Action, which is contingent upon the case being dismissed.
As previously reported in our periodic filings, an action was filed on January 20, 2004, a complaint was filed in the United States District Court for the Southern District of New York,Ballard v. Tyco International Ltd., et al. Plaintiffs are formertrustees of various trusts that were allegedly major shareholders of AMP, shareholders who receivedInc., a company acquired by Tyco stock in connection with Tyco's merger with AMP.April 1999. Plaintiffs name as defendants Tyco, International Ltd.,five of its former officers and directors and PricewaterhouseCoopers LLP former officers L. Dennis Kozlowski, Mark Swartz, Mark Belnick and former directors Frank Walsh and Michael Ashcroft. The("PWC"). As against all defendants, the complaint asserts causes of action under Sections 10(b), of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 11 of the Securities Act of 1933. As against the Tyco defendants, the complaint asserts causes of action under Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder; Section 12(a)(2) of the Securities Act; and for common law fraud and negligent misrepresentation. As against the individual defendants, the complaint asserts causes of action under Section 20(a) of the Securities Exchange Act and Section 15 of the Securities Act. The complaint alleges that defendants engaged in a scheme to artificially inflate Tyco's earnings and to mislead investors as to Tyco's positive earnings, growth and acquisition synergies prior to and in connection with its acquisition of AMP, Inc. The Judicial Panel on Multidistrict Litigation transferred the action to the District of New Hampshire. Tyco moved to dismiss the complaint, and that motion was denied. On August 5, 2005, defendant Michael A. Ashcroft's motion to dismiss with respect to the plaintiffs' claims under Sections 10(b) and 20(a) of the Securities Exchange Act, of 1934, Sections 11 and 12 (a)(2)Section 15 of the Securities Act, of 1933,and common law fraud and negligent misrepresentation. The complaint seeks an award of compensatory and exemplary damages. On March 15, 2004, the Judicial Panel on Multidistrict Litigation transferredBallard to the United States District Court for the District of New Hampshire. On June 10, 2004, the Court entered
an order consolidatingBallard with the Securities Action. On July 12, 2004, the Company moved to dismiss the complaint. On July 19, 2004, plaintiffs moved for reconsideration of the consolidation order. On April 22, 2005, the Court granted PricewaterhouseCoopers LLP's motion to dismiss. On July 11, 2005, the Court denied the Company's motion to dismiss. On July 12, 2005, the Court granted plaintiffs' motion for reconsideration. On August 5, 2005, the Company answered the plaintiffs' complaint.
As previously reported in our periodic filings, plaintiff moved to remandDavis v. Kozlowski, an action originally filed on December 9, 2003, from the United States District Court for the District of New Hampshire back to the Circuit Court of Cook County, Illinois. On March 17, 2005, the United States District Court for the District of New Hampshire granted plaintiff's motion to remand and denied defendants' motion to dismiss. On March 31, 2005, the Company moved for reconsideration of the Court's remand order. On July 17, 2006, the Court entered an order granting Tyco's motion to dismiss on the grounds that all of plaintiff'smisrepresentation claims were preempted by federal law. The motion to dismiss was granted without prejudice to plaintiff's right to file another action in state court asserting claims that are not preempted by federal law.granted.
As previously reported in our periodic filings, a complaint,Sciallo v. Tyco International Ltd., et al., was filed on September 30, 2003 in the United States District Court for the Southern District of New York. The plaintiffs purport to be former executives of U.S. Surgical who traded their U.S. Surgical stock options for Tyco International, Ltd. stock options when Tyco acquired U.S. Surgical on October 1, 1998. Plaintiffs name as defendants Tyco International Ltd. and certain former Tyco directors and executives. The complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, for common law fraud and negligence, and violation
of New York General Business Law Section 349, which prohibits deceptive acts and practices in the conduct of any business. The complaint alleges that defendants made materially false and misleading statements and omissions concerning, among other things, Tyco's financial condition and accounting practices. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.
As previously reported in our periodic filings, a complaint was filed on September 2, 2004 in the Court of Common Pleas for Dauphin County, Pennsylvania,Jasin v. Tyco International Ltd., et.et al. Thispro se plaintiff named as additional defendants Tyco International (US) Inc., L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, Mark H. Swartz, our former Chief Financial Officer and Director and Juergen W. Gromer, currently President of Tyco Electronics. Plaintiff's complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 11 of the Securities Act of 1933. Claims against Messrs. Kozlowski, Swartz and Gromer are also asserted under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder and Section 20A of the Securities Exchange Act of 1934, as well as Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Plaintiff also asserts common law fraud, negligent misrepresentation, unfair trade practice, breach of contract, breach of the duty of good faith and fair dealing and violation of Section 1-402 of the Pennsylvania Securities Act of 1972. Tyco has removed the complaint to the United States District Court for the Middle District of Pennsylvania. The Judicial Panel on Multidistrict Litigation transferred this action to the United States District Court for the District of New Hampshire. The plaintiff has moved to vacate the conditional transfer order.
As previously reported in our periodic filings, the Judicial Panel on Multidistrict Litigation was notified thatHall v. Kozlowski, et al. an action relating to plaintiff's employment, 401(k) and pension plans and ownership of Tyco stock, may be an action that should be transferred to the United States District Court for the District of New Hampshire. Thereafter, the Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of New Hampshire. On March 16, 2005, Tyco International (US) Inc. answered plaintiff's amended complaint.
As previously reported in our periodic filings, plaintiff moved to remandDavis v. Kozlowski et al., an action originally filed on December 9, 2003, from the United States District Court for the District of New Hampshire back to the Circuit Court of Cook County, Illinois. On March 17, 2005, the United States District Court for the District of New Hampshire granted plaintiff's motion to remand and denied defendants' motion to dismiss. On March 31, 2005, the Company moved for reconsideration of the Court's remand order. On July 17, 2006, the Court entered an order granting Tyco's motion to dismiss on the grounds that all of plaintiff's claims were preempted by federal law. The motion to dismiss was granted without prejudice to plaintiff's right to file another action in state court asserting claims that are not preempted by federal law. On January 8, 2007, plaintiff filed an action in the Circuit Court of Cook County, Illinois. The complaint seeks unspecified monetary damages and other relief. On January 12, 2007, Tyco removed the re-filed action to federal court in the United States District Court for the Northern District of Illinois, Eastern Division. On February 1, 2007, the Judicial Panel on Multidistrict Litigation (JPML) issued a conditional transfer order transferring the case to the District of New Hampshire. Plaintiffs filed a motion to remand the case to state court on February 12, 2007 and moved the JPML to vacate the conditional transfer order on March 9, 2007. We filed an opposition to the motion to vacate on March 29, 2007. On March 15, 2007, we filed an opposition to plaintiff's remand motion and filed a cross-motion to dismiss the action. Briefing on the cross-motion was completed on April 26, 2007. On May 31, 2007, the JPML denied the motion to vacate the conditional transfer order. On June 15, 2007 the JPML transferred the case back to the United States District Court for the District of New Hampshire. On October 16, 2007, Tyco filed its renewed cross-motion to dismiss the action.
Shareholder Derivative Litigation
As previously reported in our periodic filings, an action was filed on June 7, 2002 in the Supreme Court of the State of New York,Levin v. Kozlowski, alleging that the individually named defendants breached their fiduciary duties, committed waste and mismanagement and engaged in self-dealing in connection with Tyco's accounting practices, individual board members' use of funds, and the financial disclosures of certain mergers and acquisitions. It is further alleged that certain of the individual defendants converted corporate assets for their own use. Plaintiffs seek money damages. Plaintiffs agreed to stay that action pending the resolution of the federal derivative action, which was dismissed by the United States District Court for the District of New Hampshire on October 14, 2004; and the appeal from that ruling was voluntarily dismissed on May 19, 2005. On June 14, 2005, the plaintiffs resumed theLevin action. On September 22, 2005, the Company filed a motion to dismiss the derivative complaint. On November 14, 2006, the Supreme Court of the State of New York dismissed the complaint with prejudice. On December 11, 2006, plaintiffs filed a notice of appeal of the Court's November 14, 2006 order dismissing the complaint. On October 25, 2007, the Supreme Court of the State of New York, Appellate Division, First Department, heard oral arguments in this action and on November 15, 2007, the Court denied the plaintiff's appeal.
ERISA Litigation and Investigation
As previously reported in our periodic filings, Tyco and certain of our current and former employees, officers and directors, have been named as defendants in eight class actions brought under the Employee Retirement Income Security Act.Act ("ERISA"). Two of the actions were filed in the United States District Court for the District of New Hampshire and the six remaining actions were transferred to that courtCourt by the Judicial Panel on Multidistrict Litigation. All eight actions have been consolidated in the District Court in New Hampshire. The complaints purportedconsolidated complaint purports to bring claims on behalf of the Tyco International (US) Inc.our Retirement Savings and Investment Plans and the participants therein.therein and alleges that the defendants breached their fiduciary duties under ERISA by negligently misrepresenting and negligently failing to disclose material information concerning, among other things, the following: related-party transactions and executive compensation; our mergers and acquisitions and the accounting therefor, as well as allegedly undisclosed acquisitions; and misstatements of our financial results. The complaint also asserts that the defendants breached their fiduciary duties by allowing the Plans to invest in our shares when it was not a prudent investment. The complaints seek recovery of alleged plan losses arising from alleged breaches of fiduciary duties. On January 12, 2005, the United States District Court for the District of New Hampshire denied, without prejudice, the Company's motion to dismiss certain additional individual defendants from the action. On January 20, 2005, Plaintiffs filed a motion for class certification. On January 27, 2005, the Company answered the plaintiffs' consolidated complaint. Also, on January 28, 2005, the Company and certain individual defendants filed a motion for reconsideration of the Court's January 12, 2005 order, insofar as it related to the Tyco International (US) Inc.our Retirement Committee. On May 25, 2005, the Court denied the motion for reconsideration. On July 11, 2005, the Company and certain individual defendants opposed plaintiffs' motion for class certification. On August 15, 2006, the Court entered an order certifying a class "consisting of all Participants in the Plans for whose individual accounts the Plans purchased and/or held shares of Tyco Stock Fund at any time from August 12, 1998 to July 25, 2002." On August 29, 2006, Tyco filed a petition for leave to appeal the class certification order to the United States Court of Appeals for the First Circuit. On November 13, 2006, the United States Court of Appeals for the First Circuit denied Tyco's petition. On November 28, 2006, plaintiffs filed a motion seeking an order directing them to serve notice of the ERISA class action on potential class members. Tyco did not object to service of notice on potential class members, and on January 11, 2007, plaintiffs filed a motion, assented to by Tyco that proposed an agreed upon form of notice. On January 18, 2007, the Court granted that motion. On December 5, 2006, plaintiffs filed a motion seeking leave to file an amended complaint. Subsequently, on January 10, 2007, plaintiffs filed a motion to withdraw their motion to amend the complaint without prejudice.
ERISA Partial Withdrawal Liability Assessment and Demand
In addition, Tyco and certain of our current and former executives haveOn June 8, 2007, SimplexGrinnell received requestsa notice alleging that it had partially withdrawn from the United States DepartmentNational Automatic Sprinkler Industry Pension Fund (the "Fund"). Under Title IV of LaborERISA, if the Fund can prove that an employer completely or partially withdraws from a multi-employer pension plan such as the Fund, the employer is liable for information concerning the administrationwithdrawal liability equal to its proportionate share of the Tyco International (US) Inc. Retirement Savingsplan's unfunded vested benefits. The alleged withdrawal results from a 1994 labor dispute between Grinnell Fire Protection Systems, SimplexGrinnell's predecessor, and Investment Plans. The current focusRoad Sprinkler Fitters Local Union No. 669.
ERISA requires that payment of withdrawal liability be made in full or in quarterly installments commencing upon receipt of a liability assessment from the plan. A plan's assessment of withdrawal liability generally may be challenged only in arbitration, and ERISA requires that quarterly payments must continue to be made during the pendency of the Department's inquiry concerns losses allegedly experienced byarbitration. If the plans due to investmentsemployer prevails in our shares.arbitration (and any subsequent court appeals), its quarterly withdrawal liability payments are refunded with interest. The Department of LaborFund's total withdrawal liability assessment against SimplexGrinnell is approximately $25 million, and the quarterly withdrawal liability payments are $1.1 million commencing on August 1, 2007. SimplexGrinnell believes that it has authority to bring suit on behalf of the plans and their participants against those acting as fiduciariesstrong arguments that no withdrawal liability is owed to the Fund, and it plans to vigorously defend against the Fund's withdrawal liability assessment by timely filing for recovery of losses and additional penalties, although itarbitration. Accordingly, the Company has not informed us of any intention to do so.made no provision for this contingency in its Consolidated Financial Statements.
Tyco Litigation Against Former Senior Management
Tyco International Ltd. v. L. Dennis Kozlowski, United States District Court, Southern District of New York, No. 02-CV-7317, filed September 12, 2002, Amended April 1, 2003. As previously reported in our periodic filings, we filed a civil complaint against our former Chairman and Chief Executive Officer for breach of fiduciary duty and other wrongful conduct. The Company amended that complaint on April 1, 2003. The amended complaint alleges that the defendant misappropriated millions of dollars
from our Key Employee Loan Program and relocation program; awarded millions of dollars in unauthorized bonuses to himself and certain other Tyco employees; engaged in improper self-dealing real estate transactions involving our assets; and conspired with certain other former Tyco employees in committing these acts. The amended complaint alleges causes of action for breach of fiduciary duty, fraud, unjust enrichment, breach of contract, conversion, constructive trust, and other wrongful conduct. The amended complaint seeks recovery for all of the losses suffered by us as a result of the former Chairman and Chief Executive Officer's conduct, and of all remuneration, including restricted and unrestricted shares and options, obtained by Mr. Kozlowski during the course of this conduct. The Judicial Panel on Multidistrict Litigation transferred this action to the United States District Court for the District of New Hampshire. On October 6, 2003, Mr. Kozlowski filed a motion to dismiss or stay the case and compel arbitration, which was denied on March 16, 2004, with one exception relating to the arbitration of a claim asserting the fraudulent inducement of Mr. Kozlowski's retention agreement. On April 9, 2004, Mr. Kozlowski filed an Answer, Affirmative Defenses and Counterclaims, seeking amounts allegedly due pursuant to his purported retention agreement, life insurance policies, and other arrangements. Tyco filed its Reply to the Counterclaims on April 29, 2004. Discovery in this and the other affirmative cases is proceeding.
Mr. Kozlowski was tried on criminal charges in New York County. The first criminal trial resulted in a mistrial declared on April 2, 2004. The retrial of Mr. Kozlowski began on January 18, 2005 and concluded on June 17, 2005, when the jury returned verdicts. Of the thirty-one counts submitted to it, which were similar to certain of the claims alleged in the Company's affirmative action described above, thetwenty-two were against Mr. Kozlowski. The jury found Mr. Kozlowski guilty on all charges of grand larceny, conspiracy and securities fraud, and all but one count of falsification of business records. On September 19, 2005, Mr. Kozlowski was sentenced to a term of imprisonment of eight and one-third
years to twenty-five years, and ordered to pay an individual fine of $70 million and restitution, jointly and severally with Mr. Swartz, to Tyco of $134 million within one year. On September 19, 2005, Mr. Kozlowski filed a notice of appeal from his conviction and on October 3, 2006 filed a brief in support of his appeal. Tyco has initiated the processOn January 2, 2007, by order of collecting the restitution payment owed to it, and on November 17, 2006, the Supreme Court of the State of New York, ordered $98 million to bethe New York County District Attorney's office released from an escrow account under the supervision of the Manhattan District Attorney to Tyco, on January 2,behalf of Mr. Kozlowski, $98 million in restitution. The payment by Mr. Kozlowski was made pending the outcome of his appeal, which was denied on November 15, 2007.
Tyco International Ltd. v. Mark H. Swartz, United States District Court, Southern District of New York, No. 03-CV-2247 (TPG), filed April 1, 2003. As previously reported in our periodic filings, we filed an arbitration claim against Mark H. Swartz, our former Chief Financial Officer and director, on October 7, 2002. As a consequence of Mr. Swartz's refusal to submit to the jurisdiction of the American Arbitration Association, we filed a civil complaint against him on April 1, 2003, for breach of fiduciary duty and other wrongful conduct. The action alleges that the defendant misappropriated millions of dollars from our Key Employees Loan Program and relocation program; approved and implemented awards of millions of dollars of unauthorized bonuses to himself and certain other Tyco employees; awarded millions of dollars in unauthorized payments to himself; engaged in improper self dealing real estate transactions involving our assets; and conspired with certain other former Tyco employees in committing these acts. The complaint alleges causes of action for breach of fiduciary duty, fraud, unjust enrichment, conversion, and constructive trust, and other wrongful conduct. The action seeks recovery for all of the losses suffered by us as a result of the former Chief Financial Officer and director's conduct, and all remuneration, including restricted and unrestricted shares and options, obtained by Mr. Swartz'sSwartz during the course of this conduct. The Judicial Panel on Multidistrict Litigation transferred this action to the United States District Court for the District of New Hampshire. Mr. Swartz moved to dismiss Tyco's complaint and to compel arbitration of the parties' respective claims. The court denied Swartz's motion and he has appealed the court's decision to the United States Court of Appeals for the First Circuit. His appeal was heard on December 8, 2004. The First Circuit affirmed the District Court's decision on September 7, 2005. Discovery in this and the other affirmative cases is proceeding.
Mr. Swartz was tried on criminal charges in New York County. The first criminal trial resulted in a mistrial declared on April 2, 2004. The retrial of Mr. Swartz began on January 18, 2005 and concluded on June 17, 2005, when the jury returned verdicts. Of the thirty-one counts submitted to it, which were similar to certain of the claims alleged in the Company's affirmative action described above, thetwenty-three were against Mr. Swartz. The jury found Mr. Swartz guilty on all charges of grand larceny, conspiracy and securities fraud, and all but one count of falsification of business records. On September 19, 2005, Mr. Swartz was sentenced to a term of imprisonment of eight and one-third years to twenty-five years, and ordered to pay an individual fine of $35 million and restitution, jointly and severally with Mr. Kozlowski, to Tyco of $134 million within one year.year and Mr. Swartz was ordered individually to pay damages to Tyco in the amount of $1 million. On September 19, 2005, Mr. Swartz filed a notice of appeal from his conviction and on October 3, 2006 filed a brief in support of his appeal. On October 27, 2006, Mr. Swartz paid restitution to the Company in the amount of $38 million. The payment by Mr. Swartz was made pending the outcome of his appeal, which was denied on November 15, 2007.
Tyco International Ltd. v. L. Dennis Kozlowski and Mark H. Swartz, United States District Court Southern District of New York, No. 02-CV-9705, filed December 6, 2002. As previously disclosedreported in our periodic filings, we filed a civil complaint against our former Chairman and Chief Executive Officer and former Chief Financial Officer and Director pursuant to Section 16(b) of the Securities and Exchange Act of 1934 for disgorgement of short-swing profits from prohibited transactions in our common shares believed to exceed $40 million. The action seeks disgorgement of profits, interest, attorney's fees and costs. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire. On October 6, 2003, Messrs. Kozlowski and Swartz
moved to dismiss the claims against them based upon the statute of limitations. On March 16, 2004, Judge Barbadoro inthe District Court for the District of New Hampshire granted the defendants' motion to dismiss in part with leave for Tyco to file an amended complaint. Tyco filed an amended complaint on May 14, 2004. The defendants moved to dismiss certain claims in the amended complaint on June 28, 2004. The defendants' motion to dismiss was denied on April 21, 2005. The defendants' motion to extend time to answer the complaint until thirty days after the conclusion of deliberations in the criminal trial was granted on May 17, 2005. Both defendants'defendants filed their answers on July 18, 2005. Discovery in this and the other affirmative cases is proceeding.
Tyco International Ltd. v. Frank E. Walsh, Jr., United States District Court, Southern District of New York, No. 02-CV-4633, filed June 17, 2002. As previously reported in our periodic filings, we filed a civil complaint against Frank E. Walsh, Jr., a former director, for breach of fiduciary duty and related wrongful conduct involving receipt by Mr. Walsh of a $20 million payment in connection with aour 2001 acquisition by Tyco.of the CIT Group, Inc. The action alleges causes of action for restitution, breach of fiduciary duty and inducing breach of fiduciary duty, conversion, unjust enrichment, and a constructive trust, and seeks recovery for all of the losses suffered by us as a result of the defendant director's conduct. On December 17, 2002, Mr. Walsh paid $20 million in restitution to Tyco, which was deposited by the Company in January 2003, as a result of a plea bargain agreement with the New York County District Attorney. Our claims against Mr. Walsh are still pending. The Judicial Panel on Multidistrict Litigation transferred this action to the United States District Court for the District of New Hampshire. Discovery in this and the other affirmative cases is proceeding.
Tyco International Ltd. v. Mark A. Belnick, No. 02-CV-4644 (SWK), filed June 17, 2002. As previously reported in our periodic filings, we filed a civil complaint against our former Executive Vice President and Chief Corporate Counsel for breach of fiduciary duty and other wrongful conduct. On October 21, 2002, in a related proceeding, Mr. Belnick commenced an arbitration proceeding in New York County, New York. On October 7, 2005, the Company and Mr. Belnick entered into a settlement agreement that resolved all claims each party had previously asserted against the other.
Tyco International Ltd. v. AIG Life of Bermuda Ltd. (formerly known as American General Life of Bermuda Ltd.); L. Dennis Kozlowski; and Butterfield Trust (Bermuda) Limited, Index No. 2006: No. 82, filed on March 6, 2006 (amended April 6, 2006). We filed a civil complaint in the Supreme Court of Bermuda against our former Chief Executive Officer and others with respect to an insurance policy on the life of the former Chief Executive Officer issued by AIG Life of Bermuda Ltd. and held in trust by Butterfield Trust (Bermuda) Limited, seeking declarations that Tyco was entitled to the premiums, proceeds and value of the policy. On September 27, 2006, Tyco, Mr. Kozlowski and the other parties entered into a confidential settlement that resolved the claims in this action, with a portion of the disputed funds placed in escrow pending the resolution of the additional claims including those in the Multidistrict Litigation actions currently pending before the District Court for the District of New Hampshire.
Subpoenas and Document Requests From Governmental Entities
As previously disclosedreported in our periodic filings, we and others have received various subpoenas and requests from the SEC, the United StatesU.S. Department of Labor, state departments of labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. We are cooperating with these investigations and are complying with these requests.
Certain of our current and former employees in Fire and Security received subpoenas from the SEC's Division of Enforcement seeking testimony related to past accounting practices for the ADT dealer connect fees. The investigation, which began in June 2002, related to accounting practices employed by our former management. As previously reported in our periodic filings, these practices have been discontinued.
As previously reported in our periodic filings, in November 2004, we received an order from the SEC to report facts and circumstances involving our participation, if any, in the United Nations Oil for Food Program governing sales of Iraqi oil. On January 10, 2005 and November 8, 2005, we responded to the order and provided information concerning transactions under the United Nations Oil for Food Program. On January 31, 2006, we received a subpoena from the SEC to produce additional documents and information related to the participation of three of our businesses in the United Nations Oil for Food Program. The SEC notified us on June 7, 2006 that it was not recommending any enforcement action against Tyco in connection with its investigation of the United StatesNations Oil for Food Program. Recently, we have discovered additional product sales that may be responsive to the SEC's order and have notified the SEC staff that we intend to investigate these transactions. While it is not possible at this time to predict the final outcome of this matter, we do not believe this discovery will have a material adverse effect on the Company's financial position, results of operations or cash flows.
The U.S. Department of Labor served document subpoenas on Tyco and Fidelity Management Trust Company for documents concerning the administration of the Tyco International (US) Inc.our Retirement Savings and Investment Plans. The current focus of the Department's inquiry concerns the losses allegedly experienced by the plans due to investments in our stock. The Department of Labor has authority to bring suit on behalf of the plans and their participants against those acting as fiduciaries to the plans for recovery of losses and additional penalties, although it has not informed us of any intention to do so. The Company is continuing to cooperate with the Department's investigation.
As previously disclosed,reported in November 2004, we received an order from the SEC to report facts and circumstances involving our participation, if any, in the United Nations Oil for Food Program governing sales of Iraqi oil. On January 10, 2005 and November 8, 2005, we responded to the Order and provided information concerning transactions under the United Nations Oil for Food Program. On January 31, 2006, we received a Subpoena from the SEC to produce additional documents and information related to the participation of three of our businesses in the Oil for Food Program. The SEC notified the Companyperiodic filings, on June 7, 2006 that it was dismissing Tyco from the SEC's investigation of the United Nations Oil for Food Program.
On January 27, 2006, we received from the New Jersey Division of Criminal Justice Office of the Attorney General a subpoena to produce documents concerning, among other things, former employees, the use of certain chemicals, and the filing of reports under state and federal environmental reporting laws at the same New Jersey facility sold by Tyco in 2000. The subpoena seeks information for the period from January 1987 to December 2000. We have provided information in response to the subpoena and will continuediscussed the matter with the agency. At this time, we cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution. Tyco continues to cooperate fully with the investigators.
Intellectual Property and Antitrust LitigationEnvironmental Matters
As previously disclosedTyco is involved in our periodic filings, we are a partyvarious stages of investigation and cleanup related to environmental remediation matters at a number of patent infringement and antitrust actions that may require ussites. The ultimate cost of site cleanup is difficult to pay damage awards. Tyco has assessedpredict given the status of these matters and has recorded liabilities related to certain of these matters where appropriate.
Mallinckrodt, Inc. ("Mallinckrodt") and Nellcor Puritan Bennett, Inc. ("Nellcor"), plaintiffs/counter-defendants v. Masimo Corporation ("Masimo") et al., defendants/counter-claimants, is a consolidated patent infringement action filed on June 19, 2000 inuncertainties regarding the United States District Court for the Central District of California. Nellcor is a subsidiary of Tyco. Nellcor alleges that Masimo infringed one Nellcor patent related to pulse oximeters, which are medical devices used to measure blood oxygen levels in patients, and Masimo alleges that Nellcor infringed four Masimo patents related to pulse oximeters. Trial in the action commenced on February 18, 2004. On March 16, 2004, the jury returned a liability finding that Nellcor willfully infringed the four Masimo patents and that Masimo did not infringe the one Nellcor patent. On March 26, 2004, the jury awarded Masimo $135 million in damages for Nellcor's alleged infringement through December 31, 2003. After hearing post-trial motions, the district court issued an order on July 14, 2004 which (i) denied Masimo's request to impose an injunction on the sale of pulse oximeters; (ii) reversed the jury finding of patent infringement for oneextent of the four
patents at issue; (iii) ruled that a second patent was unenforceable due to Masimo's inequitable conduct in seekingrequired cleanup, the patent;interpretation of applicable laws and (iv) overturned the jury finding that the infringement was "willful." On August 6, 2004, the district court entered final judgment that included additional damagesregulations and alternative cleanup methods. As of $30 million for Nellcor's alleged infringement from January 1, 2004 through May 31, 2004. Nellcor asserts that Masimo infringes a second Nellcor patent (U.S. Patent No. 4,934,372—the "372 patent"). On April 8, 2005, the United States Court of Appeals for the Federal Circuit issued a decision in Nellcor's favor that reversed the district court's summary judgment finding of no infringement regarding the 372 patent claim against Masimo. The Court of Appeals remanded Nellcor's 372 patent claim to the district court for further proceedings. The district court has not yet scheduled trial in the 372 case.
Nellcor appealed the jury's infringement finding on the remaining two Masimo patents to the United States Court of Appeals for the Federal Circuit. On September 7, 2005, the Court of Appeals issued a decision on the appeal that was adverse to Nellcor. In particular, the Court of Appeals: (1) affirmed the infringement finding against Nellcor on two patents; (2) reversed the district court's ruling of non-infringement of a third patent; and (3) reversed the district court's ruling not to enter an injunction and directed the district court to issue an injunction. The Court of Appeals also: (1) affirmed the district court's ruling that Nellcor's infringement was not willful, which precluded Masimo from seeking up to treble damages; and (2) affirmed the district court's ruling that one of Masimo's patents was unenforceable due to Masimo's inequitable conduct in seeking the patent. The Company has assessed the amount of potential additional damages and interest accruing from the date of entry of final judgment to the present. Accordingly, during the fiscal quarter ending September 30, 2005,28, 2007, Tyco recorded a pre-tax charge of $277 million related to this matter and does not expect to incur material losses beyond the amount accrued.
On January 17, 2006, Tyco International Ltd., and its subsidiaries Tyco International (US) Inc., Tyco Healthcare Group LP, Mallinckrodt, Inc., and Nellcor Puritan Bennett, Inc. (collectively "Nellcor") entered into a Settlement Agreement and Release of Claims with Masimo Corporation and Masimo Laboratories, Inc. (the "Settlement") related to the consolidated patent infringement action.
Under the terms of the Settlement, Tyco on behalf of Nellcor, paid Masimo a total of $330 million on January 19, 2006, which represents $265 million in damages in the patent case for sales through January 31, 2006 (after which the infringing products will no longer be sold) and $65 million as an advance royalty for oximetry sales including Nellcor's new 06 technology products from February 1, 2006 through December 31, 2006. The Settlement does not resolve the Masimo antitrust lawsuit or the related consumer antitrust class lawsuits described below. Under the terms of the Settlement, Nellcor receives from Masimo a covenant not to sue on the Nellcor 06 products as well as a termination of all pending patent litigation with Masimo. In March 2011, Nellcor has the option to terminate Masimo's covenant not to sue and the obligation to pay future royalties on Nellcor's current products as well as any next-generation products. In addition, Nellcor shall discontinue making, offering to sell, selling or shipping any products that the court found infringed on the patents held by Masimo, but will continue to provide service and sensors for the previously sold products.
Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit filed on May 22, 2002 also pending in the United States District Court for the Central District of California. Tyco Healthcare and Mallinckrodt are subsidiaries of Tyco. In this lawsuit, Masimo alleges violations of antitrust laws against Tyco Healthcare and Mallinckrodt in the markets for pulse oximeter products. Masimo alleges that Tyco Healthcare and Mallinckrodt used their market position to prevent hospitals from purchasing Masimo's pulse oximetry products. Masimo seeks injunctive relief and monetary damages, including treble damages. Trial in this case began on February 22, 2005. The jury returned its verdict on March 21, 2005, and awarded Masimo $140 million in damages. The damages are automatically trebled under the antitrust statute to an award of $420 million. If ultimately successful, Masimo's attorneys are entitled to an award of reasonable fees
and costs in addition to the verdict amount. The district court held a hearing on June 28, 2005 regarding post-trial motions.
On March 22, 2006, the district court issued its Memorandum of Decision regarding the post-trial motions. In the Memorandum, the district court (i) vacated the jury's liability findings on two business practices; (ii) affirmed the jury's liability finding on two other business practices; (iii) vacated the jury's damage award in its entirety; and (iv) ordered a new trial on damages. The district court held the new trial on the damages on October 18 and 19, 2006. After post-trial briefing, the district court will issue its decision regarding the amount of damages to be awarded.
Tyco has assessed the status of this matter and has concluded that it is more likely than notwas probable that it would incur remedial costs in the range of approximately $36 million to $63 million. As of September 28, 2007, Tyco concluded that the jury's decision will be overturned,best estimate within this range is approximately $40 million, of which $11 million is included in accrued and further, Tyco intends to vigorously pursue all available means to achieve such reversal. Accordingly, no provision has been madeother current liabilities and $29 million is included in theother liabilities on Tyco's Consolidated Financial Statements with respect to this damage award.
Beginning on August 29, 2005 withNatchitoches Parish Hospital Service District v. Tyco International, Ltd.,twelve consumer class actions have been filed againstNellcor in the United States District Court for the Central District of California. The remaining eleven actions areAllied Orthopedic Appliances, Inc. v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on August 29, 2005,Scott Valley Respiratory Home Care v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on October 27, 2005,Brooks Memorial Hospital et al v. Tyco Healthcare Group LP filed on October 18, 2005,All Star Oxygen Services, Inc. et al v. Tyco Healthcare Group, et al filed on October 25, 2005,Niagara Falls Memorial Medical Center, et al v. Tyco Healthcare Group LP filed on October 28, 2005,Nicholas H. Noyes Memorial Hospital v. Tyco Healthcare and Mallinckrodt filed on November 4, 2005,North Bay Hospital, Inc. v. Tyco Healthcare Group, et al filed on November 15, 2005,Stephen Skoronski v. Tyco International, Ltd., et al filed on November 21, 2005,Abington Memorial Hospital v. Tyco Int'l Ltd.; Tyco Int'l (US) Inc.; Mallinckrodt In.; Tyco Healthcare Group LP filed on November 22, 2005,South Jersey Hospital, Inc. v. Tyco International, Ltd., et al filed on January 24, 2006 andDeborah Heart and Lung Center v. Tyco International, Ltd., et al filed on January 27, 2006.Balance Sheets. In all twelve complaints the putative class representatives, on behalf of themselves and others, seek to recover overcharges they allege they paid for pulse oximetry products as a result of anticompetitive conduct by Nellcor in violationview of the federal antitrust laws. TheCompany's financial position and reserves for environmental matters, the Company will respond to these complaints and intends to vigorously defend the actions.
As previously reported in the Company's periodic filings,Applied Medical Resources Corp. ("Applied Medical") v. United States Surgical ("U.S. Surgical") is a patent infringement actionbelieves that was filed in the United States District Court for the Central District of California in April 1999 in which U.S. Surgical, a subsidiary of Tyco, is the defendant. In February 2002, the district court held that U.S. Surgical's VERSASEAL universal seal system, contained in certain surgical trocar and access devices manufactured by U.S. Surgical, infringed certain of the plaintiff's patents. The district court entered a permanent injunction against U.S. Surgical based upon infringement of one of the three patents involved in the suit. The United States Court of Appeals for the Federal Circuit affirmed the district court's permanent injunction ruling in September 2003 for the VERSASEAL product, which is no longer on the market. In October 2003, the district court ruled in U.S. Surgical's favor, holding that two other patents involved in the case were invalid. A trial on damages for the earlier infringement ruling in the district court concluded on July 27, 2004. The jury awarded Applied Medical $44 million in damages and returned a finding that the earlier infringement was willful, giving the district court discretion to enhance those damages to up to treble the damages awarded to Applied Medical by the jury. On October 1, 2004, the district court issued post-trial rulings that denied U.S. Surgical's motion to set aside the jury's finding on willfulness and granted Applied Medical's motion for enhanced damages, enhancing the jury's damages award by 25%, or $11 million. On January 27, 2005, the district court awarded Applied Medical $10 million in costs, prejudgment interest and attorneys' fees. Thus, Applied Medical's total award was $65 million. U.S. Surgical appealed the damages award and the
willfulness finding to the Court of Appeals for the Federal Circuit. On January 24, 2006, the Court of Appeals issued a decision affirming the award to Applied Medical. On February 17, 2006, Tyco, on behalf of U.S. Surgical, paid Applied Medical $66 million which includes post-judgment interest accrued during the appeal. Tyco previously recorded a liability of $66 million related to this matter.
On July 31, 2003, Applied Medical filed another patent infringement suit against U.S. Surgical in the United States District Court for the Central District of California. The complaint alleges that U.S. Surgical's VERSASEAL Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,553. Applied Medical seeks injunctive relief and unspecified monetary damages, including enhanced damages for alleged willful infringement. Applied Medical filed a motion for a preliminary injunction, which the district court denied on December 23, 2003. On February 7, 2005, the district court granted U.S. Surgical's motion for summary judgment. Applied Medical appealed the summary judgment ruling. On May 15, 2006, the United States Court of Appeals for the Federal Circuit issued a decision on the appeal vacating the district court's grant of summary judgment and remanding the case for further proceedings. The district court has scheduled trial in this case for July 10, 2007.
Environmental Litigation
As previously disclosed, we have been in discussions with the U.S. Environmental Protection Agency and the New Jersey Department of Environmental Protection regarding historic environmental compliance issues at a facility sold by Tyco in 2000. In a letter dated February 10, 2006, the U.S. Environmental Protection Agency proposed a penalty of $1,750,000 for alleged violations at this facility. The Company has discussed this matter in detail with the Environmental Protection Agency and is seeking a negotiated resolution.
Commercial Litigation
Sensormatic v. Winner and Bagnara, Inc. is a franchise dispute for which Sensormatic originally filed a complaint in 1999 in the United States District Court for the Western District of Pennsylvania seeking declaratory relief. On June 28, 2004, the district court entered a stipulated judgment fixing the amount of the defendant's past damages and commissions for royalties allegedly owed under the franchise agreement in the amount of $28 million, plus $5 million in pre-judgment interest, and the entry of an injunction requiring Sensormatic to tender the franchise to the defendant. The judgment stayed the imposition andany potential payment of these damages and injunctive relief until resolutionsuch estimated amounts will not have a material adverse effect on its financial position, results of an appeal of the district court's underlying rulings on liability to the United States Court of Appeals for the Third Circuit. On June 29, 2004, Sensormatic filed its Notice of Appeal to the court of appeals. On August 31, 2005, the appellate court affirmed the district court judgment. A request for re-hearing before the entire Third Circuit was denied. No further appeals have been taken and the judgment was satisfied on October 20, 2005. The Company does not expect to incur material losses beyond what has already been accrued and paid.operations or cash flows.
Asbestos Matters
As previously reported in ourits periodic filings, Tyco and some of its subsidiaries and certain subsidiaries of Covidien are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. The majority of thesePursuant to the Separation and Distribution Agreement, Covidien has assumed all liabilities for pending cases have been filed against subsidiaries in Healthcare and Engineered Products and Services.its subsidiaries. Each case typically names between dozens to hundreds of corporate defendants. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company will continue to vigorously defend these lawsuits and the Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims. When appropriate, the Company settles claims. However, the total amount paid in any year to settle and defend all asbestos claims has been immaterial. As of September 29, 200628, 2007 there were approximately 15,5005,600 asbestos liability cases pending against the Company and ourits subsidiaries.
Income Tax Matters
During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco's U.S. federal income tax returns for the years 1997 through 2000 and issued anticipated Revenue Agents' Reports ("RARs") which reflect the IRS' determination of proposed tax adjustments for the periods under audit. The RARs propose tax audit adjustments to certain of the Company's previously filed tax return positions, all of which the Company expected and previously assessed at each balance sheet date. Accordingly, the Company has made no additional provision during the year ended September 28, 2007 as a result of the proposed audit adjustments in the RARs.
The Company has agreed with the IRS on adjustments totaling $498 million, with an estimated cash impact to the Company of $458 million, and during the third quarter of 2007, the Company paid $458 million, of which $163 million relates to the Company's discontinued operations. The Company appealed other proposed tax audit adjustments totaling approximately $1 billion, and, as Audit Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend
its prior filed tax return positions. The Company continues to believe that the amounts recorded in its financial statements relating to these tax adjustments are sufficient. However, the ultimate resolution of these matters is uncertain and could result in a material impact to the Company's financial position, results of operations or cash flows. In addition, ultimate resolution of these matters could result in the Company filing amended U.S. federal income tax returns for years subsequent to the current 1997 to 2000 audit period and could have a material impact on the Company's effective tax rate in future reporting periods.
Additionally, the IRS proposed civil fraud penalties against a prior subsidiary that was distributed to Tyco Electronics arising from alleged actions of former executives in connection with certain intercompany transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory guidelines, we estimate the proposed penalties could range between $30 million and $50 million. The Company as Audit Managing Party will vigorously oppose the assertion of such penalties against Tyco Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company's former Chief Tax Officer on a charge of willful filing of a false tax return.
Compliance Matters
As previously reported in our periodic filings, we have received and responded to various allegations and other information that certain improper payments were made by our subsidiaries in recent years. As previously reported, we have been informed that two subsidiaries in our Flow Control business in Italy have been named in a request for criminal charges filed by the Milan public prosecutor's office. We have reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that we have taken in response to the allegations. We also informed the DOJ and the SEC that we retained outside counsel to perform a company-wide baseline review of our policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("FCPA"), that we would continue to make periodic progress reports to these agencies, and that we would present our factual findings upon conclusion of the baseline review. We have and will continue to communicate with the DOJ and SEC to provide updates on the baseline review being conducted by outside counsel, including, as appropriate, briefings concerning additional instances of potential improper payments identified by us in the course of our ongoing compliance activities. Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the Company in its response to these allegations. To date, the baseline review has revealed that some business practices may not comply with Tyco and FCPA requirements. At this time, we cannot predict the outcome of these matters and other allegations reported to regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of these matters. However, it is possible that we may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on our financial position, results of operations or cash flows.
Any judgment required to be paid or settlement or other cost incurred by Tyco in connection with these matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of Tyco to Covidien or Tyco Electronics, respectively, and provides that Tyco will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among Tyco, Covidien and Tyco Electronics.
The German Federal Cartel Office ("FCO") charged that certain German subsidiaries in Tyco's Flow Control business have engaged in anti-competitive practices, in particular with regard to its hydrant, valve, street box and fittings business. Tyco investigated this matter and determined that the conduct may have violated German anti-trust-law. Tyco is cooperating with the FCO in its investigation of this violation. Tyco cannot estimate the range of potential loss that may result from this violation. It
is possible that the Company may be subject to civil or criminal proceedings and may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on our financial position, results of operations or cash flows.
Indenture Trustee Litigation
On June 4, 2007, The Bank of New York ("BONY"), as indenture trustee under the indentures dated as of June 9, 1998 and November 12, 2003, of Tyco International Group S.A. ("TIGSA"), a wholly-owned subsidiary of Tyco, commenced an action against TIGSA and Tyco in the United States District Court for the Southern District of New York. BONY served an amended complaint on October 18, 2007, which added Tyco International Finance S.A. ("TIFSA") as an additional defendant. As amended, the complaint alleges that the Separation breached the indentures and seeks damages on behalf of noteholders in excess of $4.1 billion, consisting of principal plus accrued interest on the notes issued under the indentures, plus a "make-whole" amount payable under the indentures in the event of early redemption of the notes. The amended complaint also seeks a judgment declaring that BONY was not required to sign supplemental indentures proposed by TIGSA, TIFSA and Tyco in connection with the Separation. BONY also seeks a declaratory judgment that TIGSA is obligated to pay BONY reasonable compensation and to reimburse BONY for all reasonable expenses, including attorneys' fees incurred in connection with the Separation and in resolving the proper interpretation of the indentures. On November 15, 2007, Tyco and TIFSA filed counterclaims against BONY, alleging that its refusal to sign the supplemental indentures in connection with the Separation and the filing of the amended complaint constituted a breach of the indentures and a breach of the duty of good faith and fair dealing implied in the indentures. They seek unspecified damages on these claims. Tyco and TIFSA also seek a declaratory judgment that no default has occurred and that BONY is required to sign the supplemental indentures.
On November 8, 2007, BONY delivered to the Company a Notice of Events of Default, claiming that the actions taken by the Company in connection with the Separation constitute events of default under the indentures. The claims made in the Notice of Events of Default are the same as those alleged by BONY in the litigation, and the Company continues to believe that no default or event of default has occurred. The indentures provide for a 90-day cure period following delivery of the notice of default, after which BONY could declare any outstanding amounts under the indentures immediately due and payable. We would contest such an acceleration.
TIGSA, TIFSA and Tyco continue to believe that the Separation and the proposed supplemental indentures are permitted under the indentures and that no "make-whole" amount is payable. The Company intends to vigorously defend the claims of default and believes it will prevail in legal proceedings.
If we did not have liquidity available to repay the outstanding debt under the 1998 and 2003 indentures under our 364-day bridge facility, such an acceleration of the outstanding notes would have permitted a majority of the lenders under each of our bank and letter of credit facilities to demand repayment of amounts outstanding under those facilities, and to terminate their commitments to extend additional credit thereunder. As a result, on November 27, 2007, the Company secured additional firm commitments from certain of its lenders under the bridge facility, providing the Company with additional borrowings of up to $4.0 billion to repay such notes. The additional commitments expire on, and any borrowings under the facility would mature on, November 25, 2008. The facility may only be used to repay, settle or otherwise extinguish the amounts required to be paid in connection with the litigation with BONY.
Other Matters
Earth Tech v. City of Phoenix is a contract dispute arising from Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. On December 21, 2005, Earth Tech filed a lawsuit against the City of Phoenix in the Maricopa County Superior Court alleging $3 million in damages plus interest for the City's failure to pay dewatering and computer systems costs related to the 91st Avenue project. After the City rejected Earth Tech's administrative claim against the City, Earth Tech filed and served a First Amended Complaint upon the City of Phoenix. In its First Amended Complaint, Earth Tech alleged eighteen causes of action and requested the following: (i) a recovery of at least $73 million for the value of the services performed by Earth Tech in connection with the contract; (ii) a rescission of the contract; (iii) an equitable adjustment of the Contract price for additional dewatering services and the Computer Control System; and (iv) costs for demobilization and termination of the contract. The City of Phoenix filed a Motion to Dismiss rather than filing an answer to the First Amended Complaint on May 18, 2006. The Court granted the City's Motion to Dismiss without prejudice on September 19, 2006 allowing Earth Tech 30 days to file a Second Amended Complaint. Earth Tech filed its Second Amended Compliant against the City of Phoenix on September 25, 2006. In connection with this matter, the Company has assets, which it has assessed as recoverable, of $50 million at September 28, 2007 and September 29, 2006.
On December 29, 2005, the City of Phoenix filed a lawsuit against Earth Tech, Inc., its surety, Federal Insurance Company and other unnamed parties in the Maricopa County Superior Court,The City of Phoenix v. Earth Tech, Inc., Federal Insurance Company and John Does 1-50. The lawsuit is in connection with the City of Phoenix's termination on August 12, 2005 of Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. The City alleges the following causes of action: (i) Earth Tech breached its Pre-Construction Services and Construction Management at Risk Contracts; (ii) Earth Tech did not properly, reasonably or timely manage, supervise or inspect the work under the Contracts; (iii) Federal Insurance breached the terms and conditions of the performance bond; and (iv) Federal Insurance failed to investigate the City's Bond Claims. The City requested unspecified general, consequential, incidental, special and liquidated damages plus interest as its relief. On February 8, 2006, Earth Tech filed a Motion to Dismiss the City's Complaint in which Federal Insurance Company joined. The Court denied Earth Tech's Motion to Dismiss on September 25, 2006. The City of Phoenix filed an Amended Complaint against Earth Tech and Federal Insurance on September 25, 2006. In the Amended Complaint, the City of Phoenix alleged damages of $128 million.
The Presiding Judge of Maricopa County Superior Court on July 11, 2006 consolidated all of the pending lawsuits related to this dispute on the Court's complex litigation docket. On June 6, 2007, the Court granted Earth Tech's motion for partial summary judgment, ordering that application of Arizona's Prompt Payment Act was appropriate and that any material inconsistencies in the contract be resolved in favor of the Act's requirements. On October 19, 2007, Earth Tech filed a second motion related to the Prompt Payment Act, arguing that the City of Phoenix breached its contract with Earth Tech by failing to make payment on a Payment Application that was deemed certified and approved under the Proper Payment Act. The Court is likely to rule on the motion sometime in the spring of 2008. Tyco cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of this matter.
Fitzpatrick Contractors Limited v. Tyco Fire and Integrated Solutions (UK) Ltd. On July 18, 2007, Fitzpatrick Contractors Limited ("FCL") commenced an action against Tyco Fire and Integrated Solutions (UK) Ltd. in the High Court of Justice, Queen Bench Division, Technology and Construction Court, United Kingdom, alleging that Tyco entered into a binding contract in 2002 for the design, manufacture and installation of mechanical and electrical works for the refurbishment of a portion of London Transport's Blackwell Tunnel. FCL seeks a declaratory judgment that a contract was formed between the parties and seeks damages for breach of contract in the amount of approximately $38
million. Tyco believes it has valid counterclaims for unpaid amounts owed to it by FCL for design work, purchased equipment and subcontracted construction work associated with the project, but denies that it entered a binding contract with FCL for the project and intends to defend this action vigorously. While it is not possible at this time to predict the final outcome of this dispute, Tyco does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows.
Sensormatic Security Corp. v. Sensormatic Electronics Corp., ADT Security Services, Inc. and Wallace Computer Services, Inc. In April 2002, litigation was commenced in the United States District Court for the District of Maryland by a Sensormatic franchisee, Sensormatic Security Corp. ("SSC"), alleging breach of contract against Sensormatic and tortuous interference with contract against ADT and Wallace Computer Services, Inc., a party unrelated to Tyco. The litigation was based on allegedly unpaid commissions under a franchise agreement. The lawsuit also alleges that Sensormatic improperly authorized third parties (including ADT and Wallace) to sell in SSC's exclusive territory of Maryland, Virginia and the District of Columbia. Sensormatic has agreed to indemnify Wallace. SSC seeks an accounting, monetary damages (including punitive damages against ADT and Wallace), and injunctive relief. Sensormatic and ADT have denied SSC's allegations and asserted affirmative defenses. Sensormatic also filed a counterclaim seeking recovery of overpayments made to SSC. On September 7, 2006, the trial court denied in part and granted in part the parties' cross motions for summary judgment. Among other things, the Court ruled that SSC has the right to commissions on all Sensormatic CCTV products (not just SensorVision systems) if sold for automatic theft detection in the franchise territory and SSC has the right to commissions on CCTV indirect sales if sold for automatic theft detection in the franchise territory. Sensormatic and ADT intend to appeal those rulings. Sensormatic and ADT will continue to vigorously defend the litigation. While it is not possible at this time to predict the final outcome of this dispute, Tyco does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The number of registered holders of Tyco's common shares at December 6, 2006November 15, 2007 was 46,148.26,295.
Tyco common shares are listed and traded on the New York Stock Exchange ("NYSE") and the Bermuda Stock Exchange under the symbol "TYC." The following table sets forth the high and low closing sales prices of Tyco common shares as reported by the NYSE, and the dividends paid on Tyco common shares, for the quarterly periods presented below. In connection with the Separation, effective June 29, 2007, the Company, as approved by its Board of Directors, effected a reverse stock split of Tyco's common shares, at a split ratio of one for four. Shareholder approval for the reverse stock split was obtained at the March 8, 2007 Special General Meeting of Shareholders. Market price range was adjusted for the Separation. Dividends per common share reflect the reverse stock split only.
| | Year Ended September 29, 2006 | Year Ended September 30, 2005 | Year Ended September 28, 2007 | Year Ended September 29, 2006 | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Market Price Range | | Market Price Range | | Market Price Range | | Market Price Range | | ||||||||||||||||||||||||||||
| Quarter | Dividend Per Common Share | Dividend Per Common Share | Dividend Per Common Share | Dividend Per Common Share | ||||||||||||||||||||||||||||||||
| High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||||||
| First | $ | 29.58 | $ | 25.71 | $ | 0.1000 | $ | 36.27 | $ | 29.78 | $ | 0.0125 | $ | 48.69 | $ | 43.81 | $ | 0.40 | $ | 46.40 | $ | 40.33 | $ | 0.40 | ||||||||||||
| Second | 31.04 | 24.80 | 0.1000 | 36.37 | 33.18 | 0.1000 | 52.09 | 46.57 | 0.40 | 48.69 | 38.90 | 0.40 | ||||||||||||||||||||||||
| Third | 28.50 | 25.78 | 0.1000 | 34.44 | 28.53 | 0.1000 | 53.83 | 49.88 | 0.80 | 44.70 | 40.44 | 0.40 | ||||||||||||||||||||||||
| Fourth | 27.99 | 25.23 | 0.1000 | 30.96 | 27.00 | 0.1000 | 53.36 | 40.59 | — | 43.90 | 39.57 | 0.40 | ||||||||||||||||||||||||
| 0.4000 | 0.3125 | |||||||||||||||||||||||||||||||||||
| $ | 1.60 | $ | 1.60 | |||||||||||||||||||||||||||||||||
Dividend Policy
WeOn September 13, 2007 Tyco's Board of Directors approved a quarterly dividend on the Company's common shares of $0.15 per share payable on November 1, 2007 to shareholders of record of Tyco International Ltd. post Separation on October 1, 2007. The dividend per common share in the above table represents that of Tyco pre-Separation, which included Covidien and Tyco Electronics. Following the Separation, Covidien and Tyco Electronics declared quarterly dividends as independent public companies. The timing, declaration and payment of future dividends to holders of our common shares, however, falls within the discretion of our Board of Directors and will depend upon many factors, including the statutory requirements of Bermuda law, our financial condition and results of operations, the capital requirements of our businesses, industry practice and any other factors the Board of Directors deems relevant. Additionally, we may from time to time enter into financing agreements that contain financial covenants and restrictions, some of which may limit the ability of Tyco to pay dividends. Future dividends
Performance Graph
Set forth below is a graph comparing the cumulative total shareholder return on ourTyco's common shares if any,against the cumulative return on the S&P 500 Index and the Dow Jones Industrial Diversified Index, assuming investment of $100 on September 30, 2002, including the reinvestment of dividends. The graph shows the cumulative total return as of the fiscal years ended September 30, 2003, 2004, 2005, September 29, 2006 and September 28, 2007.
| | 9/02 | 9/03 | 9/04 | 9/05 | 9/06 | 9/07 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tyco International Ltd. | $ | 100.00 | $ | 145.33 | $ | 218.47 | $ | 200.98 | $ | 204.18 | $ | 209.64 | ||||||
| S&P 500 | 100.00 | 124.40 | 141.65 | 159.01 | 176.17 | 205.13 | ||||||||||||
| Dow Jones Industrial Diversified | 100.00 | 126.24 | 155.58 | 159.29 | 170.66 | 211.64 | ||||||||||||
Equity Compensation Plan Information
The following table provides information as of September 28, 2007 with respect to Tyco's common shares issuable under its equity compensation plans:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||
|---|---|---|---|---|---|---|---|---|
| Equity compensation plans approved by security holders: | ||||||||
| 2004 Stock and Incentive Plan(1) | 19,943,812 | $ | 50.62 | 30,812,860 | ||||
| LTIP I Plan(2) | 5,232,975 | $ | 40.69 | — | ||||
| ESPP(3) | — | — | 3,088,945 | |||||
| 25,176,787 | 33,901,805 | |||||||
| Equity compensation plans not approved by security holders: | ||||||||
| LTIP II Plan(4) | 8,175,175 | $ | 53.49 | — | ||||
| SAYE(5) | 734,860 | $ | 23.30 | 7,064,900 | ||||
| 8,910,035 | 7,064,900 | |||||||
| Total | 34,086,822 | 40,966,705 | ||||||
nonrecurring events, including a change of control. Under the terms of the 2004 Plan, adopted in March 2004, no additional options, equity or equity-based grants will be made under the LTIP II Plan. The shares granted under the LTIP II Plan will be issued at vesting under the 2004 Plan.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs | |||||
|---|---|---|---|---|---|---|---|---|---|
| 7/1/06–7/28/06 | 4,900,000 | $ | 27.36 | 4,900,000 | — | ||||
| 7/29/06–9/1/06 | 13,364,600 | $ | 26.04 | 13,364,600 | — | ||||
| 9/2/06–9/29/06 | 5,439,200 | $ | 26.35 | 5,439,200 | — | ||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs | |||||
|---|---|---|---|---|---|---|---|---|---|
| 6/30/07–7/27/07 | 35,111 | $ | 52.97 | — | — | ||||
| 7/28/07–8/31/07 | 9,530 | $ | 52.36 | — | — | ||||
| 9/1/07–9/28/07 | 1,273,797 | $ | 44.50 | 1,267,500 | — | ||||
The transactions described in the table above primarily represent the repurchase of common shares on the NYSE as part of the $2.0$1.0 billion share repurchase program approved by the Board of Directors in May 2006.September 2007. The average price paid per share is calculated by dividing the total cash paid for the shares by the total number of shares repurchased. Approximately $659$944 million remained outstanding under this share repurchase program at September 29, 2006.28, 2007. The Company, through an affiliate, also acquires shares from certain employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares. Approximately 31,00051,000 shares were acquired in these vesting-related transactions outside of the share repurchase program during the quarter ended September 29, 2006.28, 2007.
Item 6. Selected Financial Data
The following tablestable sets forth selected consolidated financial data of Tyco. This data is derived from Tyco's consolidated financial statements for the five years ended September 28, 2007, September 29, 2006, September 30, 2005, 2004 and 2003, respectively. In connection with the Separation, effective June 29, 2007, the Company, as approved by its Board of Directors, effected a reverse stock split of Tyco's common shares, at a split ratio of one for four. Share and 2002, respectively. The selected financial informationper share data for each of theall periods presented below hashave been restatedadjusted to reflect the revisions discussed in Note 1 to the Consolidated Financial Statements.reverse stock split. This selected financial data should be read in conjunction with Tyco's Consolidated Financial Statements and related notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| | 2006(1) | 2005(2)(3) (Restated) | 2004(2)(4) (Restated) | 2003(2)(5)(6) (Restated) | 2002(2)(7) (Restated) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions, except per share data) | |||||||||||||||||
| Consolidated Statements of Income Data: | ||||||||||||||||||
| Net revenue | $ | 40,960 | $ | 39,305 | $ | 37,960 | $ | 33,853 | $ | 32,686 | ||||||||
| Income (loss) from continuing operations | 4,075 | 3,044 | 2,869 | 840 | (3,023 | ) | ||||||||||||
| Net income (loss) | 3,713 | 3,019 | 2,820 | 921 | (9,233 | ) | ||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||||
| Income (loss) from continuing operations | 2.03 | 1.51 | 1.43 | 0.42 | (1.52 | ) | ||||||||||||
| Net income (loss) | 1.85 | 1.50 | 1.41 | 0.46 | (4.64 | ) | ||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||||||||
| Income (loss) from continuing operations | 1.97 | 1.44 | 1.34 | 0.42 | (1.52 | ) | ||||||||||||
| Net income (loss) | 1.80 | 1.43 | 1.32 | 0.46 | (4.64 | ) | ||||||||||||
| Cash dividends per share(8) | 0.40 | 0.31 | 0.05 | 0.05 | 0.05 | |||||||||||||
| Consolidated Balance Sheets Data (End of Period): | ||||||||||||||||||
| Total assets | $ | 63,722 | $ | 62,686 | $ | 63,737 | $ | 63,047 | $ | 65,525 | ||||||||
| Long-term debt | 9,365 | 10,599 | 14,518 | 18,059 | 16,506 | |||||||||||||
| Shareholders' equity | 35,419 | 32,515 | 30,362 | 26,419 | 24,106 | |||||||||||||
| | 2007(1) | 2006(2) | 2005(3) | 2004(4) | 2003(5)(6) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions, except per share data) | |||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||
| Net revenue | $ | 18,781 | $ | 17,336 | $ | 16,665 | $ | 16,029 | $ | 14,726 | ||||||||
| (Loss) income from continuing operations | (2,519 | ) | 823 | 581 | 345 | (439 | ) | |||||||||||
| Net (loss) income | (1,742 | ) | 3,590 | 3,094 | 2,822 | 966 | ||||||||||||
| Basic earnings per share: | ||||||||||||||||||
| (Loss) income from continuing operations | (5.09 | ) | 1.64 | 1.15 | 0.69 | (0.88 | ) | |||||||||||
| Net (loss) income | (3.52 | ) | 7.14 | 6.15 | 5.64 | 1.94 | ||||||||||||
| Diluted earnings per share: | ||||||||||||||||||
| (Loss) income from continuing operations | (5.09 | ) | 1.60 | 1.13 | 0.68 | (0.88 | ) | |||||||||||
| Net (loss) income | (3.52 | ) | 6.95 | 5.85 | 5.60 | 1.94 | ||||||||||||
| Cash dividends per share(7) | 1.60 | 1.60 | 1.25 | 0.20 | 0.20 | |||||||||||||
| Consolidated Balance Sheets Data (End of Period)(8): | ||||||||||||||||||
| Total assets | $ | 32,815 | $ | 63,011 | $ | 62,465 | $ | 63,718 | $ | 63,174 | ||||||||
| Long-term debt | 4,076 | 8,853 | 10,072 | 13,917 | 16,992 | |||||||||||||
| Shareholders' equity | 15,624 | 35,387 | 32,619 | 30,399 | 26,451 | |||||||||||||
$21 $21 million gain, net of income taxes, related to a cumulative effect adjustment recorded in conjunction with the change in measurement date for pension and post retirementpostretirement benefit plans (see Note 97 to the Consolidated Financial Statements).
| | 2005 (Restated) | 2004 (Restated) | 2003 (Restated) | 2002 (Restated) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions, except per share data) | |||||||||||||
| Net income, as reported | $ | 3,019 | $ | 2,820 | $ | 921 | $ | (9,233 | ) | |||||
| Add: Employee compensation expense for share options included in reported net income, net of income taxes | 23 | 66 | 67 | 53 | ||||||||||
| Less: Total employee compensation expense for share options determined under fair value method, net of income taxes | (169 | ) | (264 | ) | (367 | ) | (454 | ) | ||||||
| Net income, pro forma | $ | 2,873 | $ | 2,622 | $ | 621 | $ | (9,634 | ) | |||||
Earnings per share: | ||||||||||||||
| Basic—as reported(1) | $ | 1.50 | $ | 1.41 | $ | 0.46 | $ | (4.64 | ) | |||||
| Basic—pro forma | 1.43 | 1.31 | 0.31 | (4.85 | ) | |||||||||
| Diluted—as reported(2) | 1.43 | 1.32 | 0.46 | (4.64 | ) | |||||||||
| Diluted—pro forma | 1.37 | 1.24 | 0.32 | (4.85 | ) | |||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations including the effects of the restatement described in Note 1 to the Consolidated Financial Statements should be read together with the Selected Financial Data and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due toas a result of many factors, including but not limited to those under the headings "Risk Factors" and "Forward-Looking Information."
Introduction
The Consolidated Financial Statements include the consolidated accountsresults of Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (hereinafter collectively referred to as "we," the "Company" or "Tyco") and have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP").
The Company operatesIn connection with the Separation, Tyco Healthcare changed its name to Covidien Ltd. ("Covidien"). As Covidien and Tyco Electronics historically accounted for 55% of our revenues, we have realigned our management and segment reporting structure and report financial and operating information in the following business segments:five segments, effective March 31, 2007:
We also provide general corporate services to our segments and construction managementthese costs are reported as Corporate and operating services.
The operating results ofOther. During the Tyco Global Network ("TGN") business are presented within Corporate through the date of its disposal in the thirdfourth quarter of 2005.2007, Infrastructure Services, previously reported as part of Corporate and Other, met the held for sale criteria and has been included in discontinued operations in all periods presented.
Restatement
Review of Prior Period Stock Option Grant Practices
Following publicity in 2006 regarding the granting of stock options at a number of companies, the Company initiated an internal review of its historical stock option grant practices to determine whether the Company's stock option award actions were appropriately governed and were accurately reflected in the Company's financial statements. The Company's Internal Audit staff, which reports directly References to the Audit Committee of the Board of Directors, began a review of the Company's equity incentive plan practices and associated approvals over the period October 1999 through June 2006. In addition to its review of plan administration, the Internal Audit staff performed detailed audit procedures on more than 95% of share options granted through the regular and off-cycle grants during this period. The audit procedures covered 100% of named executive officers and Section 16 officers and directors. The Company's review included an evaluation of grant authorizations, an assessment of the appropriate measurement dates under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and the application of appropriate equity pricing methodology.
The Company has determined that between October 1999 and 2002, there were several grants for which complete documentation was not available. As such, validation of the appropriate measurement date under APB Opinion No. 25 was difficult to determine with precision. For such grants, the Company determined an appropriate measurement date in reliance upon all available evidence and
consideration of alternatives, including the communication date to grantees for all grants, to establish a reasonable date upon which equity recipients and share awards were known, fixed and ready to be communicated to employees. To the extent the Company was able to conclude that grant date lists were fixed and ready to be communicated to employees, the measurement date was considered to be the grant date. However, in many instances, the measurement date the Company used was the date that the equity award was communicated to the recipient.
The Company has concluded that errors relatingsegment data are to the Company's stock option accounting primarily resulted from: (a) incomplete documentation to enable application of accounting principles under APB Opinion No. 25; (b) the unintentional misapplication of generally accepted accounting principles; and (c) the absence of adequate control procedures in 1999 through early 2002 designed to ensure equity recipients and share awards were fixed and certain prior to the legal grant date.
The amount of aggregate compensation expense related to this item, which the Company should have recorded in prior periods, is $252 million pre-tax and $173 million after-tax, relating to grants awarded prior to the end of 2002. None of this amount relates to 2006, $17 million pre-tax ($8 million after-tax) relates to 2005 and $66 million pre-tax ($46 million after-tax) relates to 2004, as awards vested over the relevant vesting periods. Had the Company used the communication date as the measurement date in all instances, the difference in the amount recorded would not have been material to anycontinuing operations. Prior period or in the aggregate.
Review of Equity Plan Compliance
Separately, the Company identified an error related to the recognition of compensation expense under the Company's employee stock purchase program in the United Kingdom. The aggregate compensation expense related to this item which the Company should have recorded in 2002-2005 is $29 million pre-tax and $20 million after-tax. None of this amount relates to 2006, $7 million pre-tax ($5 million after-tax) relates to 2005 and $19 million pre-tax ($13 million after-tax) relates to 2004.
Effect of Restatement
Taken together, these prior period errors result in an aggregate understatement of compensation expense of $281 million pre-tax and $193 million after-tax. Based on the findings of the items discussed above, the Company has restated its reported results for prior periods to reflect the impact of additional stock-based compensation expense in Corporate. The impact by year is as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 and Prior | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pre-tax impact | — | $ | 24 | $ | 85 | $ | 84 | $ | 75 | $ | 13 | $ | 281 | |||||||
| After-tax impact | — | $ | 13 | $ | 59 | $ | 59 | $ | 53 | $ | 9 | $ | 193 | |||||||
The impact on the Consolidated Statements of Income for the years ended September 30, 2005 and 2004, and the Consolidated Balance Sheet as of September 30, 2005, as a result of the above restatement, is summarized in the tables below. There was no impact on total cash flows from operating, investing or financing activities within the Consolidated Statements of Cash Flows for the years ended September 30, 2005 and 2004. The amounts previously reported are derived from the
Form 10-K for the year ended September 30, 2005 filed on December 9, 2005 and have been reclassified forto exclude the effectsresults of discontinued operations.
| | Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | ||||||
| | ($ in millions) | |||||||
| Operating income, as previously reported | $ | 5,792 | $ | 5,231 | ||||
| Adjustments: | ||||||||
| Prior Period Stock Option Grant Practices | (17 | ) | (66 | ) | ||||
| Equity Plan Compliance | (7 | ) | (19 | ) | ||||
| Decrease | (24 | ) | (85 | ) | ||||
| Operating income, as restated | $ | 5,768 | $ | 5,146 | ||||
| Operating Margins: | ||||||||
| As previously reported | 14.7 | % | 13.8 | % | ||||
| As restated | 14.7 | % | 13.6 | % | ||||
| | Net Income | Accumulated Earnings | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years Ended September 30, | At October 1, | |||||||||
| | 2005 | 2004 | 2003 | ||||||||
| | ($ in millions) | ||||||||||
| As previously reported | $ | 3,032 | $ | 2,879 | $ | 2,961 | |||||
| Adjustments: | |||||||||||
| Prior Period Stock Option Grant Practices | (8 | ) | (46 | ) | (119 | ) | |||||
| Equity Plan Compliance | (5 | ) | (13 | ) | (2 | ) | |||||
| Decrease(1) | (13 | ) | (59 | ) | (121 | ) | |||||
| As restated | $ | 3,019 | $ | 2,820 | $ | 2,840 | |||||
| | Years Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | ||||||||||||
| | Amounts Previously Reported | As Restated | Amounts Previously Reported | As Restated | ||||||||||
| | ($ in millions, except per share data) | |||||||||||||
| Consolidated Statements of Income Data: | ||||||||||||||
| Selling, general and administrative expenses | $ | 8,205 | $ | 8,229 | $ | 8,097 | $ | 8,182 | ||||||
| Operating income | 5,792 | 5,768 | 5,231 | 5,146 | ||||||||||
| Income from continuing operations before income taxes and minority interest | 4,189 | 4,165 | 4,080 | 3,995 | ||||||||||
| Income taxes | (1,123 | ) | (1,112 | ) | (1,138 | ) | (1,112 | ) | ||||||
| Income from continuing operations | 3,057 | 3,044 | 2,928 | 2,869 | ||||||||||
| Income before cumulative effect of accounting change | 3,011 | 2,998 | 2,879 | 2,820 | ||||||||||
| Net income | $ | 3,032 | $ | 3,019 | $ | 2,879 | $ | 2,820 | ||||||
| Basic earnings per share: | ||||||||||||||
| Income from continuing operations | $ | 1.52 | $ | 1.51 | $ | 1.46 | $ | 1.43 | ||||||
| Income before cumulative effect of accounting change | 1.50 | 1.49 | 1.44 | 1.41 | ||||||||||
| Net income | $ | 1.51 | $ | 1.50 | $ | 1.44 | $ | 1.41 | ||||||
| Diluted earnings per share: | ||||||||||||||
| Income from continuing operations | $ | 1.45 | $ | 1.44 | $ | 1.37 | $ | 1.34 | ||||||
| Income before cumulative effect of accounting change | 1.42 | 1.42 | 1.35 | 1.32 | ||||||||||
| Net income | $ | 1.43 | $ | 1.43 | $ | 1.35 | $ | 1.32 | ||||||
| | As of September 30, 2005 | ||||||
|---|---|---|---|---|---|---|---|
| | Amounts Previously Reported | As Restated | |||||
| | ($ in millions) | ||||||
| Consolidated Balance Sheet Data: | |||||||
| Assets | |||||||
| Other assets | $ | 5,225 | $ | 5,290 | |||
| Total Assets | $ | 62,621 | $ | 62,686 | |||
| Liabilities and Shareholders' Equity | |||||||
| Contributed surplus, net | $ | 15,249 | $ | 15,507 | |||
| Accumulated earnings(1) | 7,993 | 7,800 | |||||
| Total Shareholders' Equity | 32,450 | 32,515 | |||||
| Total Liabilities and Shareholders' Equity | $ | 62,621 | $ | 62,686 | |||
Overview
Effective June 29, 2007, Tyco completed the spin-offs of Covidien and Tyco Electronics, formerly Healthcare and Electronics businesses, respectively, into separate, publicly traded companies (the "Separation") in the form of a distribution to Tyco shareholders. The distribution was made on June 29, 2007, to Tyco shareholders of record on June 18, 2007, the record date. Each Tyco shareholder received 0.25 of a common share of each of Covidien and Tyco Electronics for each Tyco common
share held on the record date. Tyco shareholders received cash in lieu of fractional shares for amounts of less than one Covidien or Tyco Electronics common share. The distribution was structured to be tax-free to Tyco shareholders except to the extent of cash received in lieu of fractional shares. As previously reporteda result of the distribution, the operations of Tyco's former Healthcare and Electronics businesses are now classified as discontinued operations in our periodic filings,all periods presented.
Additionally, on January 13, 2006,the distribution date, the Company, announced thatas approved by its Board of Directors, approvedeffected a planreverse stock split of Tyco's common shares, at a split ratio of one for four. Shareholder approval for the reverse stock split was obtained at the March 8, 2007 Special General Meeting of Shareholders. Share and per share data for all periods presented have been adjusted to separatereflect the reverse stock split.
We have and will continue to incur separation costs related to debt refinancing, tax restructuring, professional services and employee-related costs. We currently estimate that the total income statement charges will be approximately $1.4 billion, after-tax, much of which will be reflected as discontinued operations. During 2007 and 2006, the Company into three separate, publicly traded companies—Tyco Healthcare, oneincurred pre-tax costs related to the Separation, including the $647 million loss on early extinguishment of debt in 2007, of $1,083 million and $169 million, respectively. Of this amount, $105 million and $49 million is included in separation costs, $259 million and $0 million related to loss on early extinguishment of debt is included in other expense, net and $719 million and $120 million is included in discontinued operations, respectively. Most of the world's leading diversified healthcare companies; Tyco Electronics,remaining charges are expected to be incurred during the world's largest passive electronic components manufacturer;first six months of fiscal 2008.
Additionally, 2007 includes tax charges related to the Separation primarily for the write-off of deferred tax assets that will no longer be realizable of $183 million, of which $95 million is included in income taxes and a combination of Tyco Fire and Security and Engineered Products and Services, a global business with leading positions$88 million is included in residential and commercial security, fire protection, and industrial products and services (the "Proposed Separation"). After thorough reviews of strategic options with our Board of Directors, we believe that this strategy is the best way to position our market-leading companies for sustained growth and value creation.discontinued operations.
Following the Proposed Separation, Tyco's shareholders will own 100% of the equity in all three companies through tax-free stock dividends. Each company will have its own independent Board of
Directors and strong corporate governance standards. We expect to file Registration StatementsOn April 27, 2007, in connection with the Proposed Separation, duringTyco and certain of its subsidiaries that are issuers of its corporate debt commenced tender offers to purchase for cash substantially all of its outstanding U.S. dollar denominated public debt. Additionally, on April 30, 2007, Tyco International Group S.A., a wholly-owned subsidiary of the second quarterCompany ("TIGSA"), commenced tender offers to purchase for cash all of 2007.its outstanding Euro and Pound Sterling denominated public debt. In connection with the debt tender offers, Tyco incurred a pre-tax charge for the early extinguishment of debt of approximately $647 million, for which no tax benefit is available.
In connection with the Proposed Separation, during the Company continuesthird quarter of 2007 we reorganized to estimate that the net economic cost to complete the transaction is expected to approximate $1.0 billion, largely for tax restructuring, debt refinancing, professional servicesa new management and employee-related costs. Depending on prevailing market conditions through the datesegment reporting structure. As part of the Proposed Separation, the Company anticipates that the corresponding income statement charges would be larger than net economic cost to complete the Proposed Separation. The difference between the income statement charges and the estimated net economic cost is expected to result from costs to retire, refinance or reassign debt, as well as non-cash charges. During 2006, the Company incurred $169 million of costs relatedthese organizational changes, we assessed new reporting units, assigned goodwill to the Proposed Separation primarily related to legal, accountingnew reporting units and consulting work associated with executingtested goodwill for impairment. As a result, we recognized a goodwill impairment of $46 million in 2007 in the transaction.
Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, the filing and effectiveness of registration statements with the Securities and Exchange Commission ("SEC") and the completion of any necessary debt refinancings. Approval by the Company's shareholders is not required as a condition to the consummation of the Proposed Separation. Tyco has received an initial private letter ruling from the Internal Revenue Service ("IRS") regarding the U.S. federal income tax consequences of the Proposed Separation noting it will qualify for favorable tax treatment.ADT Worldwide segment.
We are focused on growing profitability within each of these companies before and after the Proposed Separation, so that each may be well positioned for long-term growth as independent entities. Following the Proposed Separation, we expect that all three companies will be dividend-paying companies. As we prepare for the Proposed Separation, we remain committed to returning excess cash to shareholders. During 2006,In September 2007, Tyco's Board of Directors approved a new $1.0 billion share repurchase program under which, we repurchased 951.3 million of our common shares for $2.5 billion under our share repurchase programs. We$56 million. During 2007 we also completed the $1.5 billion share repurchase program previously approved by the Board of Directors with the repurchase of 45 million of our common shares for $1.2 billion and we repurchased an additional 50 million of our common shares for $1.3 billion under the new $2.0 billion share repurchase program approved by the Board of Directors in May 2006. We have $659 million remaining onAdditionally, during 2006 we completed the $2.0$1.5 billion share repurchase program whichapproved by the Board of Directors in July of 2005. During 2007, we expectpaid dividends of $791 million to complete priorshareholders. On September 13, 2007 Tyco's Board of Directors approved a quarterly dividend on the Company's common shares of $0.15 per share payable on November 1, 2007 to the Proposed Separation.
During 2006, holdersshareholders of record of Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA") Series A 2.75% convertible senior debentures due 2018 with a 2008 put option converted $1.2 billion of these debentures into 54 million Tyco common shares and redeemed the remaining $1 million principal amount outstanding with cash. Additionally, we utilized $1.0 billion in cash for a scheduled repayment of public notes and terminated one of our synthetic lease facilities for a total cash payment of $203 million, reducing principal debt and minority interest by $191 million and $10 million, respectively. InLtd. post Separation on October 2006, we exercised our right to buy five cable laying sea vessels that were previously included under an off-balance sheet leasing arrangement for $280 million.1, 2007.
During 2006,2007, we completed the sale of our Plastics and Adhesives segment. Our Plastics, Adhesives and Ludlow Coated Products businesses were sold for net proceeds of $882 million and the A&E Products Group was sold for net proceeds of $2 million. During 2006, the Company also recorded a $30 million receivable due from the purchaser of the Plastics, Adhesives and Ludlow Coated Products businesses based on the decline of average resin prices during fiscal year 2006, as contemplated in the definitive sale agreement. This amount is payable to Tyco no later than January 2007. Additionally, we entered into a definitive agreement to sell Printed Circuit GroupAquas Industriales de Jose, C.A. ("PCG"AIJ"), a Tyco Electronics business and leading manufacturer of high-technology printed circuit boardsjoint venture that was majority owned by Infrastructure Services, for the military, aerospace and commercial markets, for $226 million. This transaction was completed on October 27, 2006$42 million in net cash proceeds and a pre-tax gain onof $19 million was recorded. AIJ met the held for sale of approximately $45 million is expected. As such, theand discontinued operations of our Plasticscriteria and Adhesives
segment and PCG business are reflected ashas been included in discontinued operations in all periods presented. Details related to the Company's divestiture program and the related discontinued operations are discussed in "Discontinued Operations and Divestitures."
We are continuing to assess the strategic fit of our various businesses and are considering additional divestitures where businesses do not align with our long term vision. Tyco will explore a number of strategic alternatives for under-performing or non-strategic businesses including possible divestiture. In July 2007, the Board of Directors approved for divestiture Infrastructure Services which was previously reported as part of Corporate and Other. Infrastructure Services had total net revenue of $1.3 billion and operating income of $53 million in 2007. Infrastructure Services met the held for sale criteria in the fourth quarter of 2007 and has been included in discontinued operations in all periods presented.
To further improve operating efficiency, during the first quarter of 2007, we have launched a restructuring program across all segments, including the corporate organization, which will streamline some of the businesses and reduce ourthe operational footprint. We expect to incur charges related to the program of approximately $600$350 million overto $400 million through the next two years,end of which $500 million is expected to be2008. During 2007, we incurred in 2007. We expect that the total cash expenditures for this program will be approximately $450charges of $204 million, of which $250$7 million is expectedwas recorded in 2007.cost of sales, and utilized cash of $70 million related to this program. We believe this restructuring program will strengthen our competitive position over the long term.
Class Action Settlement
On May 14, 2007, Tyco entered into a Memorandum of Understanding with plaintiffs' counsel in connection with the settlement of 32 purported securities class action lawsuits.
Under the terms of the Memorandum of Understanding, the plaintiffs agreed to release all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco to the certified class. The parties to the Memorandum of Understanding have applied to the court for approval of the settlement agreement. On July 13, 2007, the U. S. District Court in Concord, New Hampshire granted preliminary approval of the settlement. On November 2, 2007, the final fairness hearing for the class settlement was held. The Court indicated it would approve the settlement and stated a formal ruling would be issued in a few weeks. If the settlement agreement does not receive final court approval, the Memorandum of Understanding will be null and void. By December 28, 2007, class participants must file their proofs of claim demonstrating their right to recovery under the class settlement.
The deadline for deciding not to participate in the class settlement was September 28, 2007. As of such date, Tyco had received opt-out notices from individuals and entities totaling approximately 4% of the shares owned by class members. These individuals and entities may pursue their claims separately against Tyco and any judgments resulting from such claims would not reduce the settlement amount. One entity, Franklin Mutual Advisers, LLC, has filed a complaint against Tyco on September 24, 2007 in an action styledFranklin Mutual Advisers, LLC v. Tyco International Ltd. in the United States District Court for the District of New Jersey alleging violations of Section 11 of the Securities Act of 1933, 15 U.S.C. Sec. 77(b), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(b), and Rule 10b-5 promulgated thereunder and Section 18 of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(k) in connection with the plaintiffs' purchases and sales of Tyco securities between June 4, 2001 and April 30, 2002. The plaintiffs seek unspecified compensatory damages and reasonable attorneys' fees and costs. Tyco has requested that this action be transferred to the United States District Court for the District of New Hampshire. Tyco intends to vigorously defend the litigation. It is not possible at this time to predict the final outcome or to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of theFranklin matter or other unasserted claims from individuals that have opted-out.
Under the terms of the Separation and Distribution Agreement entered into in connection with the Separation, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full amount of the class action settlement and any judgments resulting from opt-out claims. Additionally, under the Separation and Distribution Agreement, the companies share in the liability and related escrow accounts, with Tyco assuming 27%, Covidien 42% and Tyco Electronics 31% of the settlement amount.
Tyco incurred a charge to expense, for which no tax benefit is available, and a current liability of $2.975 billion in 2007. The Company has also recovered or expects to recover certain of these costs from insurers. As such, the Company recorded $113 million of recoveries in connection with the class action settlement in its Consolidated Statements of Operations. Tyco borrowed under its unsecured bridge and credit facilities to fund the liability and placed the proceeds in escrow for the benefit of the class. In connection with the Separation, Covidien and Tyco Electronics assumed their portion of the related borrowing. The escrow accounts will earn interest that is payable to the class. Interest is also accrued on the class action settlement liability. Based on the Separation and Distribution Agreement, at September 28, 2007 Tyco had a receivable from Covidien and Tyco Electronics for their portion of the liability of $1,257 million and $927 million, respectively, and a payable to Covidien and Tyco Electronics for their interest in the escrow accounts. Receivables and payables that pertain to the class action settlement and related escrow accounts with the same counterparty are presented net in the consolidated balance sheet. Tyco's portion of the liability is $808 million. Additionally, Tyco has paid $73 million and recorded payables of $9 million at September 28, 2007, with an offset to shareholders' equity for amounts due to Covidien and Tyco Electronics for their portion of the insurance recovery.
Operating Results
Net revenue and net income for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004, as restated, waswere as follows ($ in millions):
| | 2006 | 2005 (Restated) | 2004 (Restated) | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 33,146 | $ | 31,533 | $ | 29,886 | $ | 12,095 | $ | 10,974 | $ | 10,342 | ||||||||
| Service revenue | 7,814 | 7,772 | 8,074 | 6,686 | 6,362 | 6,323 | ||||||||||||||
| Net revenue | $ | 40,960 | $ | 39,305 | $ | 37,960 | $ | 18,781 | $ | 17,336 | $ | 16,665 | ||||||||
| Operating income | $ | 5,474 | $ | 5,768 | $ | 5,146 | ||||||||||||||
| Operating (loss) income | $ | (1,715 | ) | $ | 1,370 | $ | 1,191 | |||||||||||||
| Interest income | 134 | 123 | 91 | 102 | 43 | 39 | ||||||||||||||
| Interest expense | (713 | ) | (815 | ) | (956 | ) | (313 | ) | (279 | ) | (322 | ) | ||||||||
| Other expense, net | (11 | ) | (911 | ) | (286 | ) | (255 | ) | — | (296 | ) | |||||||||
| Income from continuing operations before income taxes and minority interest | 4,884 | 4,165 | 3,995 | |||||||||||||||||
| (Loss) income from continuing operations before income taxes and minority interest | (2,181 | ) | 1,134 | 612 | ||||||||||||||||
| Income taxes | (799 | ) | (1,112 | ) | (1,112 | ) | (334 | ) | (310 | ) | (29 | ) | ||||||||
| Minority interest | (10 | ) | (9 | ) | (14 | ) | (4 | ) | (1 | ) | (2 | ) | ||||||||
| Income from continuing operations | 4,075 | 3,044 | 2,869 | |||||||||||||||||
| Loss from discontinued operations, net of income taxes | (348 | ) | (46 | ) | (49 | ) | ||||||||||||||
| (Loss) income from continuing operations | (2,519 | ) | 823 | 581 | ||||||||||||||||
| Income from discontinued operations, net of income taxes | 777 | 2,781 | 2,492 | |||||||||||||||||
| Income before cumulative effect of accounting change | 3,727 | 2,998 | 2,820 | |||||||||||||||||
| (Loss) income before cumulative effect of accounting change | (1,742 | ) | 3,604 | 3,073 | ||||||||||||||||
| Cumulative effect of accounting change, net of income taxes | (14 | ) | 21 | — | — | (14 | ) | 21 | ||||||||||||
| Net income | $ | 3,713 | $ | 3,019 | $ | 2,820 | ||||||||||||||
| Net (loss) income | $ | (1,742 | ) | $ | 3,590 | $ | 3,094 | |||||||||||||
Net revenue increased $1.7$1.4 billion, or 4.2%8.3%, for 2007 as compared to 2006 as a result of growth in all of our segments. The increase in net revenue was largely driven by Flow Control as a result of volume growth from continued strength in most industrial end markets. In addition, ADT Worldwide had strong growth in Asia and Latin America, as well as growth in its recurring revenue base and
contracting revenue in North America. Fire Protection Services experienced continued growth in electronic and mechanical contracting. Foreign currency exchange rates positively affected 2007 by $586 million while the net impact of acquisitions and divestitures negatively affected 2007 by $48 million.
Operating income decreased $3.1 billion for 2007. Operating income was primarily impacted by the class action settlement charge, net of $2.862 billion. Revenue growth in all segments was partially offset by lower margins in Electrical and Metal Products primarily due to unfavorable spreads on both steel and copper products. Additionally, operating income was impacted by costs incurred relating to the Separation and the restructuring program announced in November 2006. Separation related costs impacted operating income by $105 million for 2007 and $49 million for 2006. Restructuring and asset impairment charges, net impacted operating income by $217 million for 2007. Also impacting operating income was a goodwill impairment charge of $46 million due to the reorganization into our new management and segment reporting structure. Divestiture charges impacted 2007 by $4 million. Restructuring, asset impairment and divestiture charges, net were $15 million for 2006.
Net revenue increased $671 million, or 4.0%, for 2006 as compared to 2005 as a result of growth in all segments, ledfour of our segments. The increase in net revenue was largely driven by ElectronicsFlow Control as a result of volume growth from strength in most industrial end markets. In addition, revenue growth was favorably impacted by increased selling prices of armored cable products due to higher costs of copper within Electrical and EngineeredMetal Products and Services.during 2006. Foreign currency exchange rates andnegatively affected 2006 by $85 million while the net impact of acquisitions and divestitures negatively impacted 2006 revenue growthaffected the period by $326 million and $125 million, respectively.$118 million.
Operating income decreased $294increased $179 million, or 5.1%15.0%, for 2006 while operating margin decreased 1.3increased 0.8 percentage points to 13.4%7.9%. The increase in operating income was driven by growth in three of our segments as well as reduced operating expenses in corporate, partially offset by lower margins in ADT Worldwide and Safety Products. Operating income for 2006 was unfavorably impactedaffected by charges of $426a $100 million consisting of separation costs of $169 million;charge relating to a pre-existing voluntary replacement program for certain sprinkler heads, incremental stock option charges of $161$84 million as required under Statement of Financial Accounting Standards ("SFAS")SFAS No. 123R, "Share-Based PaymentPayments," chargesSeparation related costs of $63$49 million related to purchased in-process research and development and net restructuring, asset impairment and impairmentdivestiture charges of $33 million, of which $6 million is included in cost of sales.$15 million. Operating income for 2006 also included net gains and impairments on divestitures of $44 million, $72 million of income related to the extinguishment of certain payment obligations under a split dollar life insurance policy and rabbi trust pursuant to a settlement with aMr. Kozlowski, former executiveChief Executive Officer, and
$48 $48 million of income resulting from a reduction in our estimated workers' compensation liabilities primarily due to favorable claims experience. In addition, foreign currency exchange ratesOperating income during 2005 was negatively affected operating income by $52 million.
Net revenue increased $1.3 billion, or 3.5%, for 2005 as compared to 2004, which resulted from growth in all segments. Foreign currency exchange rates favorably affected 2005 by $873 million while the impactnet restructuring, asset impairment and divestiture charges of divestitures and acquisitions negatively impacted the period by $689 million.
Operating income increased $622 million, or 12.1%, for 2005 while operating margin increased 1.1 percentage point to 14.7%. Operating income for 2005 was favorably impacted by the gain on the sale of the TGN business of $301$40 million. In addition, the year2005 was unfavorably impactedaffected by charges related to an adverse decision by the United States Courta charge of Appeals for the Federal Circuit on a patent dispute in the Healthcare segment of $277$50 million a charge related to an SEC enforcement action of $50 million and a $70 million charge relatingfor estimated contingencies related to contested legal proceedings seeking to enforce retention agreements for five former executives' employment of $70 million. Foreign currency exchange rates favorably affected operating income by $142 million.executives.
Results by Geographic Area
Net revenue by geographic area for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 was as follows ($ in millions):
| | | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue: | |||||||||||||||||||
| Net revenue(1): | |||||||||||||||||||
| United States | United States | $ | 19,985 | $ | 19,298 | $ | 19,254 | $ | 8,884 | $ | 8,613 | $ | 8,161 | ||||||
| Other Americas | Other Americas | 2,494 | 2,202 | 2,103 | 1,445 | 1,358 | 1,255 | ||||||||||||
| Europe | 11,498 | 11,407 | 10,830 | ||||||||||||||||
| Europe, Middle East and Africa ("EMEA") | 5,462 | 4,825 | 4,876 | ||||||||||||||||
| Asia-Pacific | Asia-Pacific | 6,983 | 6,398 | 5,773 | 2,990 | 2,540 | 2,373 | ||||||||||||
| Net revenue(1) | $ | 40,960 | $ | 39,305 | $ | 37,960 | $ | 18,781 | $ | 17,336 | $ | 16,665 | |||||||
Segment Results
The segment discussions that follow describe the significant factors contributing to the changes in results for each segmentof our realigned segments included in continuing operations.
ElectronicsADT Worldwide
Net revenue, operating income and operating margin for ElectronicsADT Worldwide for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 were as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 12,515 | $ | 11,620 | $ | 10,921 | $ | 2,734 | $ | 2,546 | $ | 2,471 | ||||||||
| Service revenue | 209 | 154 | 450 | 4,914 | 4,659 | 4,633 | ||||||||||||||
| Net revenue | $ | 12,724 | $ | 11,774 | $ | 11,371 | $ | 7,648 | $ | 7,205 | $ | 7,104 | ||||||||
| Operating income | $ | 1,808 | $ | 1,849 | $ | 1,744 | $ | 842 | $ | 907 | $ | 952 | ||||||||
| Operating margin | 14.2 | % | 15.7 | % | 15.3 | % | 11.0 | % | 12.6 | % | 13.4 | % | ||||||||
Net revenue by geographic area for ADT Worldwide for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 was as follows ($ in millions):
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| North America | $ | 4,093 | $ | 3,980 | $ | 3,930 | |||
| Europe, Middle East and Africa | 2,574 | 2,368 | 2,399 | ||||||
| Rest of World | 981 | 857 | 775 | ||||||
| $ | 7,648 | $ | 7,205 | $ | 7,104 | ||||
Net revenue for ElectronicsADT Worldwide increased $950 million or 8.1% in 20066.1% during 2007, with product revenue up 7.4% and service revenue up 5.5%, as compared to 2005,2006. Revenue from product sales includes sales and installation of electronic security and other systems. Service revenue is comprised of electronic security services and maintenance, including a 7.7%the monitoring of burglar alarms, fire alarms and other life safety systems as well as services related to retailer anti-theft systems. The 2.8% revenue growth in North America resulted largely from an increase in product revenue. Thecommercial installations, primarily in the retailer market, as well as an increase in the recurring revenue base. Revenue in the EMEA region grew 8.7%, primarily driven by favorable changes in foreign currency exchange rates. The 14.5% revenue growth in the Rest of World geographies was primarily driven by strong growth in Asia and Latin America and, to a lesser extent, favorable changes in foreign currency exchange rates. Overall, net revenue reflects broad-based volume growth across most customer end markets, especially premise wiring, industrial machinery and equipment, consumer electronics, communications equipment manufacturing and communication service provider markets. These increases were partially offsetwas
favorably affected by the impact of unfavorable$213 million due to changes in foreign currency exchange rates while the net impact of $148acquisitions and divestitures unfavorably impacted net revenue by $3 million.
Operating income North America is the most profitable geographic area for ADT Worldwide with 2007 and 2006 operating margin of 17.1% and 16.6%, respectively. ADT EMEA, while profitable with 2007 and 2006 operating margin of 3.1% and 6.3%, respectively, has strong future prospects but is not performing to the level we believe is attainable. As part of our long term program to improve profitability in ADT EMEA, several specific actions have been started, including the appointment of new general management and initiation of an estimated $90 million restructuring program to improve field efficiency, operations and consolidate certain administrative functions. We incurred charges of $69 million related to this restructuring program in 2007 which negatively impacted operating margins.
Attrition rates for 2006 decreasedcustomers in our ADT Worldwide business continued to improve, declining to an average of 12.3% on a trailing 12-month basis for 2007, as compared to 200514.2% for 2006 and 15.0% in 2005. As a result of our ongoing review of attrition rates and other pertinent factors affecting the related patterns in which revenues are expected to be earned, management reassessed amortization and depreciation methods and lives for its company-owned security systems and dealer intangible assets and made adjustments in 2007 (see Note 1).
Operating income of $842 million in 2007 decreased $65 million from $907 million in 2006. Factors that positively impacted operating income included increased volume, operational efficiencies and reductions to depreciation and amortization expense, of $26 million. The decrease to depreciation and amortization expense resulted from changes to the depreciation method and estimated useful lives for pooled subscriber assets and changes to the estimated useful lives of dealer intangible assets. These increases were more than offset by a goodwill impairment charge of $46 million, due primarily to the reorganization of our management and segment reporting structure, as well as increased material costs of $306 million, incremental stock optioninvestment in selling and marketing in Americas and Asia. In addition, results for 2007 included net restructuring and asset impairment charges of $83 million, which were primarily related to actions to improve field efficiencies and consolidating certain administrative functions in Europe, and an impairment of certain indefinite lived intangible assets. Net restructuring, asset impairment and divestiture charges were $5 million in 2006.
During the fourth quarter of 2007, ADT Worldwide began converting certain North American customers to digital backup services in advance of the February 2008 analog-to-digital signal transition for wireless cellular carriers. Given the Company's experience with this conversion in the fourth quarter, we estimate that the cost of the conversion will negatively impact operating income by approximate $40 million required under SFAS No. 123Rto $50 million in the first half of 2008.
Net revenue for ADT Worldwide increased 1.4% during 2006, with product revenue up 3.0% compared to 2005. Revenue grew 10.6% in the Rest of World geographies, driven primarily by strong growth in Asia and negativeLatin America. Revenue in North America was up slightly, while revenue in the EMEA region declined due to the continued high attrition of the legacy account base in Continental Europe. Net revenue was unfavorably affected by $35 million due to changes in foreign currency exchange rates while the net impact of $23acquisitions and divestitures unfavorably impacted net revenue by $19 million. Additionally, operating
Operating income decreased $45 million in 2006 from 2005. Results for 2006 included net restructuring, divestitureasset impairment and impairmentdivestiture charges of $16 million, of which $6 million is reflected in cost of sales, as compared to net restructuring and other credits of $10 million in 2005, discussed below. Operating income for 2006 also includes $3 million related to the Proposed Separation.
Net revenue for Electronics increased $403 million or 3.5% in 2005 as compared to 2004, including a 6.4% increase in product revenue. The increase in net revenue was driven primarily by sales to the automotive, aerospace and defense, consumer electronics, power utilities, communications equipment manufacturing and communication service provider markets. In addition, revenue increased substantially due to favorable changes in foreign currency exchange rates of $291 million. These increases were partially offset by the impact of the divestiture of the Electrical Contracting Services business of $353 million.
Operating income and operating margin for 2005 increased as compared to 2004 due primarily to increased sales volume, cost savings initiatives and favorable changes in foreign currency exchange rates of $57 million. These increases were partially offset by an 80 basis point impact of increased commodity costs. Additionally, operating income for 2005 included net restructuring and other credits of $10$5 million as compared to net restructuring, divestitureasset impairment and impairmentdivestiture charges of $20$13 million in 2004.2005. Operating income for 2006 was negatively affected by slightly lower gross margin, due largely to margin pressures in commercial contracting coupled with a slightly higher mix of lower-margin contracting revenue. These effects were partially offset by cost savings related to operational excellence initiatives. In addition, 2006 was unfavorably affected by incremental stock option charges of $14 million required under SFAS No. 123R.
Fire and SecurityProtection Services
Net revenue, operating income and operating margin for Fire and SecurityProtection Services for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 were as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 5,426 | $ | 5,299 | $ | 5,343 | $ | 1,901 | $ | 1,729 | $ | 1,626 | ||||||||
| Service revenue | 6,227 | 6,204 | 6,104 | 1,605 | 1,552 | 1,556 | ||||||||||||||
| Net revenue | $ | 11,653 | $ | 11,503 | $ | 11,447 | $ | 3,506 | $ | 3,281 | $ | 3,182 | ||||||||
| Operating income | $ | 1,190 | $ | 1,216 | $ | 899 | $ | 253 | $ | 239 | $ | 202 | ||||||||
| Operating margin | 10.2 | % | 10.6 | % | 7.9 | % | 7.2 | % | 7.3 | % | 6.3 | % | ||||||||
Net revenue for Fire and SecurityProtection Services increased $150$225 million, or 1.3% in 20066.9%, during 2007 as compared to 2005, including2006, driven largely by a 2.4%9.9% increase in revenue from product revenue.sales. Revenue from product sales includes sales and installation of security, fire protection and other systems. NetService revenue increased due tocomprises inspection, maintenance, service and monitoring of fire detection and suppression systems. This increase was largely the result of strong growth in Worldwide Fire Protection Contractingmost regions which benefited from continuing strength in commercial construction activity in our focused end-markets. Changes in foreign currency exchange rates had a favorable impact of $99 million while divestitures had a negative impact of $30 million.
Operating income increased $14 million during 2007 as compared to 2006 resulting largely from increased volume, and Servicesimproved margins, primarily in North America. Results for 2007 included net restructuring charges of $33 million, of which $1 million is included in cost of sales, primarily related to electricalactions to improve field efficiencies and mechanical contractingconsolidate certain administrative functions in Europe, compared to no charges 2006.
Net revenue for Fire Protection Services increased $99 million, or 3.1%, during 2006 as well as growthcompared to 2005, driven largely by a 6.3% increase in revenue from product sales. Most of the revenue increase occurred in North AmericanAmerica, which experienced strong bookings and international markets in our Worldwide Electronic Security Services. These increases were offsetincreasing backlog throughout most of the past two years. Revenue was unfavorably affected by the impact of acquisitions$39 million related to divestitures and divestitures of $117$22 million unfavorabledue to changes in foreign currency exchange rates of $60 million, and a decrease in sales of breathing and fire detection products within Safety Products.rates.
Operating income decreased $26increased $37 million in 2006 over 2005. Higher revenue, slightly improved gross margin and continued control of general and administrative expenses contributed to the prior year primarily as a result of lower margins, increased investments in selling and marketing and a decline in European recurring monitoring revenues within Worldwide Electronic Security Services. Results for the current period included net restructuring, impairment and divestiture charges of $11 million as compared to net restructuring, impairment and divestiture charges of $28 million in 2005.improved operating results. Operating income for 2006 was also favorably impactedaffected by cost savings related to operational excellence initiatives and prior year restructuring programs. In addition, 2006 operating income was unfavorably impactedaffected by $2 million
related to the Proposed Separation as well as incremental stock option charges of $35$8 million required under SFAS No. 123R.
Attrition rates for customers in our Worldwide Electronic Security Services business decreased to 13.8% on a trailing twelve-month basis for 2006, as compared to 14.8% for 2005 and 15.1% in 2004.
Net revenue for Fire and Security remained relatively level during 2005 as compared to 2004 as the decrease in product revenue was offset by an increase in service revenue. Revenue from product sales includes sales and installation of security, fire protection and other systems. Net revenue increased due to favorable changes in foreign currency exchange rates of $274 million and, to a lesser extent, increased sales volume of breathing and intrusion products at Tyco Safety Products as well as growth in our European fire services business. These increases were offset by the impact of divestitures of $315 million and decreased sales at our security business in Europe.
Operating income increased $317 million in 2005 over the prior year. Results for the current period included net restructuring, impairment and divestiture charges of $28 million as compared to net restructuring, impairment and divestiture charges of $264 million in 2004. Operating income for 2005 was also favorably impacted by foreign currency exchange rates of $26 million as well as cost savings related to operational excellence initiatives and prior year restructuring programs. These cost reductions were partially offset by increased investment in sales and marketing.
HealthcareFlow Control
Net revenue, operating income and operating margin for HealthcareFlow Control for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 were as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 9,579 | $ | 9,477 | $ | 9,040 | $ | 3,618 | $ | 3,002 | $ | 2,690 | ||||||||
| Service revenue | 62 | 66 | 70 | 148 | 133 | 116 | ||||||||||||||
| Net revenue | $ | 9,641 | $ | 9,543 | $ | 9,110 | $ | 3,766 | $ | 3,135 | $ | 2,806 | ||||||||
| Operating income | $ | 2,200 | $ | 2,286 | $ | 2,365 | $ | 457 | $ | 356 | $ | 336 | ||||||||
| Operating margin | 22.8 | % | 24.0 | % | 26.0 | % | 12.1 | % | 11.4 | % | 12.0 | % | ||||||||
Net revenue for HealthcareFlow Control increased $98$631 million, or 1.0%20.1%, in 20062007 as compared to 2005. This2006. The increase in net revenue was largely driven by the International and Surgical divisions within Medical Devices & Supplies as a result of strong growth across the majority of geographic regions in surgical sales including laparoscopy, ablation and vessel sealing, and to a lesser extent, sutures. Also contributing to the revenue increase was volume growth from continued strength in Bulk Pharmaceuticals (active pharmaceutical ingredients) and Retail,most industrial
end markets with growth primarily driven by new product sales and distribution,significant project growth in Latin America, as well as favorable economic trendsthe energy and strategic promotional effortswater sectors. Growth in key markets. These increases were partially offset by the adverse impact of voluntary product recallsthese sectors was strong across all geographical regions, and, in Imagingparticular, Asia-Pacific and lower volume sales within Respiratory, in addition to the negativeEurope. Favorable changes in foreign currency exchange rates positively impacted revenue by $197 million while the net impact of $93acquisitions and divestitures unfavorably impacted net revenue by $16 million.
OperatingThe increase in operating income and operating margin decreased $86of $101 million, and 1.2 percentage points, respectively,or 28.4%, in 2007 as compared 2006 was primarily due to 2005. The increased volume in Medical Devices & Supplies, discussed above, was more than offset by unfavorable manufacturing performance primarily in Respiratory and Imaging, as a result of lower volumes and higher expenses primarily associated with voluntary product recalls,revenue growth, as well as weakness in Retail of $40 million. Also contributing to the decreaseimproved utilization rates. The increase in operating income although to a lesser extent,during 2007 was additional investmentspartially offset by net restructuring and asset impairment charges of $25 million, which includes $6 million in research and development and selling expenses. Operating income was adversely impacted by a chargecost of $63 million related to purchased in-process research and development, incremental stock option charges required under SFAS No. 123R of $37 million, $2sales, $3 million of divestiture charges, related to the Proposedand $1 million of Separation and a $31 million negative
impact related to foreign currency exchange rates. Additionally, operating income for 2006 included a gain on divestiture of $48 million, primarily relating to a sale of a business within Medical Devices and Supplies.costs.
Net revenue for HealthcareFlow Control increased $433$329 million, or 4.8% in 2005 as compared to 2004. This increase resulted primarily from growth in existing businesses and, to a lesser extent, favorable changes in foreign currency exchange rates of $141 million. Growth in Healthcare's underlying businesses was principally driven by increased revenue within Medical Devices & Supplies which was largely the result of increased sales volume in the International division, primarily in Europe, due to a sales force investment and sales growth in vessel sealing, laparoscopy, and stapling. Increased sales at the Surgical division within Medical Devices & Supplies also strongly contributed, due to enhanced contracting with group purchasing organizations, increased acceptance of Laparoscopic Gastric By-Pass procedures and increased adoption of LigaSure device. Pharmaceuticals also contributed to the increase in revenue, although to a lesser extent. These increases were partially offset by decreased sales in Retail primarily due to a difficult competitive environment and customer consolidations.
The decreases in operating income and operating margin in 2005 as compared to 2004 were due primarily to a $277 million charge recorded in the fourth quarter of 2005, associated with the adverse decision by the United States Court of Appeals for the Federal Circuit on a previously disclosed legal matter. (Refer to Note 18 to the Consolidated Financial Statements for further discussion.) This charge, combined with declines in the Retail division as a result of the competitive environment mentioned above as well as increased material and transportation costs, was offset by substantial increases from other divisions, specifically the International and Surgical divisions within Medical Devices & Supplies as well as within Pharmaceutical. Increases in these divisions were due to strong sales growth as mentioned above, combined with a favorable product mix. Also positively impacting the segment were reduced administrative expenses at the segment level, as well as favorable foreign exchange rates of $41 million.
Engineered Products and Services
Net revenue, operating income and operating margin for Engineered Products and Services for the years ended September 29, 2006, September 30, 2005 and 2004 were as follows ($ in millions):
| | 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 5,625 | $ | 5,137 | $ | 4,582 | ||||
| Service revenue | 1,317 | 1,319 | 1,425 | |||||||
| Net revenue | $ | 6,942 | $ | 6,456 | $ | 6,007 | ||||
| Operating income | $ | 676 | $ | 672 | $ | 620 | ||||
| Operating margin | 9.7 | % | 10.4 | % | 10.3 | % | ||||
Net revenue for Engineered Products and Services increased $486 million or 7.5%11.7%, in 2006 as compared to 2005. The increase in net revenue was largely driven by Flow Control as a result of strongvolume growth from strength in most industrial end markets with substantial project volume in the Pacific Region and favorable market conditions in Asia and North America, as well as increased selling prices in Electrical & Metal Products due to higher costs of copper. To a lesser extent, Tyco Fire & Building Products experienced growth in the industrialenergy, process and commercial construction marketswater sectors. Growth in these sectors was particularly strong in Asia-Pacific and increased price realization.the Americas. The above increases in revenue were partially offset by a decrease at Infrastructure Services as a result of a strategic decision to be more selective in bidding for new projects, which has resulted in fewer but more profitable projects, and unfavorable changes in foreign currency exchange rates of $25$43 million.
OperatingThe increase in operating income remained relatively level in 2006 as compared to 2005. Both the2005 was due primarily to revenue growth at Flow Controlmentioned above, along with the impact of operational excellence initiatives. This increase was partially offset by the impact of incremental stock option charges required under SFAS No. 123R of $7 million.
Safety Products
Net revenue, operating income and Fire & Buildingoperating margin for Safety Products for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 were as follows ($ in millions):
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 1,752 | $ | 1,660 | $ | 1,668 | ||||
| Service revenue | 15 | 15 | 14 | |||||||
| Net revenue | $ | 1,767 | $ | 1,675 | $ | 1,682 | ||||
| Operating income | $ | 286 | $ | 202 | $ | 278 | ||||
| Operating margin | 16.2 | % | 12.1 | % | 16.5 | % | ||||
Net revenue for Safety Products increased $92 million, or 5.5%, during 2007 as compared to 2006 primarily from strong performance in the fire suppression and electronic security businesses. Favorable changes in foreign currency exchange rates of $48 million also contributed to the increase in revenue. The increase in the fire suppression business was driven by continued growth in the energy and marine sectors in the Americas and the Middle East as well as increased selling prices to help offset the significant cost increase of raw materials. The electronic security business also experienced favorable copper spreadsgrowth as a result of new product introductions and new market expansions. These increases were partially offset by continued softness in Electrical &
Metal Products and higher margin projects at Infrastructure Services contributed positivelythe life safety business in North America due to operatingdelays of federal assistance provided to fire departments.
Operating income in 2006. Offsetting this growth wasincreased $84 million to $286 million for the year ended September 28, 2007 compared to the prior year. Prior year results included a $100 million charge relatingrelated to thea pre-existing Voluntary Replacement Program ("VRP") for certain sprinkler heads (see Note 16in the fire suppression business. The deadline for filing claims to participate in the Consolidated Financial Statements) and incremental stock option chargesVRP ended on August 31, 2007. In light of $17the most current claims data, an additional $10 million required under SFAS No. 123R.charge was recorded in the fourth quarter of 2007.
Net revenue for EngineeredSafety Products and Services increased $449decreased $7 million or 7.5% in 2005during 2006 as compared to 2004.2005 driven by the unfavorable impact of $56 million from divested businesses as well as delays of federal assistance provided to fire departments which unfavorably impacted the life safety business. These decreases were
partially offset by stronger performance in the fire suppression business as a result of favorable market conditions in the United States, Middle East and China and new product introductions, including clean agent fire suppression systems. The electronic security business also experienced favorable growth as a result of new product introductions and new market expansions. Foreign currency exchange rates negatively impacted revenues by $7 million.
Operating income decreased $76 million in 2006 over 2005 primarily as a result of a $100 million charge related to a pre-existing voluntary replacement program for sprinkler heads in the fire suppression business. This charge reflected our updated estimate of the additional costs necessary to bring the program to completion. The decrease in operating income during 2006 was partially offset by volume growth and higher margins from new product introductions and price increases in the fire suppression and electronic security business, as well as cost reduction benefits from the 2004 restructuring programs. Also, 2006 results include the effect of incremental stock option charges required under SFAS No. 123R of $5 million.
Electrical and Metal Products
Net revenue, operating income and operating margin for Electrical and Metal Products for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 were as follows ($ in millions):
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 1,970 | $ | 1,946 | $ | 1,795 | ||||
| Service revenue | 4 | 3 | 3 | |||||||
| Net revenue | $ | 1,974 | $ | 1,949 | $ | 1,798 | ||||
| Operating income | $ | 159 | $ | 319 | $ | 295 | ||||
| Operating margin | 8.1 | % | 16.4 | % | 16.4 | % | ||||
Net revenue for Electrical and Metal Products increased $25 million, or 1.3%, in 2007 as compared to 2006. Favorable changes in foreign currency exchange rates of $20 million contributed to the increase in revenue. The increase in net revenue was largely driven by increased sales volume of armored cable products, steel tubular products, and higher selling prices and sales volumes in Brazil. These increases were largely offset by the impact of lower selling prices on steel tubular products in North America.
The decrease in operating income of $160 million, or 50.2%, in 2007 as compared to 2006 was primarily due to unfavorable spreads on both steel tubular and armored cable products. Income generated by higher sales volume for both armored cable and steel tubular products were more than offset by lower selling prices and higher raw material prices.
Net revenue for Electrical &and Metal Products dueincreased $151 million, or 8.4%, in 2006 as compared to 2005. The increase in net revenue in 2006 was largely driven by increased selling prices of armored cable products as a result of higher costs of copper and higher volumes of core steel and other raw materials. In addition, Flow Control and,products due to a lesser extent, Tyco Fire & Building Products experienced growth in the industrial and commercialnon-residential construction markets.markets in North America. Favorable changes in foreign currency exchange rates of $167$15 million also contributed to the increase in revenue. The above increases in revenue were partially offset by the impact of lower selling prices on core steel products in North America mainly due to lower costs of steel and a decrease at Infrastructure Services as a result of a strategic decision to be more selectiveslower market for products in bidding for new projects, which has resulted in fewer but more profitable projects.Brazil.
The increase in operating income of $24 million in 2006 as compared to 2005 was due primarily to favorable copper spreads and higher volumes of core steel products. These increases inwere partially offset by the impact of reduced spreads for core steel products and incremental stock option charges required under SFAS No. 123R of $3 million.
Net revenue, operating income and operating margin for Corporate and Other Metal Products for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 were as follows ($ in 2005 as compared to 2004 were due primarily to increased volumemillions):
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | $ | 120 | $ | 91 | $ | 93 | ||||
| Service revenue | — | — | — | |||||||
| Net revenue | $ | 120 | $ | 91 | $ | 93 | ||||
| Operations | $ | 24 | $ | 18 | $ | 18 | ||||
| Corporate expense | (3,736 | ) | (671 | ) | (890 | ) | ||||
| Operating loss | $ | (3,712 | ) | $ | (653 | ) | $ | (872 | ) | |
Corporate and demand withinOther includes the industrialoperating results of certain international buildings products businesses.
Corporate expense for 2007 included class action settlement charge, net of $2.862 billion, Separation related costs of $104 million, and commercial markets, along with the impact of operational excellence initiatives, cost reductions from prior period restructuring programs and favorable changes in foreign currency exchange rates of $21 million. These increases more than offset the impact of higher raw material costs. Additionally, 2005 operating income includes $4 million of net restructuring impairment and divestiture charges as compared to the $62of $40 million of net restructuring, impairment and divestiture charges in 2004.
Corporate
Corporate net revenue was $29 million and $25 million in 2005 and 2004, respectively, whichprimarily related to the TGN business which was soldconsolidation of certain headquarter functions. Additionally, corporate expense for 2007 includes $13 million of charges related to the accelerated amortization of restricted shares in connection with the third quarterSeparation.
In connection with the Separation, we have initiated actions to reduce our corporate expense and are targeting a full year corporate expense run rate of 2005.$500 million by mid-2008.
Corporate expense was $400 million, $255 million and $482 million in 2006 2005 and 2004, respectively.was $219 million lower than 2005. Corporate expense for 2006 includes $162included $72 million of income related to the Proposed Separationextinguishment of certain payment obligations under a split dollar life insurance policy and incremental stock option charges of $32 million required under SFAS No. 123R. Corporate expense also includes income relatedrabbi trust pursuant to a settlement with aMr. Kozlowski, former executive of $72 million as well asChief Executive Officer, and $48 million of income resulting from a reduction in our estimated workers' compensation liabilities primarily due to favorable claims experience. OperatingThese income for 2005 and 2004 has been restated to reflect additional compensation expenseitems were partially offset by incremental stock option charges of $24$47 million required under SFAS 123R, Separation related costs of $49 million and $85 million, respectively, relatedrestructuring and divestiture charges of $2 million. On a comparative basis to the review of prior period stock option grant practices and equity plan compliance. See Note 1 to the Consolidated Financial Statements.2005, corporate expense in 2006 also benefited from lower Sarbanes-Oxley compliance costs.
Corporate expense for 2005 includes a $301 million gain on the sale of the TGN business and TGN operating losses of $54 million. In addition, corporate expenses for 2005 included a $50 million charge representing thefor fines and penalties that the Company paid to resolve the matters raised in the SEC investigation that commenced in June 2002, as well as a $70 million charge for estimated legacy contingencies related to contested legal proceedings seeking to enforce retention agreements for five former executives' employment.
Corporate expense for 2004 includes net charges of $14 million, which consists of charges for the impairment of long-lived assets of $8 million and net restructuring charges of $6 million primarily attributable to severance related to the relocation of the corporate headquarters. Expense also included $73 million of operating losses related to the TGN.executives.
Interest Income and Expense
Interest income was $134$102 million in 2007, as compared to $43 million and $39 million in 2006 as comparedand 2005, respectively. The increase in interest income in 2007 is primarily related to $123 million and $91 million in 2005 and 2004, respectively.interest earned on the class action settlement escrow of $41 million.
Interest expense was $713$313 million in 2007, as compared to $279 million in 2006 as compared to $815and $322 million in 2005 and $9562005. The increase in interest expense in 2007 is a result of interest on the class action settlement liability of $41 million, in 2004.partially offset by lower debt outstanding. The decrease in interest expense in 2006 is primarily driven by lower debt balances, partially offset by the impact of higher interest rates on our interest rate swap program as compared to 2005.
The decrease in interest expense in 2005 over 2004 is primarily the result of lower debt balances, partially offset by the impact of higher interest rates on ourweighted-average interest rate swap program compared to 2004. The weighted-average rates of interest on total debt outstanding at September 28, 2007, September 29, 2006 and September 30, 2005 were 6.3%, 6.0% and 5.7%, respectively.
In each period, net interest amounts were proportionally allocated to Covidien and Tyco Electronics based on the debt amounts that we believe were utilized by Covidien and Tyco Electronics historically inclusive of amounts directly incurred and is reflected as discontinued operations. Allocated net interest was calculated using our historical weighted average interest rate on debt, including the impact of interest rate swap agreements. The portion of Tyco's interest income allocated to Covidien and Tyco Electronics was $35 million, $53 million and $43 million during 2007, 2006 and 2005, respectively. The portion of Tyco's interest expense allocated to Covidien and 2004 were 5.9%, 5.6%Tyco Electronics was $242 million, $378 million and 5.2%,$433 million during 2007, 2006 and 2005, respectively.
Other Expense, Net
Other expense, net was $255 million in 2007 and $296 million in 2005. During 2006,2007, other expense, net consisted primarily of a $259 million loss relatingon early extinguishment of debt incurred in connection with the debt tender offers (see Note 13), for which no tax benefit is available. This charge consists primarily of premiums paid and the write-off of unamortized debt issuance costs and discounts. The total loss on early extinguishment of debt was $647 million, with $259 million included in continuing operations and $388 million allocated to the write-down of certain investments to their net realizable value.Covidien and Tyco Electronics and included in discontinued operations.
During 2005, other expense, net includedconsisted primarily of losses related to the repurchase of outstanding convertible debt prior to its scheduled maturity partially offset by a loss on$109 million court-ordered restitution award.
During 2005, the retirement of debt. The Company repurchased $1,241 million principal amount of its outstanding 2.75% convertible senior debentures for $1,823 million and $750 million principal amount of its outstanding 3.125% convertible senior debentures for $1,147 million. These repurchases resulted in a $1,013 million loss on the retirement of debt, including the write-off of unamortized debt issuance costs.costs, with $405 included in continuing operations and $608 million allocated to Covidien and Tyco Electronics and included in discontinued operations.
Also duringAdditionally, in September 2005, other expense, net included incomewe were awarded a total of $109$134 million related to a court-orderedas restitution award. On September 12, 2002, indictments were filed in the Supreme Court of the State of New Yorkconnection with our litigation against Mr. L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, and Mr. Mark H. Swartz, our former Chief Financial Officer and directorDirector (together, the "Defendants"), alleging enterprise corruption, fraud, conspiracy, grand larceny, falsifying certain business records and other crimes. On June 17, 2005, a jury convicted the Defendants on 22 of 23 countsas described in the indictment. On September 19, 2005, the Defendants were sentenced in New York State Supreme Court to serve eight and one third years to twenty five years in prison and to make joint restitution to the Company in the amount of $134 million, resulting from the larceny convictions.
Item 3. Legal Proceedings. The restitution award is comprised of $109 million of previously expensed compensation made to the defendantsDefendants and reported as other expense, net in prior years and $25 million related to a loan receivable from one of the DefendantsMr. L. Dennis Kozlowski which had been and remains reflected in the Company's consolidated financial statementsConsolidated Financial Statements as a receivable. The Defendants have filed a notice of appeal of the convictions. The Company considered the collectibility of the restitution award and assessed the likelihood of the Defendants' success upon appeal of the larceny convictions, which, if successful, could result in a change to the restitution order, and has concluded that receipt of the restitution award is probable. The Court ordered the restitution payment to be made by no later than one year from the date of sentencing. Tyco has initiated the process of collecting the restitution payment owed, subject to the pending appeal. During October 2006,2007, the Company received payment of $38 million relating to the restitution and expects to receive the remaining amount in the second quarter of 2007.
During 2004, other expense, net consisted primarily of a loss on the retirement of debt. The Company repurchased $303 million of its 7.2% notes due 2008 for cash of $341 million, which resulted in a $38 million loss, including the write-off of unamortized debt issuance costs. Additionally, the Company repurchased $517 million of its outstanding 2.75% convertible senior debentures with a 2008 put option. The total purchase price paid was $750 million and the repurchase resulted in a $241 million loss on the retirement of debt, including the write-off of unamortized debt issuance costs.these amounts.
Income Taxes
Effective Income Tax Rate
The effective tax rate for 2007 is not meaningful primarily as a result of the class action settlement charge, net of $2.862 billion and the loss on early extinguishment of debt of $259 million for which no tax benefit is available. Additionally, taxes for 2007 were negatively impacted by tax costs related to the Separation. Our effective income tax rate was 16.4%, 26.7%27.3% and 27.8%4.7% for 2006 2005 and 2004,2005, respectively. The decreaseincrease in the effective tax rate from 2005 to 2006 was primarily the result of additional releasesa lower release of deferred tax asset valuation allowances, as a result of improved historical and projected profitabilityincreased profits in certainhigher tax rate jurisdictions and a $127 million favorable adjustmentadjustments to correct prior yearthe tax reserves onaccrual for legacy tax matters. The decreasematters in the effective tax rate from 2004 to 2005, is primarily the result of the release of valuation allowances, benefits realized related to the TGN divestiture, as well as the court-ordered restitution award related to certain former executives for which there is no tax obligation
and, to a lesser extent, increased profitability in operations in jurisdictions with lower tax rates. This decrease is partially offset by an increase in charges for which no tax benefit was available such as the loss on retirement of debt asset impairments and the estimated settlement of the SEC enforcement action.for which no benefit was available in 2005.
The valuation allowance for deferred tax assets of $1,731$666 million and $1,871$800 million at September 29, 200628, 2007 and September 30, 2005,29, 2006, respectively, relates principally to the uncertainty of the utilization of
certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our Consolidated Balance Sheets. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, ""Accounting for Income Taxes"," which requires a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Further, management has reviewed with tax counsel the issues raised by these taxing authorities and the adequacy of these recorded amounts. Substantially all of these potential tax liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not expected within one year.
Other Income Tax Matters
In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a Tax Sharing Agreement that generally governs Covidien's, Tyco Electronics' and Tyco's respective rights, responsibilities, and obligations after the distribution with respect to taxes, including ordinary course of business taxes and taxes, if any, incurred as a result of any failure of the distribution of all of the shares of Covidien or Tyco Electronics to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Code or certain internal transactions undertaken in anticipation of the spin-offs to qualify for tax-favored treatment under the Code.
Under the Tax Sharing Agreement, with certain exceptions, Tyco generally is responsible for the payment of 27% of any additional U.S. income taxes that are required to be paid to a U.S. tax authority as a result of a U.S. tax audit of Covidien's, Tyco Electronics' or Tyco's subsidiaries' income tax returns for all periods prior to the spin-offs.
Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco's, Covidien's and Tyco Electronics' income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42% and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and Tyco Electronics' U.S. income tax returns. All costs and expenses associated with the management of these shared tax liabilities are shared equally among the parties. At September 28, 2007, Tyco has recorded a receivable from Covidien and Tyco Electronics of $103 million reflected in other assets as our estimate of their portion of the Tax Sharing obligations with an offset to shareholders' equity. Other liabilities include $543 million for the fair value of Tyco's obligations under the Tax Sharing Agreement, determined in accordance with FIN 45 recognized with an offset to shareholders' equity.
Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected to occur as the IRS audit process is completed for the impacted years. Given the nature of the shared liabilities, the maximum amount of potential future payments is not determinable.
In the event the Separation is determined to be taxable and such determination was the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result
thereof. If such determination is not the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, then Tyco, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%, respectively, of any taxes imposed on Tyco, Covidien or Tyco Electronics as a result of such determination. Such tax amounts could be significant. The Company is responsible for all of its own taxes that are not shared pursuant to the Tax Sharing Agreement's sharing formula. In addition, Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of its agreed-upon share of Tyco's, Covidien's and Tyco Electronics' tax liabilities. See Note 16 for further discussion of guarantees and indemnifications extended among Tyco, Covidien and Tyco Electronics.
The Company and its subsidiaries' income tax returns periodically are periodically examined by various tax authorities. In connection with suchthese examinations, tax authorities, including the United States Internal Revenue Service ("IRS"), have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies and related interest that management has assessed as probable and estimable have been recorded. While
In 2004, in connection with the timing and ultimate resolutionIRS audit of these matters is uncertain, the Company anticipates that certain of these matters could be resolved during 2007.
The IRS continues to audit the1997 through 2000 years, 1997 to 2000. In 2004 the Company submitted to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the proposed adjustments. These adjustments did not have a material impact on the financial condition, results of operations or cash flows of the Company.
DuringAlso during 2006, the Company has developed proposed amendments to U.S. federal income tax returns for additional periods.periods through 2002. On the basis of previously accepted amendments, the Company has determined that acceptance of these adjustments is probable and, accordingly, has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows.
The Company has yet to complete proposed amendments to its U.S. federal income tax returns for periods subsequent to 2002, which will primarily reflect the roll forward through 2006 of the amendments for the periods 1997 to 2002. When the Company's tax return positions are updated additional adjustments may be identified and recorded in the Consolidated Financial Statements. While the final adjustments cannot be determined until the income tax return amendment process is completed, the Company believes that any resulting adjustments will not have a material impact on its financial condition, results of operations or cash flows.
During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco's U.S. federal income tax returns for the years 1997 though 2000 and issued anticipated Revenue Agents' Reports ("RARs") which reflect the IRS' determination of proposed tax adjustments for the periods under audit. The RARs propose tax audit adjustments to certain of the Company's previously filed tax return positions, all of which the Company expected and previously assessed at each balance sheet date. Accordingly, the Company has made no additional provision during the year ended September 28, 2007 as a result of the proposed audit adjustments in the RARs.
The Company has agreed with the IRS on adjustments totaling $498 million, with an estimated cash impact to the Company of $458 million, and during the third quarter of 2007, the Company paid $458 million, of which $163 million relates to the Company's discontinued operations. The Company
appealed other proposed tax audit adjustments totaling approximately $1 billion, and, as Audit Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend its prior filed tax return positions. The Company continues to believe that the amounts recorded in its financial statements relating to these tax adjustments are sufficient. However, the ultimate resolution of these matters is uncertain and could result in a material impact to the Company's financial position, results of operations or cash flows. In addition, ultimate resolution of these matters could result in the Company filing amended U.S. federal income tax returns for years subsequent to the current 1997 to 2000 audit period and could have a material impact on the Company's effective tax rate in future reporting periods.
Additionally, the IRS proposed civil fraud penalties against a prior subsidiary that was distributed to Tyco Electronics arising from alleged actions of former executives in connection with certain intercompany transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory guidelines, we estimate the proposed penalties could range between $30 million and $50 million. The Company as Audit Managing Party will vigorously oppose the assertion of such penalties against Tyco Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company's former Chief Tax Officer on a charge of willful filing of a false tax return.
Except for earnings that are currently distributed, no additional material provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
Discontinued Operations and Divestitures
Discontinued Operations
During 2006,the third quarter of 2007, Tyco completed the Separation and has presented its Healthcare and Electronics businesses as discontinued operations in all periods presented.
The Company has used available information to develop its best estimates for certain assets and liabilities related to the Separation. In limited instances, final determination of the balances will be made in subsequent periods. During the fourth quarter of 2007, $72 million was recorded through shareholders' equity, primarily related to the cash true-up adjustment and other items, as specified in the Separation and Distribution Agreement, adjustments to certain pre-Separation tax liabilities, and the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of Tyco, Covidien and/or Tyco Electronics legal entities. Additional adjustments are not expected to be material and will be recorded through shareholder's equity in subsequent periods as tax returns are finalized.
During 2007, AIJ, a joint venture that was majority owned by Infrastructure Services, was sold for $42 million in net cash proceeds and a pre-tax gain on sale of $19 million was recorded. Additionally, during the fourth quarter of 2007, the remaining portion of Infrastructure Services met the held for sale criteria and its results of operations have been included in discontinued operations for all periods presented. Infrastructure Services provides consulting, engineering, construction management and operating services for the water, wastewater, environmental, transportation and facilities market. The Company has assessed the recoverability of these businesses carrying values and will continue to assess recoverability based on current fair value, less cost to sell, until the businesses are sold. On September 17, 2007, the Company consummatedexecuted a definitive agreement to sell for approximately
$295 million in cash 100% of the salestock of ETEO—Empresa de Transmissao de Energia do Oeste Ltda., a Brazilian subsidiary of Infrastructure Services. The transaction is subject to Brazilian regulatory approval and normal closing conditions and is expected to close by the end of the second quarter of fiscal 2008. The Company expects to sell the remaining portion of Infrastructure Services by the end of fiscal 2008.
The AIJ, Infrastructure Services, Plastics, Adhesives and Ludlow Coated Products businesses as well as theand A&E Product business for $975 million and $6 million in gross cash proceeds, respectively. Working capital and other adjustments resulted in net proceeds of $882 million for the sale of the Plastics, Adhesives and Ludlow Coated Products businesses. During 2006, the Company also recorded a $30 million receivable due from the purchaser of the Plastics, Adhesives and Ludlow Coated Products businesses based on the decline of average resin prices during fiscal year 2006, as contemplated in the definitive sale agreement. This amount is payable to Tyco no later than January 2007. Net cash proceeds received for the sale of the A&E Products business was $2 million, which does not include working capital provisions which are expected to be settled prior to the end of calendar year 2006. Both businesses met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented.
During 2006, the Company recorded a $261 million and $26 million pre-tax loss on sale from discontinued operations related to the Plastics, Adhesives and Ludlow Coated Products businesses and A&E Products business, respectively, which include $275 million and $22 million, respectively, of pre-tax impairment charges to write the businesses down to their fair values less costs to sell. Fair values used for the respective impairment assessments were based on existing market conditions and the terms and conditions included or expected to be included in the respective sale agreements.
During 2006, the Company approved a plan to divest the Printed Circuit Group ("PCG") business, a component of the Electronics segment, and also entered into a definitive sale agreement to sell PCG for $226 million in cash. During 2006, the Company recorded a $4 million pre-tax loss on sale from discontinued operations for PCG related to the divestiture of the PCG Spain business as well as certain other costs to sell. The sale of PCG was completed in October 2006 and the Company expects to record a gain on the sale of approximately $45 million. See Note 28 to the Consolidated Financial Statements. The PCG business met the held for sale and discontinued operations criteria and has been included in discontinued operations in all periods presented.
In 2005, Tyco announced its intent to explore the divesture of its Plastics, Adhesives and Ludlow Coated Products businesses, as well as the A&E Products business, a global manufacturer of plastic film, specialty tapes and adhesives, coated products and garment hangers. As a result of consideration for potential sale and deteriorating operating results in the A&E Products business, the Company performed an interim assessment of the recoverability of both goodwill and long-lived assets and determined that the book value of certain long-lived assets in the A&E Products business was greater than their estimated fair value and consequently recorded a long-lived asset impairment of $40 million and goodwill impairment charge of $162 million. Fair value used for the impairment assessment was based on probability-weighted expected future cash flow of the assets.
During 2005, the Company divested 8 businesses which were reported as discontinued operations within Fire and Security, Engineered Products and Services and the Plastics and Adhesives business segment. The Company reported losses on sale or additional impairments to write the carrying value of such assets down to their estimated fair value less costs to sell of $60 million during 2005.
During 2004, the Company reported losses on the sale of discontinued operations of $132 million to write the carrying value of such assets down to their fair value less cost to sell.
For the additional 8 businesses in 2005 and the divested businesses in 2004, fair value used for the impairment assessment was primarily based on the terms and conditions included or expected to be included in the sales agreements.
(Gains) lossesLosses on divestitures
During 2004, the Company divested twenty-one2007, 2006 and liquidated four non-core businesses across all business segments primarily within Fire and Security. During 2004,2005, the Company recorded net losses$4 million, $2 million and impairments on divestitures$23 million, respectively, of $116 milliondivestiture charges in continuing operations in connection with the divestiture or write-down to fair value, less cost to sell, of certain held for sale businesses.
During 2005, Tyco agreed to sell the TGN, its undersea fiber optic telecommunication network. The sale was consummated on June 30, 2005. As part of the sale transaction, Tyco received gross cash proceeds of $130 million, and the purchaser assumed certain liabilities. In connection with this sale, Tyco recorded a $301 million gain which is reflected in (gains) losses on divestitures in the Consolidated Statement of Income for 2005. The Company has presented the operations of the TGN in continuing operations as the criteria for discontinued operations were not met.
During 2005, the Company divested 10 businesses that were reported as continuing operations in Fire and Security, Healthcare and Engineered Products and Services. The Company recorded net losses and impairments on divestitures of $32 million, including a $3 million charge reflected in cost of sales, in connection with the divestiture and liquidation of these businesses, as well as the write-down to estimated fair value of certain held for sale businesses.
During 2006, the Company divested 6 businesses that were reported as continuing operations in Fire and Security and Healthcare. The Company recorded net gains on divestitures of $46 million in connection with the divestiture of these businesses, less $2 million of divestiture charges related to the write-down to estimated fair value and costs to sell certain other held for sale businesses.
For the divested businesses during 2006, 2005 and 2004, fair value used for the impairment assessmentassessments was primarily based on the terms and conditions included or expected to be included in the sales agreements.
Acquisitions
During 2006, Tyco's Healthcare segment acquired over 90% ownership2007, cash paid for acquisitions included in Floreane Medical Implants, S.A. ("Floreane") for approximately $123 million in cash, net of cash acquired of $3continuing operations, primarily within ADT Worldwide, Safety Products and Flow Control, totaled $31 million. Floreane is an innovator in the development of surgical support implants for parietal, urological and gynecological surgery. The remaining outstanding shares would be acquired if they become available. The Company recorded a $3 million in-process research and development charge in conjunction with the acquisition.
During 2006, Tyco's Healthcare segment also acquired over 50% ownership of Airox S.A. ("Airox") for approximately $59 million, net of cash acquired of $4 million. Airox is a leading European company in the home respiratory ventilation systems business. Tyco expects to acquire the remaining Airox shares in a mandatory tender offer. The initial share purchase and the subsequent tender offer combined are expected to total approximately $108 million. The Company has also recorded an $11 million in-process research and development charge in conjunction with the acquisition. The charge relates to the development of second generation technology which has not yet obtained regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use.
During 2006, Tyco's Healthcare segment also acquired Confluent Surgical, Inc. ("Confluent"). The total purchase price is expected to be $246 million. As of September 29, 2006, the Company has paid approximately $200 million in cash, net of cash acquired of $12 million. The Company has also deposited approximately $34 million of the total purchase price into an escrow account related to closing balance sheet adjustments and certain indemnifications to be resolved through fiscal 2008. The Company recorded a $49 million in-process research and development charge in conjunction with the acquisition related to technology which Confluent is developing for numerous applications across
several surgical disciplines which have not yet received regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use.
Cash paid for other acquisitions by businesses included in continuing operations during 2006 and 2005 totaled $31$5 million net of $8and $6 million, cash acquired.
In July 2005, Tyco's Healthcare segment acquired Vivant Medical Inc. ("Vivant"), a developer of microwave ablation medical technology. The transaction is valued at approximately $66 million cash, with up to approximately $35 million additional cash to be paid in the future based on achieving certain milestones.
Cash paid, net of cash acquired, for various other acquisitions totaled $16 million.
During 2004, the Company completed the acquisition of two businesses within Engineered Products and Services and Fire and Security for an aggregate cost of $9 million.respectively.
These acquisitions were funded utilizing cash from operations. The results of operations of the acquired companies have been included in Tyco's consolidated results from the respective acquisition dates. These acquisitions did not have a material effect on the Company's financial position, results of operations or cash flows.
Goodwill Impairment
In connection with the Separation, during the third quarter of 2007 Tyco reorganized into a new management and segment reporting structure. As part of these organizational changes, the Company assessed new reporting units and conducted valuations to determine the assignment of goodwill to the new reporting units based on their estimated relative fair values. Following the relative fair value goodwill allocation, the Company then tested goodwill for impairment by comparing the fair value of each reporting unit with its carrying value amount. If the carrying amount of a reporting unit exceeded its fair value, goodwill was considered potentially impaired. Where goodwill was potentially impaired, the Company compared the implied fair value of the reporting unit goodwill to the carrying amount of that goodwill. The carrying amount of goodwill exceeded the implied fair value of goodwill in the Australia and New Zealand Security Services business, part of the ADT Worldwide segment. As a result, the Company recognized a goodwill impairment of $46 million in the third quarter of 2007.
In determining fair value, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and market place data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment. Changes to these factors and judgments could result in impairment to one or more of our reporting units in a future period. See Note 1.
Cumulative Effect of Accounting Change
During 2006, the Company adopted Financial Accounting Standards Board Interpretation ("FIN") No. 47, ""Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143."143 Accordingly,." FIN No. 47 clarifies the Company has recognizedtiming of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 requires that conditional asset retirement obligations, along with the associated capitalized asset retirement costs, be initially reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and property, plant and equipment, netan increase of $10 million in its Consolidated Balance Sheet at September 29, 2006. In addition, the Company recordedcarrying amount of the related assets, of which $19 million and $5 million are reflected in liabilities and assets of discontinued operations, respectively. The initial recognition resulted in a cumulative effect of accounting change which resulted in aof $14 million after-tax loss ($22 million pre-tax). Refer to Note 1 to, reflecting the Consolidated Financial Statements for additional information onaccumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47.47 been in effect at the time.
During 2005, the Company changed the measurement date for its pension and postretirement benefit plans, from September 30th to August 31st, effective October 1, 2004. The Company believes that the one-month change of measurement date is a preferable change as it allows management adequate time to evaluate and report the actuarial information in the Company's Consolidated Financial Statements under the accelerated reporting deadlines. As a result of this change, the Company recorded a $21 million after-tax gain ($28 million pre-tax) cumulative effect of accounting change. Refer to Note 19 to the Consolidated Financial Statements for additional information on retirement plans.
Change in Fiscal Year and Reporting Calendar Alignment
Effective October 1, 2004, Tyco changed its fiscal year end from a calendar fiscal year ending September 30 to a "52-53 week" year ending on the last Friday of September, such that each quarterly period will be 13 weeks in length. In addition, certain of the Company's subsidiaries had consistently closed their books up to one month prior to the Company's fiscal period end. These subsidiaries now report results for the same period as the reported results of the consolidated Company. The impact of this change was not material to the Consolidated Financial Statements. Net income for the transition period related to this change was $26 million and was reported within Shareholders' Equity during 2005.
Critical Accounting Policies and Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period.
Depreciation and Amortization MethodMethods for Security Monitoring SystemsMonitoring-Related Assets—Tyco generally considers assets related to the acquisition of new customers in its electronic security assetsbusiness in three asset pools:categories: internally generated residential subscriber systems, internally generated commercial subscriber systems (collectively referred to as subscriber system assets) and customer accounts acquired through the ADT dealer program. The determination of the depreciable lives of subscriber systems,program (referred to as defined below, included indealer intangibles). Subscriber system assets include installed property, plant and equipment for which Tyco retains ownership and deferred costs directly related to the amortizable lives of customer contractsacquisition and relatedsystem installation. Subscriber system assets and any deferred revenue resulting from the customer relationships included in intangible assets,acquisition are primarily based on historical attrition rates, third-party lifing studies andaccounted for over the usefulexpected life of the underlying tangible asset. The realizable valuesubscriber. In certain geographical areas where the Company has a large number of customers that behave in a similar manner over time, the Company accounts for subscriber system assets and remaining useful lives of these assets could be impacted by changes in customer attrition rates. If the attrition rates were to rise, Tyco may be required to accelerate the depreciation and amortization.
With respect to Tyco's depreciation policy for security monitoring systems installed in residential and commercial customer premises, the costs of these systems are combined inrelated deferred revenue using pools, with separate pools for internally generated residentialthe components of subscriber system assets and internally generated commercialany related deferred revenue based on the month and year of acquisition.
Effective as of the beginning of the third quarter of 2007, Tyco changed the depreciation method and estimated useful life used to account customers (collectively "subscriber systems"),for pooled subscriber system assets (primarily in North America) and generally depreciated over ten to fourteen years. Tyco concluded that for residential and commercial account poolsrelated deferred revenue from the straight-line method with lives ranging from 10 to 14 years to an accelerated method with lives up to 15 years. The accelerated method utilizes declining balance rates based on geographical area ranging from 160% to 195% for residential subscriber pools and 145% to 265% for commercial subscriber pools and converts to a straight-line methodology when the resulting depreciation charge is greater than that from the accelerated method. The Company will continue to use a straight-line method with a 14-year life for non-pooled subscriber system assets (primarily in Europe and Asia) and related deferred revenue, with remaining balances written off upon customer termination.
The change in the method and estimated useful life used to account for pooled subscriber system assets and related deferred revenue resulted from our ongoing analysis of depreciation over a ten to fourteen-year period continues to be appropriate given the observedall pertinent factors, including actual customer attrition data for these pools.
Tyco purchases residential security monitoring contracts from an external network of independent dealers who operate underspecific to customer categories and geographical areas, demand, competition, and the ADT dealer program. The purchase price of these customer contracts is recorded as an intangible asset (i.e., contracts and related customer relationships).
Intangible assets arising from the ADT dealer program are amortized in pools determined by the month of contract acquisition on an accelerated basis over the period and pattern of economic benefit that is expected to be obtained from the customer relationship. Tyco believes that the accelerated method that presently best achieves the matching objective described above is the double-declining balance method based on a ten-year life for the first eight years of the estimated technological life of the installed systems. The pertinent factors have been influenced by management's ongoing customer relationships convertingretention programs, as well as tactical and strategic initiatives to improve service delivery, customer satisfaction, and the straight-line method of amortization for the remaining four yearscredit worthiness of the estimated relationship period. Actualsubscriber customer base. All pertinent factors, including actual customer attrition data is regularlyspecific to customer categories and geographical areas, demand, competition, and the estimated technological life of the installed systems, will continue to be reviewed in orderby the Company at each balance sheet date to assess the continued applicabilityappropriateness of methods and estimated useful lives.
Effective as of the beginning of the third quarter of 2007, Tyco also changed the estimated useful life of dealer intangibles in geographical areas comprising approximately 90% of the net carrying value of dealer intangibles from 12 to 15 years. The Company continues to amortize dealer intangible assets on an accelerated methodbasis. The change in the estimated useful life used to account for dealer intangibles resulted from our ongoing analysis of amortization described above.all pertinent factors, including actual customer attrition data, demand, competition, and the estimated technological life of the installed systems. The pertinent factors have been influenced by management's ongoing customer retention programs, as well as tactical and strategic initiatives to improve service delivery, customer satisfaction, and the credit worthiness of the subscriber customer base.
Attrition rates for customers in our ADT Worldwide Electronic Security Services business were 13.8%12.3%, 14.8%14.2% and 15.1%15.0% on a trailing 12-month basis for 2007, 2006 2005 and 2004,2005, respectively.
Revenue Recognition—Contract sales for the installation of fire protection systems, large security intruder systems undersea fiber-optic cable systems and other construction relatedconstruction-related projects are recorded primarily onunder the percentage-of-completion method. Profits recognized on contracts in process are based upon contractedestimated contract revenue and related estimatedtotal cost toof the project at completion. The risk of this methodology is its dependence upon estimates of costs toat completion, which are subject to the uncertainties inherent in long-term contracts. Revisions into cost estimates as contracts progress have the effect of increasing or decreasing profits in the currenteach period. Provisions for anticipated losses are made in the period in which they first become determinable. If estimates are inaccurate, there is risk that our revenue and profits for the period may be overstated or understated.
Product discounts granted are based on the terms of arrangements with direct, indirect and other markets participants. Rebates are estimated based on sales terms, historical experience and trend analysis.
Loss Contingencies—Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on
judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, the Company records receivables from third party insurers when recovery has been determined to be probable.
Income Taxes—In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state, federal and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We currently have recorded significant valuation allowances that we intend to maintain until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on our future earnings. If a change in a valuation allowance occurs, which was established in connection with an acquisition, such adjustment may impact goodwill rather than the income tax provision.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company's financial condition, results of operations or cash flows or financial position.flows.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves
in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the tax liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are assessed for impairment annually and more frequently if a triggering event occurs.events occur. In performing this assessment,these assessments, management relies on a number ofvarious factors, including operating results, business plans, economic projections, anticipated future cash flows, andcomparable transactions and other market place data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill and indefinite-lived intangible assets for impairment. Since judgment is involved in performing fair value measurements used in goodwill valuationand indefinite-lived intangible assets impairment analyses, there is risk that the carrying valuevalues of our goodwill or indefinite-lived intangible assets may be overstated or understated.overstated.
We elected to make the first day of the fourth quarter the annual impairment assessment date for all reporting units.goodwill and indefinite-lived intangible assets. When testing for goodwill impairment, the Company follows the guidance prescribed in SFAS No. 142, ""Goodwill and Other Intangible Assets."" First, the Company performs a step I goodwill impairment test to identify a potential impairment. In doing so, the Company compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and a step II goodwill impairment test isfurther tests are performed to measure the amount of impairment loss. In the second step IIof the goodwill impairment test, the Company compares the implied fair value of reporting unit goodwill with the carrying amount of thatthe reporting unit's goodwill. If the carrying amount of reporting unitunit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities isrepresents the implied fair value of goodwill.
Disruptions to our business such as end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, the divestiture of a significant component of a reporting unit and market capitalization declines may result in our having to perform a goodwill impairment first step valuation analysis for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future.
Goodwill impairments related to continuing operations were $46 million during 2007. There were no goodwill impairments related to continuing operations during 2006 2005 and 2004. Goodwill impairments included in loss from discontinued operations in 2005 totaled $162 million.2005.
Long-Lived Assets—Assets held and used by the Company, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of anthe asset may not be fully recoverable. Tyco performs undiscounted operating cash flow analyses to determine if impairment exists. For purposes of evaluatingrecognition and measurement of an impairment for assets held for use, Tyco groups assets and liabilities at the recoverability of long-lived assetslowest level for which cash flows are separately identified. If an impairment is determined to be held and used, a recoverability testexist, any related impairment loss is performedcalculated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.fair value. Impairments to long-lived assets to be disposed of are recorded based upon the fair value of the applicable assets. The calculation of the fair value of long-lived assets is based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated.
Pension and Postretirement Benefits—Our pension expense and obligations are developed from actuarial valuations. Two critical assumptions in determining pension expense and obligations are the discount rate and expected long-term return on plan assets. We evaluate these assumptions at least annually. Other assumptions reflect demographic factors such as retirement, mortality and turnover and are evaluated periodically and updated to reflect our actual experience. Actual results may differ from actuarial assumptions. The discount rate represents the market rate for high-quality fixed income investments and is used to calculate the present value of the expected future cash flows for benefit obligations under our pension plans. A decrease in the discount rate increases the present value of pension benefit obligations. A 25 basis point decrease in the discount rate would increase our present value of pension obligations by approximately $225$90 million. We consider the current and expected asset allocations of our pension plans, as well as historical and expected long-term rates of return on those types of plan assets, in determining the expected long-term return on plan assets. A 50 basis point decrease in the expected long-term return on plan assets would increase our pension expense by approximately $20$10 million.
Liquidity and Capital Resources
The sources of our cash flow from operating activities and the use of a portion of that cash in our operations for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004, as restated, were as follows ($ in millions):
| | 2006 | 2005 (Restated) | 2004 (Restated) | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||||||||||||||
| Operating income | $ | 5,474 | $ | 5,768 | $ | 5,146 | ||||||||||||||
| Non-cash restructuring and asset impairment charges (credits), net | 9 | (13 | ) | 16 | ||||||||||||||||
| (Gains) losses on divestitures | (44 | ) | (271 | ) | 111 | |||||||||||||||
| In-process research and development | 63 | — | — | |||||||||||||||||
| Operating (loss) income | $ | (1,715 | ) | $ | 1,370 | $ | 1,191 | |||||||||||||
| Goodwill impairment | 46 | — | — | |||||||||||||||||
| Non-cash restructuring and asset impairment charges, net | 24 | 2 | 2 | |||||||||||||||||
| Losses on divestitures | 4 | 2 | 23 | |||||||||||||||||
| Depreciation and amortization(1) | 2,065 | 2,084 | 2,098 | 1,151 | 1,182 | 1,204 | ||||||||||||||
| Non-cash compensation expense | 275 | 99 | 121 | 173 | 151 | 72 | ||||||||||||||
| Deferred income taxes | 72 | (28 | ) | 167 | (11 | ) | (414 | ) | (227 | ) | ||||||||||
| Provision for losses on accounts receivable and inventory | 174 | 232 | 317 | 94 | 56 | 102 | ||||||||||||||
| Other, net(2) | (47 | ) | 148 | 79 | 28 | (36 | ) | 147 | ||||||||||||
| Net increase in working capital | (1,069 | ) | (61 | ) | (873 | ) | ||||||||||||||
| Class action settlement liability | 2,992 | — | — | |||||||||||||||||
| Net change in working capital | (405 | ) | 226 | 125 | ||||||||||||||||
| Interest income | 134 | 123 | 91 | 102 | 43 | 39 | ||||||||||||||
| Interest expense | (713 | ) | (815 | ) | (956 | ) | (313 | ) | (279 | ) | (322 | ) | ||||||||
| Income tax expense | (799 | ) | (1,112 | ) | (1,112 | ) | (334 | ) | (310 | ) | (29 | ) | ||||||||
| Net cash provided by operating activities | $ | 5,594 | $ | 6,154 | $ | 5,205 | $ | 1,836 | $ | 1,993 | $ | 2,327 | ||||||||
Other cash flow items: | ||||||||||||||||||||
| Capital expenditures, net(3) | $ | (1,514 | ) | $ | (1,263 | ) | $ | (987 | ) | $ | (646 | ) | $ | (519 | ) | $ | (463 | ) | ||
| Decrease in sale of accounts receivable | 9 | 18 | 929 | 7 | 8 | 8 | ||||||||||||||
| Acquisition of customer accounts (ADT dealer program) | (373 | ) | (328 | ) | (254 | ) | (409 | ) | (373 | ) | (328 | ) | ||||||||
| Purchase accounting and holdback liabilities | (19 | ) | (47 | ) | (104 | ) | (10 | ) | (7 | ) | (14 | ) | ||||||||
| Voluntary pension contributions | 2 | 115 | 567 | 23 | — | 83 | ||||||||||||||
The net change in total working capital was a cash decrease of $1,069$405 million in 2006.2007. The components of this change are set forth in the Consolidated Statements of Cash Flows. The changesignificant changes in working capital included ana $166 million increase of $680 million in inventories, and a $332$128 million decrease in accrued and other liabilities, primarily related to decreased accrued legal and audit fees, partially offset by an increase in annual employee bonus compensation.
The provision for losses on accounts receivable, and inventory decreased from $232$244 million duringof changes in income taxes, net, which includes a payment of legacy tax liabilities. Additionally, working capital includes the year ended September 30, 2005collection of $38 million related to $174restitution owed by Mark H. Swartz, former Chief Financial Officer and Director, and $98 million related to the restitution owed by L. Dennis Kozlowski, former Chairman and Chief Executive Officer.
During the third quarter of 2007, Tyco entered into the class action settlement and borrowed under its unsecured bridge loan and revolving credit facilities to fund the $2.992 billion liability, placing the proceeds in escrow for the current period. This decrease was driven by improvements across all segments, particularly due to improved accounts receivable aging, an overall improved credit profilebenefit of the customer base, and better collections. Consequently, our allowance for doubtful accounts decreased from $421 million at September 30, 2005 to $336 million at September 29, 2006.class.
Cash flows from operating activities and other cash flow items by segment for the year ended September 29, 2006 were as follows ($ in millions):
| | Electronics | Fire and Security | Healthcare | Engineered Products and Services | Corporate and Other | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||||||||||||||
| Operating income (loss) | $ | 1,808 | $ | 1,190 | $ | 2,200 | $ | 676 | $ | (400 | ) | $ | 5,474 | |||||||
| Non-cash restructuring and asset impairment charges, net | 3 | 1 | 4 | 1 | — | 9 | ||||||||||||||
| Losses (gains) on divestitures | 2 | 1 | (48 | ) | — | 1 | (44 | ) | ||||||||||||
| In-process research and development | 63 | 63 | ||||||||||||||||||
| Depreciation | 463 | 567 | 270 | 104 | 11 | 1,415 | ||||||||||||||
| Intangible assets amortization | 70 | 514 | 64 | 2 | — | 650 | ||||||||||||||
| Depreciation and amortization | 533 | 1,081 | 334 | 106 | 11 | 2,065 | ||||||||||||||
| Non-cash compensation expense | 65 | 56 | 58 | 26 | 70 | 275 | ||||||||||||||
| Deferred income taxes | — | — | — | — | 72 | 72 | ||||||||||||||
| Provision for losses on accounts receivable and inventory | 67 | 31 | 48 | 28 | — | 174 | ||||||||||||||
| Net (increase) decrease in working capital and other | (92 | ) | (126 | ) | (605 | ) | 25 | (318 | ) | (1,116 | ) | |||||||||
| Interest income | — | — | — | — | 134 | 134 | ||||||||||||||
| Interest expense | — | — | — | — | (713 | ) | (713 | ) | ||||||||||||
| Income tax expense | — | — | — | — | (799 | ) | (799 | ) | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 2,386 | $ | 2,234 | $ | 2,054 | $ | 862 | $ | (1,942 | ) | $ | 5,594 | |||||||
Other cash flow items: | ||||||||||||||||||||
| Capital expenditures, net | $ | (549 | ) | $ | (433 | ) | $ | (429 | ) | $ | (98 | ) | $ | (5 | ) | $ | (1,514 | ) | ||
| Decrease in sale of accounts receivable | — | 9 | — | — | — | 9 | ||||||||||||||
| Acquisition of customer accounts (ADT dealer program) | — | (373 | ) | — | — | — | (373 | ) | ||||||||||||
| Purchase accounting and holdback liabilities | (4 | ) | (6 | ) | (8 | ) | (1 | ) | — | (19 | ) | |||||||||
| Voluntary pension contributions | — | — | 2 | — | — | 2 | ||||||||||||||
During 2006, the Company2007, we completed the sale of our Plastics and Adhesives segment, previously announced in 2005. Our Plastics, Adhesives and Ludlow Coated Products businesses were soldthe AIJ business for net proceeds of $882 million and the A&E Products Group was sold for $2$42 million in net cash proceeds.
During 2006, Additionally, during 2007, we made additional cash outflowsreceived $271 million due to the liquidation of approximately $450 million for the resolution of certain previously accrued legal matters, includinginvestments in a patent dispute in the Healthcare segment, and a cash payment of $50 million to settle the previously disclosed SEC enforcement action. We will continue to use excess cash to repurchase shares.
During 2006, we repaid and terminated one of our synthetic lease facilities for a total cash payment of $203 million, reducing principal debt and minority interest by $191 million and $10 million, respectively. Also, we utilized $1.0 billion in cash and $700rabbi trust, as well as $136 million in credit facility borrowings for scheduled repayments of public notes.
During 2006, we paid $413 million related to acquisitions of businesses, net of cash acquired, including a net $200 million and a net $123 million related to the previously discussed acquisitions of Confluent and Floreane, respectively, within Tyco's Healthcare segment.restitution payments owed by former executives as described above.
We continue to fund capital expenditures to improve the cost structure of our businesses, to invest in new processes and technology, and to maintain high quality production standards. Capital spending increased to $1.6 billion$669 million in 20062007 from $1.4 billion$558 million in 2005.2006. The level of capital expenditures in 20072008 is expected to exceed spending levels in 20062007 and is also expected to exceed depreciation.
In October 2006, the Company exercised its right to buy five cable laying sea vessels that were previously included under an off-balance sheet leasing arrangement for $280 million. This cash paid will be included in capital expenditures for 2007.
Income taxes paid, netSeptember 2007, Tyco's Board of refunds, during the year was $862 million.
During 2006, we repurchased 95 million of our common shares for $2.5 billion, completing the $1.5Directors approved a new $1.0 billion share repurchase program previously approved byunder which, we repurchased 1.3 million common shares for $56 million. During the Boardfirst quarter of Directors in July 2005 and continuing2007 we repurchased 5 million common shares for $659 million completing the new $2.0 billion share repurchase program approved by the Board of Directors in May 2006. This followed the repurchase of 13 million common shares for $1.3 billion in 2006. Additionally during 2006, we completed the $1.5 billion share repurchase program approved by the Board of Directors in July of 2005 with the repurchase of 11 million common shares for $1.2 billion.
In 2006, we commenced the termination of our interest rate and cross currency swaps, which were designated as fair value hedges. During 2007, we terminated the remaining swaps. Such terminations resulted in a net cash inflow of $63 million.
During the first quarter of 2007, we launched a $350 million to $400 million company-wide restructuring program. During 2007, 2006 and 2005 we paid out $70 million, $32 million and 2004,$103 million, respectively, in cash related to restructuring activities. See Note 3 to our Consolidated Financial Statements for further information regarding our restructuring activities.
Income taxes paid, net of refunds, related to continuing operations was $650 million in 2007, which included $295 million of legacy tax liability payments of amounts not yet due to the IRS in respect of their examination of our 1997 through 2000 U.S. federal income tax returns (the ultimate resolution of which is uncertain).
During 2007, 2006 and 2005, Tyco paid $409 million, $373 million $328 million and $254$328 million of cash, respectively, to acquire approximately 415,000, 401,000 364,000 and 302,000364,000 customer contracts for electronic security services through the ADT dealer program.
During 2007, 2006 2005 and 20042005, we paid out $68$10 million, $171$7 million and $266 million, respectively, in cash related to restructuring activities. These amounts include $7 million, $16 million and $43 million, respectively, reported in discontinued operations. See Note 4 to our Consolidated Financial Statements for further information regarding our restructuring activities. Subsequent to year end, we launched a $600 million company-wide restructuring program. We expect to incur approximately $500 million of charges in 2007, and we expect that the total cash expenditures for this program will be approximately $450 million, of which $250 million is expected in 2007.
During 2006, 2005 and 2004, we paid $101 million, $48 million and $107$14 million, respectively, in cash for purchase accounting and holdback liabilities. Of the total cash paid, $82 million, $1 million and $3 million, respectively, was reported in discontinued operations. Holdback liabilities represent a portion of the purchase price withheld from the seller pending finalization of the acquisition balance sheet and other contingencies. At September 29, 200628, 2007 holdback liabilities on our Consolidated Balance Sheets were $112$16 million, of which $23 million are included in accrued and other current liabilities and $89 million are included in other liabilities. At September 29, 2006, $4028, 2007, $14 million of acquisition liabilities remained on our Consolidated Balance Sheets, of which $14$4 million are included in accrued and other current liabilities and $26$10 million are included in other liabilities.
As previously mentioned, in January 2006,discussed, effective June 29, 2007, the Company announced that its Board of Directors approved a plan to separatecompleted the Company into three separate, publicly traded companies.Separation. In connection with the Proposed Separation, we paid $349 million in Separation costs during 2007 and $96 million in separation costs during 2006.2006, including $256 million and $77 million, respectively, recorded in cash provided by discontinued operating activities. We expect that during 2007, we will incur the remaining cash outflows related to the Proposed Separation whichduring the first six months of fiscal 2008. These amounts will be largely attributable toprimarily consist of tax restructuring, debt refinancing, professional services and employee-related costs.
In October 2006, the Company completed the sale of its PCG business, which was part of the Electronics segment, for $226 million and expects to record a gain on the sale of approximately $45 million.
Capitalization
Shareholders' equity was $15.6 billion or $31.50 per share, at September 28, 2007, compared to $35.4 billion or $17.78$71.06 per share, at September 29, 2006, compared2006. Shareholders' equity decreased $19.8 billion primarily due to $32.5 billion or $16.14 per share, at September 30, 2005.the distribution of Covidien and Tyco Electronics to shareholders. This increasedecrease was also due primarily to net incomeloss of $3.7$1.7 billion, the exchange of convertible debt due 2018 of $1.2 billion, and favorable changes in foreign currency exchange rates of $619 million. These increases were partially offset by the repurchase of common shares by a subsidiary of $2.5 billion as previously mentioned$727 million, and dividends declared of $807$668 million, offset by favorable changes in foreign currency exchange rates of $883 million.
AtIn connection with the Separation, as approved by our Board of Directors, we executed a reverse stock split, and as a result, four Tyco shares were converted into one share. Shareholder approval was obtained at the March 8, 2007 Special General Meeting of Shareholders.
Our debt levels decreased significantly as compared to September 29, 2006 primarily due to the debt tenders and Covidien and Tyco Electronics assuming their portion of related borrowings. At September 28, 2007, total debt decreased $2.3$5.1 billion to $10.2$4.5 billion, as compared to $12.5$9.6 billion at September 30, 2005.29, 2006. Total debt as a percentage of total capitalization (total debt and shareholders' equity) was 22% at September 29, 2006 and 28% at September 30, 2005. Our debt levels significantly decreased28, 2007, which increased slightly as compared to 21% at September 30, 2005 primarily29, 2006 due to the redemption of $1.2 billion of our Series A 2.75% convertible senior debentures due 2018 with a 2008 put option,decrease in shareholders' equity mentioned above. SeeDebt Tenders and the scheduled $1.0 billion repayment of our 6.375% public notes. Also, as mentioned, we repaidBank and terminated one of our synthetic lease facilities reducing our principal debt by $203 million.Revolving Credit Facilities below for further discussion.
Our cash balance decreased to $2.9$1.9 billion at September 28, 2007, as compared to $2.2 billion at September 29, 2006, as compared to $3.2 billion at September 30, 2005.2006. The decrease in cash was primarily due to the repurchase of shares under the previously-announced programs, and the scheduled debt repayments referred to above capital expenditures, and to a lesser extent, dividend payments. The majority of thesethe class action settlement escrow. These decreases were partially offset by cash flows provided by operations and transfers from discontinued operations.
TIGSA holds a $1.0 billion 5-year revolving credit facility expiring on December 16, 2009. TIGSA also holds a $1.5 billion 3-year revolving bank credit facility which was amended during 2006 to extend the maturity date from December 22, 2006 to December 21, 2007. Additionally, TIGSA holds a $500 million 3-year unsecured letter of credit facility expiring on June 15, 2007. At September 29, 2006, letters of credit of $475 million have been issued under the $500 million facility and $25 million remains available for issuance. Also, during 2006, TIGSA borrowed $700 million under its $1.5 billion 3-year revolving bank credit facility, with the entire proceeds used to repay its 5.8% public notes due 2006 at their maturity on August 1, 2006. There were no amounts borrowed under the other credit facilities at September 29, 2006.
The Company's bank credit agreements contain a number of financial covenants, such as a limit on the ratio of debt to earnings before interest, income taxes, depreciation, and amortization and minimum levels of net worth, and limits on the incurrence of liens. The Company's outstanding indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants are presently considered restrictive to the Company's operations. The Company is currently in compliance with all of its debt covenants.
As previously discussed, in May 2006,September 2007, the Board of Directors approved a new $2.0$1.0 billion share repurchase program. Pursuant to the new program, we may repurchase Tyco shares from time to time in open market purchases at prevailing market prices, in negotiated transactions off the market, or pursuant to an approved 10b5-1 trading plan in accordance with applicable regulations. A Rule 10b5-1 trading plan permits the Company to repurchase its shares during periods when the Company would not normally be active in the trading market due to insider trading laws, provided the plan is adopted when the Company is not aware of material non-public information. Under a Rule 10b5-1 trading plan, we would be unable to repurchase shares above a pre-determined price per share. Additionally, the maximum number of shares that we may purchase each day would be governed by Rule 10b-18.
Dividend payments were $791 million in 2007. On December 9, 2004,September 13, 2007 Tyco's Board of Directors approved a quarterly dividend on the Company's common shares of $0.15 per share payable on November 1, 2007 to shareholders of record of Tyco International Ltd. post Separation on October 1, 2007. The timing, declaration and payment of future dividends to holders of our common shares, however, falls within the discretion of our Board of Directors and will depend upon many factors, including the statutory requirements of Bermuda law, our financial condition and results of operations, the capital requirements of our businesses, industry practice and any other factors the Board of Directors approved an increase in the quarterly dividend on our common shares from $0.0125 to $0.10 per share. As a result, dividend payments were $806 million in 2006. Following the Proposed Separation, we expect that all three companies will be dividend-paying companies.deems relevant.
Also, followingDebt Tenders
On April 27, 2007, we announced that, in connection with the Proposed Separation, it is anticipated that all three companies will be capitalized to provide financial flexibility to take advantagewe and certain of future growth opportunities. They are expected to have financial policies, balance sheet and credit metricsour subsidiaries that are commensurateissuers of our corporate debt had commenced tender offers to purchase for cash substantially all of our outstanding U.S. dollar denominated public debt, aggregating approximately $6.6 billion. Of this amount, approximately $5.9 billion was non-convertible U.S. debt and $750 million was convertible U.S. debt, with solid investment grade ratings.maturities from 2007 to 2029. In conjunction with the tender offers, the relevant issuer solicited consents for certain clarifying amendments to the indentures pursuant to which the debt was issued. We received acceptance notices for approximately $2.1 billion, or 36% of our outstanding non-convertible U.S. debt and approximately $726 million or 97% of our outstanding convertible U.S. debt. Debt which was not tendered in an amount of approximately $3.8 billion remains with us.
Additionally, Tyco will continueInternational Group S.A., our wholly-owned subsidiary organized under the laws of Luxembourg ("TIGSA"), commenced on April 30, 2007 tender offers to follow financial policies that are consistentpurchase for cash all of its outstanding Euro and Pound Sterling denominated public debt, aggregating the equivalent of approximately $1.9 billion, with maturities from 2008 to 2031, issued under its currentEuro Medium Term Note Programme (the "EMTN Notes") and a consent solicitation for certain clarifying amendments to the fiscal agency agreement pursuant to which the EMTN Notes were issued. We received acceptance notices for approximately $1.5 billion, or 80% of our EMTN Notes. The remaining EMTN Notes were repurchased pursuant to an optional redemption.
In connection with the debt tender offers, we incurred a pre-tax charge for the early extinguishment of debt of approximately $647 million, for which no tax benefit is available (see Note 5).
TIGSA's remaining debt was contributed to Tyco International Finance S.A. ("TIFSA"), a wholly owned subsidiary of the Company and successor company to TIGSA.
Bank and Revolving Credit Facilities
On April 25, 2007, we, certain of our subsidiaries and a syndicate of banks entered into three 364-day unsecured bridge loan facilities with an aggregate commitment amount of $10 billion. At the end of May 2007, the aggregate commitment amount under these facilities was increased to $12.5 billion. We borrowed approximately $8.9 billion under the unsecured bridge loan facilities to fund our debt tender offers, repay our existing bank credit ratings untilfacilities and to finance the planned transactions take place.class action settlement. Of this amount, approximately $4.3 billion and $3.6 billion was assigned to Covidien and Tyco Electronics, respectively. We initially guaranteed the new unsecured bridge loan facilities and Covidien and Tyco Electronics each assumed Tyco's obligations with respect to their unsecured bridge loan facilities upon the Separation. We no longer guarantee those assumed amounts. This facility has a variable interest rate based on LIBOR. The Company's existingmargin over LIBOR payable by TIFSA can vary based on changes in our credit rating. As of September 28, 2007, our aggregate commitment under our unsecured bridge loan facility was $4.0 billion and $367 million remained outstanding with a weighted-average interest rate of 5.5%.
On October 1, 2007, the commitments with respect to the unused portion of our unsecured bridge loan facility expired. Our unsecured revolving credit facility described below and our letter of credit facility described inCommitments and Contingencies—Contractual Obligations, provide the lenders under those facilities with the right to demand repayment of outstanding amounts, and to terminate commitments to extend additional credit, if (i) certain of our outstanding public debt is expecteddeclared due and payable and (ii) we do not have sufficient liquidity available under our unsecured bridge loan facility to refinance such debt. As a result, on November 27, 2007, we secured additional firm commitments from certain of our lenders under the bridge loan facility. These additional commitments provide us with sufficient liquidity to repay the outstanding public debt with borrowings of up to
$4.0 billion. The additional commitments expire on, and any borrowings under the facility would mature on, November 25, 2008. The facility may only be allocated amongused to repay, settle or otherwise extinguish the public debt described above, which is the subject of ongoing litigation between us and The Bank of New York. For more information regarding such litigation, see Item 3. Legal Proceedings—Indenture Trustee Litigation.
Additionally, on April 25, 2007, we, certain of our subsidiaries and a syndicate of banks entered into three companies or refinanced. Any existing or potential liabilitiesunsecured revolving credit facilities with an initial aggregate commitment amount of $2.5 billion that cannot be associated withincreased to $4.25 billion at the time of the Separation. Of the aggregate commitment amount of $4.25 billion, a particular entity will be allocated appropriately$1.25 billion commitment is available to us, and a $1.5 billion commitment was available to each of Covidien and Tyco Electronics. We will use the businesses,revolving credit facilities for working capital, capital expenditures and other corporate purposes. We initially guaranteed the new revolving credit facilities and Covidien and Tyco Electronics each assumed our obligations with respect to their revolving credit facilities upon the Separation. We no longer guarantee those assumed amounts. At September 28, 2007, we have borrowed $308 million under our unsecured revolving credit facility. This facility has a sharing agreement amongvariable interest rate based on LIBOR. The margin over LIBOR payable by TIFSA can vary based on changes in our credit rating.
The unsecured revolving credit facilities replaced TIGSA's existing $1.0 billion 5-year revolving credit facility and $1.5 billion 3-year revolving bank credit facility, which were terminated by June 1, 2007 prior to their scheduled expiration dates of December 16, 2009 and December 21, 2007, respectively. On the three companies will be established.date of termination, no amounts were borrowed under these facilities.
TIFSA's bank credit agreements contain customary terms and conditions, and financial covenants that limit the ratio of our debt to our earnings before interest, taxes, depreciation, and amortization and that limit our ability to incur subsidiary debt or grant liens on our property. Our indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants are considered restrictive to our business. We believe we are in compliance with all of our debt covenants. The Bank of New York, as indenture trustee under indentures dated as of June 9, 1998 and November 12, 2003, is contesting whether the Separation transactions were permitted under such indentures. See Item 3. Legal Proceedings—Indenture Trustee Litigation.
The following table details our long-term debt ratings at September 29, 200628, 2007 and September 30, 2005:29, 2006:
| | ||||
|---|---|---|---|---|
| Moody's | ||||
| Standard & Poor's | BBB+ | |||
| Fitch | BBB+ |
The security ratings set forth above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Contractual Obligations
Contractual obligations and commitments for principal debt, minimum lease payment obligations under non-cancelable operating leases and other obligations at September 29, 200628, 2007 is as follows ($ in millions):
| | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Debt(1) | $ | 782 | $ | 820 | $ | 2,555 | $ | 14 | $ | 1,002 | $ | 4,833 | $ | 10,006 | ||||||||||||||||||||||||||||
| Debt(1)(2) | $ | 372 | $ | 517 | $ | 1 | $ | 517 | $ | 1,158 | $ | 1,848 | $ | 4,413 | ||||||||||||||||||||||||||||
| Capital leases | 26 | 27 | 22 | 9 | 7 | 76 | 167 | 8 | 7 | 6 | 4 | 2 | 37 | 64 | ||||||||||||||||||||||||||||
| Operating leases | 516 | 405 | 302 | 214 | 158 | 499 | 2,094 | 291 | 226 | 171 | 123 | 72 | 157 | 1,040 | ||||||||||||||||||||||||||||
| Purchase obligations | 222 | 24 | 10 | 10 | 7 | 24 | 297 | 114 | 7 | 3 | — | — | — | 124 | ||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 1,546 | $ | 1,276 | $ | 2,889 | $ | 247 | $ | 1,174 | $ | 5,432 | $ | 12,564 | $ | 785 | $ | 757 | $ | 181 | $ | 644 | $ | 1,232 | $ | 2,042 | $ | 5,641 | ||||||||||||||
At September 29, 2006, the Company had outstanding letters of credit and bank guarantees in the amount of $1.3 billion.
At September 29, 2006, TIGSA28, 2007, TIFSA had unsecured credit facilities of $1.5$1.25 billion due December 21, 2007, and $1.0 billion due December 16, 2009,April 25, 2012, of which $1.8approximately $0.9 billion was undrawn and available (see Note 1513 to the Consolidated Financial Statements). In addition, certain of the Company's operating subsidiaries have uncommitted overdraft and similar types of facilities, which total $624$55 million, of which $606$51 million was undrawn and available at September 29, 2006.available. These facilities expire at various
dates through the year 2013,2009, most of which are renewable and are established primarily within our international operations.
At September 29, 2006, the Company had a contingent purchase price liability of $80 million related to the 2001 acquisition of Com-Net by Electronics. This represents the maximum amount payable to the former shareholders of Com-Net only after the constructionOn June 21, 2007, Tyco and installation of a communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. A liability for this contingency has not been recorded in Tyco's Consolidated Financial Statements as the outcome of this contingency cannot be reasonably determined.
In June 2004, TIGSATIFSA entered into a new $500 million 3-year unsecured letter of credit facility, due Junewith Citibank N.A. as administrative agent, expiring on December 15, 2007. The facility provides for the issuance of letters of credit, supported by a related line of credit facility. TIGSATIFSA may only borrow under the line of credit agreement to reimburse the bank for obligations with respect to letters of credit issued under this facility. The covenants under this facility are substantially similar to TIGSA's bankthe covenants under the bridge loan and revolving credit facilities entered into during December 2003 and the indenture related to TIGSA's 6% notes due 2013 issued in November 2003. TIGSAfacilities. TIFSA would pay interest on any outstanding borrowings at a variable interest rate, based on the bank's base rate or the Eurodollar rate, as defined. Upon the occurrence of certain credit events, the interest rate on the outstanding borrowings becomes fixed. The issuance of letters of credit under this credit facility during 2004 enabled the Company to release approximately $480 million of restricted cash and investments. As of September 29, 2006,28, 2007, letters of credit of $475$494 million have been issued under the $500 million credit facility and $25$6 million remains available for issuance. There were no amounts borrowed under this credit facility at September 29, 2006.28, 2007. On October 19, 2007, the facility was amended. The amendment extended the maturity date to June 15, 2008 and adjusted the interest rate spreads and fees applicable to extensions of credit thereunder. Loans under the amended letter of credit agreement will continue to bear interest based on LIBOR plus the applicable margin.
At September 28, 2007, the Company had total outstanding letters of credit and bank guarantees of $1.1 billion.
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, results of operations or cash flows.
In connection with the Separation, the Company entered into a liability sharing agreement regarding certain class actions that were pending against Tyco prior to the Separation. Subject to the
terms and conditions of the Separation and Distribution Agreement, the Company will manage and control all the legal matters related to assumed contingent liabilities as described in the Separation and Distribution Agreement, including the defense or settlement thereof, subject to certain limitations.
Tyco has assumed 27%, Covidien has assumed 42% and Tyco Electronics has assumed 31% of certain Tyco pre-Separation contingent and other corporate liabilities, which include securities class action litigation, ERISA class action litigation, certain legacy tax contingencies and any actions with respect to the spin-offs or the distributions made or brought by any third party except for litigation related to our public debt. Any amounts relating to these contingent and other corporate liabilities paid by Tyco after the spin-offs that are subject to the allocation provisions of the Separation and Distribution Agreement will be shared among Tyco, Covidien and Tyco Electronics pursuant to the same allocation ratio. As described in the Separation and Distribution Agreement, Tyco, Tyco Electronics and Covidien are jointly and severally liable for all amounts relating to the previously disclosed securities class action settlement. All costs and expenses that Tyco incurs in connection with the defense of such litigation, other than the amount of any judgment or settlement, which will be allocated in the manner described above, will be borne equally by Covidien, Tyco Electronics and Tyco.
Legal Matters
Class Actions
For a detailed discussion of contingencies related to Tyco's securities class actions, class action settlement, securities class action proceedings, shareholder derivative litigation, ERISA related litigation, and investigation, andTyco litigation against former senior management, litigation related to our public debt and various other legal matters, see Item 3. Legal Proceedings. We are generally obligated to indemnify our directors and officers and our former directors and officers who are named as defendants in some or all of these matters to the extent required by Bermuda law. In addition, our insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and liability, in some or all of these matters. While we may from time to time seek to engage plaintiff's counsel in settlement discussions, we are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that wouldcould have a material adverse effect on our financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.
Investigations
For a detailed discussion of contingencies related to governmental investigations related to Tyco, see Item 3. Legal Proceedings—Subpoenas and Document Requests From Governmental Entities. We cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government entities or instrumentalities
(which (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties or adverse impacts, each of which could have a material adverse effect on our business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters.
On April 17, 2006, the Company reached a settlement that closes the SEC Enforcement Division's investigation of the Company regarding certain accounting practices and other actions by former Tyco officers. On April 25, 2006, the United States District Court for the Southern District of New York entered a final judgment in which the Company was ordered to pay $1 in disgorgement and a fine of $50 million. During the third quarter of 2006, the Company satisfied the judgment which was accrued in 2005.
Intellectual Property and Antitrust Litigation
The Company is party to a number of patent infringement and antitrust actions that may require the Company to pay damage awards. Tyco has assessed the status of these matters and has recorded liabilities related to certain of these matters where appropriate. For a detailed discussion of contingencies related to Tyco's intellectual property and antitrust litigation, see Item 3. Legal Proceedings—Intellectual Property and Antitrust Litigation.
Environmental Matters
For a detailed discussion of contingencies related to Tyco's environmental matters, see Item 1. Business—Environmental Matters.
Asbestos Matters
Tyco and some of its subsidiaries and certain subsidiaries of Covidien are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. Pursuant to the Separation and Distribution Agreement, Covidien has assumed all liabilities for pending cases filed against Covidien's subsidiaries. Consistent with the national trend of increased asbestos-related litigation, the Company has observed an increase in the number of these lawsuits in the past several years. The majority of these cases have been filed against subsidiaries in Healthcare and Engineered Products and Services. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. A majority of the cases involve product liability claims, based principally on allegations of past distribution of heat-resistant industrial products incorporating asbestos or the past distribution of industrial valves that incorporated asbestos-containing gaskets or packing. Each case typically names between dozens to hundreds of corporate defendants.
Tyco's involvement in asbestos cases has been limited because its subsidiaries did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims were never substantiated and have been dismissed by the courts. The Company will continue to vigorously defend thesethe lawsuits that have been filed against it and its subsidiaries. To date, the Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims.
When appropriate, the Company settles claims; however, the total amount paid in any year to settle and defend all asbestos claims has been immaterial. As of September 29, 2006,28, 2007, there were approximately 15,5005,600 asbestos liability cases pending against the Company and its subsidiaries.
The Company estimates its pending asbestos claims that were incurred but not reported, as well as related insurance and indemnification recoveries. The Company's estimate of the liability for pending and future claims is based on claim experience over the past five years and covers claims expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all
known and anticipated future claims, after taking into account its substantial indemnification rights and insurance coverage, will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
Income Taxes
Tyco and its subsidiaries' income tax returns periodically are periodically examined by various tax authorities. In connection with suchthese examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies and related interest that management has assessed as probable and estimable have been recorded. While the timing and ultimate resolutionFor a detailed discussion of these matters is uncertain, the Company anticipates that certain of these matters could be resolved during 2007.contingencies related to Tyco's income taxes, see Item 3. Legal Proceedings—Income Tax Matters.
Compliance Matters
Tyco has received and responded to various allegations and other information that certain improper payments were made by Tyco subsidiaries in recent years. During 2005,As previously reported, we have been informed that two subsidiaries in our Flow Control business in Italy have been named in a request for criminal charges filed by the Milan public prosecutor's office. Tyco has reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("FCPA"), that it would continue to make periodic progress reports to these agencies, and that it would present its factual findings upon conclusion of the baseline review. The Company has and will continue to have communicationscommunicate with the DOJ
and SEC to provide updates on the baseline review being conducted by outside counsel, including, as appropriate, briefings concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities.
Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the Company in its response to these allegations. To date, the baseline review has revealed that some business practices may not comply with Tyco and FCPA requirements. At this time, Tyco cannot predict the outcome of these matters and other allegations reported to regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of anythese matters. However, it is possible that the Company may be required to pay judgments, suffer penalties or allincur settlements in amounts that may have a material adverse effect on its financial position, results of these matters.operations or cash flows. For a detailed discussion of contingencies related to Tyco's compliance matters, see Item 3. Legal Proceedings—Compliance Matters.
Other Matters
The Company is a party to a contract dispute arising from Earth Tech's contract with the City of Phoenix, Arizona for the expansion of the City's 91st Avenue Waste Water Treatment Plant. Both Earth Tech and the City of Phoenix have filed lawsuits in the local county superior court alleging the other party has breached the contract. At this time, Tyco cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of this matter. For a detailed discussion of contingencies related to Tyco's other legal matters, see Note 18 to our Consolidated Financial Statements.Item 3. Legal Proceedings—Other Matters.
The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.
Backlog
At September 29, 2006,28, 2007, we had a backlog of unfilled orders of $14.2$9.1 billion, compared to a backlog of $13.5$8.2 billion at September 30, 2005.29, 2006. We expect that approximately 77%86% of our backlog at
September 29, 200628, 2007 will be filled during 2007.2008. Backlog by reportable industry segment at September 29, 200628, 2007 and September 30, 200529, 2006 is as follows ($ in millions):
| | 2006 | 2005 | ||||
|---|---|---|---|---|---|---|
| Fire and Security | $ | 7,000 | $ | 6,732 | ||
| Engineered Products and Services | 4,167 | 4,007 | ||||
| Electronics | 2,711 | 2,496 | ||||
| Healthcare | 280 | 272 | ||||
| $ | 14,158 | $ | 13,507 | |||
| | 2007 | 2006 | ||||
|---|---|---|---|---|---|---|
| ADT Worldwide | $ | 6,137 | $ | 5,776 | ||
| Fire Protection Services | 1,108 | 1,050 | ||||
| Flow Control | 1,579 | 1,115 | ||||
| Safety Products | 144 | 133 | ||||
| Electrical and Metal Products | 113 | 101 | ||||
| Corporate and Other | 4 | 3 | ||||
| $ | 9,085 | $ | 8,178 | |||
Within Fire and Security,ADT Worldwide, backlog increased primarily as a result of strong bookings in North America and Europe.across all regions. Backlog for Fire and SecurityADT Worldwide also includes recurring revenue-in-force, which represents twelve12 months' fees for monitoring and maintenance services under contract in the security business. The amount of recurring revenue-in-force at September 28, 2007 and September 29, 2006 and September 30, 2005 was $3.65$3.93 billion and $3.55$3.65 billion, respectively. Backlog within Engineered Products andFire Protection Services increased primarily as a result of increased orders atin North America. Flow Control. Within Electronics, backlog increased as a result ofControl had increased bookings in most key end markets. Backlog in Healthcare represents unfilled orders, which,mostly in the nature of the business, are normally shipped shortly after purchase orders are received. We do not view backlog in Healthcare to be a significant indicator of the level of future sales activity.Asia-Pacific and Europe regions.
Off-Balance Sheet Arrangements
Sale of Accounts Receivable
Tyco utilized several programs under which it sold participating interests in accounts receivable to investors who, in turn, purchased and received ownership and security interests in those receivables. These transactions qualified as true sales. TheCertain of Tyco's international businesses utilize the sale proceeds were less than the face amount of accounts receivable sold, and the discount from the face amount was included in selling, general and administrative expenses in the Consolidated Statements of Income. Such discount aggregated $18 million, or 3.1% of the weighted-average balance of the receivables outstanding, during 2004.
During 2004, the Company reduced outstanding balances under its accounts receivable programs by $929 million, of which $812 million related to its corporate accounts receivable programs which were terminated in 2005. No amounts were utilized under these programs at September 30, 2004, and through the date of termination. The remaining reduction of $117 million related to certain of the Company's international businesses selling fewer accounts receivable as a short-term financing mechanism.mechanisms. The aggregate amount outstanding under the Company's remaining international accounts receivable programs was $76 million, $75 million and $80$79 million at September 28, 2007, September 29, 2006 and September 30, 2005, respectively.
Guarantees
Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 20072008 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance and the potential exposure for nonperformance under the guarantees would not have a material effect on the Company's financial position, results of operations or cash flows.
There are certain guarantees or indemnifications extended among Tyco, Covidien and Tyco Electronics in accordance with the terms of the Separation and Distribution Agreement and the Tax Sharing Agreement. At the time of the Separation, Tyco recorded a liability necessary to recognize the fair value of such guarantees and indemnifications in accordance with Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Fair values were determined with the assistance of a third party valuation firm. The liability necessary to reflect the fair value of these guarantees and indemnifications is $543 million, which is included in other liabilities on our Consolidated Balance Sheets. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. See Note 16 for further discussion of the Tax Sharing Agreement.
In addition, Tyco historically provided support in the form of financial and/or performance guarantees to various Covidien and Tyco Electronics operating entities. In connection with the Separation, the Company worked with the guarantee counterparties to cancel or assign these guarantees to Covidien or Tyco Electronics. To the extent these guarantees were not assigned prior to the Separation date, Tyco assumed primary liability on any remaining support. The estimated fair values of those obligations are $7 million, which are included in other liabilities with an offset to shareholders' equity on our Consolidated Balance Sheets, and were recorded in accordance with FIN No. 45.
In disposing of assets or businesses, the Company often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental
contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Item I.1. Business—Environmental Matters for a discussion of these liabilities.
The Company had an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon expiration of this lease in October 2006, a subsidiary of the Company has the option to buy these vessels for approximately $280 million, or return the vessels to the lessor and, under a residual guarantee, pay any shortfall in sales proceeds to the lessor from a third party in an amount not to exceed $235 million. As of September 29, 2006, the Company expected this obligation to be $54 million, which is recorded in the accompanying Consolidated Balance Sheets, based on an estimate of the fair value of the vessels performed by management with the assistance of a third-party valuation. In October 2006, the Company exercised its option to buy these vessels for $280 million. See Note 28 to the Consolidated Financial Statements.
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, results of operations or cash flows.
The Company records estimated product warranty costs at the time of sale. For further information on estimated product warranty, see Notes 1 and 1614 to the Consolidated Financial Statements.
In 2001, Engineereda division of Safety Products and Services initiated a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain Model GB fireO-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco's acquisition. Under this program, the sprinkler heads are being replaced over a 5-7 year period free of charge to property owners. In the third quarter of 2006, the Company completed a comprehensive review of reported claims, recent claim rates and cost trends and further assessed the future of the program. The Company determined that an additional liability was necessary in order to satisfy the Company's obligation under the VRP. As a result, the Company recorded a $100 million charge which was reflected in cost of sales. On May 1, 2007, the Consumer Products Safety Commission and the Company announced an August 31, 2007 deadline for filing claims to participate in the VRP. The Company will fulfill all valid claims for replacement of qualifying sprinklers received up to August 31, 2007. During the fourth quarter of 2007, the Company further assessed the expected cost to complete the program in light of the most current claims data and determined that an additional accrual of $10 million was necessary to satisfy the estimated remaining obligation. The ultimate cost to complete the program will be impacted by a number of factors such as changes in material and labor costs, and the actual number of sprinkler heads replaced. Actual results could differ from this estimate. Settlements during 20062007 include cash expenditures of $37$38 million related to the VRP.
Recently Adopted Accounting Pronouncements—Effective October 1, 2005, Tyco adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Tyco adopted SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost is recognized for the unvested portion of share-based payments granted prior to October 1, 2005 and all share-based payments granted subsequent to September 30, 2005 over the related vesting period. Prior to October 1, 2005, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock-based compensation. Prior period results have not been restated. Due to the adoption of SFAS No. 123R, the Company's results from continuing operations for 2006 include incremental share-based compensation expense totaling $161 million. As such, basic and diluted earnings per share from continuing operations were impacted by $0.06 and $0.05, respectively, in 2006.
On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. FAS 123R-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." The Company elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R in the fourth quarter of fiscal 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are fully vested and outstanding upon adoption of SFAS No. 123R. The adoption did not have a material impact on our results of operations and financial condition.
The Company adopted FASB Interpretation ("FIN") No. 47,"Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143," during the fourth quarter of 2006. This Interpretation clarifies the timing of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Interpretation requires that conditional asset retirement obligations, along with the associated capitalized asset retirement costs, be reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and an increase of $10 million in the carrying amount of the related assets. The initial recognition resulted in a cumulative effect of accounting change of $22 million, pre-tax, reflecting the accumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47 been in effect at the time. Certain obligations relating to the handling and disposal of asbestos have not been recorded due to the fact that fair value cannot be reasonably estimated because the Company does not have sufficient information about the range of time over which the obligation may be settled. The undiscounted cash flows relating to the asset retirement obligations that have not been recognized in the financial statements are approximately $8 million. The Company will continue to monitor such legal asset retirement obligations and recognize a liability in the period sufficient information becomes available to reasonably estimate the fair value.
In June 2005, the FASB issued Staff Position ("FSP") No. 143-1,"Accounting for Electronic Equipment Waste Obligations," which provides guidance on accounting for historical waste obligations associated with the European Union Waste, Electrical and Electronic Equipment Directive ("WEEE Directive"). Under the directive, the waste management obligation for historical equipment (products
put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced, at which time the waste management obligation may be transferred to the producer of the replacement equipment. FSP No. 143-1 is effective for the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. The financial statement impact depends heavily on the respective laws and regulations adopted by the EU member countries, their implementation guidance and the type of recycling programs and systems that are established. The Company evaluated the effects of FSP No. 143-1 and determined that it did not have a material impact on the Company's results of operations, financial position or cash flows.
Recently Issued Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 158, ""Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)."." SFAS No. 158 requires that employers recognize the funded status of defined benefit pension and other postretirement benefit plans as a net asset or liability on the balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as a component of net periodic benefit cost. Under SFAS No. 158, companies are required to measure plan assets and benefit obligations as of their fiscal year end. The Company presently uses a measurement date of August 31st. SFAS No. 158 also requires additional disclosure in the notes to the financial statements. The recognition provisions of SFAS No. 158 are effective for fiscal 2007, while the measurement date provisions become effective in fiscal 2009. The Company is currently assessingadopted the impactrecognition and disclosure provisions of SFAS No. 158 on its consolidated financial statements. Based on the funded status of defined benefit and other postretirement plans as of September 29, 2006, the28, 2007. The Company estimates that it would recognizerecognized a net $356$111 million liability through a reduction in shareholders' equity.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 requires that companies utilize a "dual approach" in assessing the quantitative effects of financial statement misstatements. The ultimate amounts recorded are highly dependentdual approach includes both an income statement focused and balance sheet focused assessment. SAB No. 108 is effective for Tyco in fiscal 2007. The implementation of SAB No. 108 did not have a material impact on various estimatesTyco's results of operations, financial position or cash flows.
Recently Issued Accounting Pronouncements—In February 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and assumptions including, among other things, the discount rate selected, future compensation levels and performance of plan assets. Changes in these assumptions could increase or decrease the estimated impact of implementingFinancial Liabilities." SFAS No. 158.159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for Tyco in the first quarter of fiscal 2009.
The Company is currently assessing the impact that SFAS No. 159 will have on the results of its operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, ""Fair Value Measurements"," which enhances existing guidance for measuring assets and liabilities at fair value. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for Tyco beginning September 29, 2008.in fiscal 2009. The Company is currently assessing the impact, if any, that SFAS No. 157 will have on the results of its operations, financial position or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statement." SAB No. 108 requires that companies utilize a "dual-approach" to assessing the quantitative effects of financial statement misstatements. The dual approach includes both an income statement focused and balance sheet focused assessment. SAB No. 108 is applicable for Tyco's fiscal year ending September 28, 2007. The Company is currently assessing the impact of the adoption of SAB No. 108, but does not expect that it will have a significant impact on its financial position or results of operations.
In June 2006, the FASB issued FIN No. 48, ""Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109."109." This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for Tyco in the first quarter of fiscal 2008. The Company is currently implementing and assessing the expected impact thatof adopting FIN No. 48 will48. Based on the assessment to date, management does not expect the adoption to have a material effect on the results of its operations, financial position or cash flows.
Certain statements in this report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "project" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the SEC, or in Tyco's communications and discussions with investors and analysts in the normal course of business through meetings, web casts, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, product expansion, backlog, the consummation and benefits of acquisitions and divestitures, the Proposed Separation or other matters, as well as financings and repurchases of debt or equity securities, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements include, among other things:
changes in rules and regulations regarding the retirement and disposal of certain electrical products;
Additionally, there are several factors and assumptions that could affect the Company's plan to separate into three independent entities, our future results and cause actual results to differ materially from those expressed in our forward looking statements:
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
WeIn the ordinary course of conducting business, we are subjectexposed to market riskcertain risks associated with potential changes in market conditions. These risks include fluctuations in foreign currency exchange rates, interest rates and foreign currency exchange rates. In ordercommodity prices. Accordingly, we have established a comprehensive risk management process to monitor, evaluate and manage the principal exposures we assume. We seek to manage these risks through the volatility relatinguse of financial derivative instruments. Our portfolio of derivative financial instruments may, from time to our more significant market risks, we enter intotime, include forward foreign currency exchange contracts, cross-currencycross currency swaps, foreign currency options, and interest rate swaps. Derivative financial instruments related to interest rate sensitivity of debt obligations, intercompany cross border transactions and anticipated non-functional currency cash flows are used with the goal of mitigating a significant portion of these exposures when it is cost effective to do so.
We do not anticipateexecute transactions or utilize derivative financial instruments for trading or speculative purposes. Further, to reduce the risk that a counterparty will be unable to honor its contractual obligations to us, we only enter into contracts with counterparties having at least an A/A2 long-term debt rating. These counterparties are generally financial institutions and there is no significant concentration of exposure with any one party.
During fiscal year 2007, the Company elected to change its presentation of market risk information from a tabular format to a disclosure based on the results of sensitivity analysis. Management believes this method of presentation provides more useful information for assessing the Company's overall exposure to market risks. The results of our sensitivity analysis represent an estimate of reasonably possible outcomes based on hypothetical market conditions and are not necessarily indicative of actual results. Although, there were no material changes in our primary risk exposures and risk management activities, our level of exposure decreased across all risk categories as a result of the spin-off of our Healthcare and Electronics businesses.
Foreign Currency Exposures
We economically hedge our exposure to fluctuations in exchange rates through the use of forward foreign exchange contracts and options. During 2007, our largest exposures to foreign exchange rates existed primarily with the British Pound, Euro, Brazilian Real, Australian Dollar and Canadian Dollar against the U.S. Dollar. The market risk exposuresrelated to the forward foreign exchange contracts is measured by estimating the potential impact of a 10% change in the value of the U.S. Dollar relative to the local currency exchange rates. The rates used to perform this analysis were based on the market rates in effect on September 28, 2007. A 10% appreciation of the U.S. dollar relative to the local currency exchange rates would result in a $248 million net increase in the fair value of the contracts. Conversely, a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would result in a $303 million net decrease in the fair value of the contracts. However, gains or losses on these derivative instruments are economically offset by the gains or losses on the underlying transactions.
Previously, we hedged our investment in certain foreign operations. In December 2006, due to required changes to the legal entity structure to facilitate the Separation, the Company determined that it will no longer consider certain intercompany foreign currency transactions to be long-term investments. As a result, the related foreign currency transaction gains and losses on such investments were recorded in the income statement subsequent to this determination rather than to the currency translation component of shareholders' equity. Forward contracts that were previously designated as hedges of these net investments continued to be used to manage this exposure but were no longer designated as net investment hedges.
Also in connection with the Separation and the debt tender, the Company de-designated its 6.125% Euro denominated public notes due 2007 on March 29, 2007, its 5.5% Euro denominated public notes due 2008 and its 6.5% British Pound denominated public notes due 2031 on May 21, 2007, that had previously been considered as hedges of net investments in certain foreign operations. At September 28, 2007, the Company did not hedge its net investment in foreign operations, and all of its outstanding borrowings were denominated in U.S. dollars.
Interest Rate Exposures
Our long-term debt portfolio primarily consists of fixed-rate instruments. Historically, the Company managed its exposure to interest rates by entering into interest rate and cross-currency swaps designated as fair value hedges. In assessing the current and future riskpotential risks related to movements in interest rates, we terminated the interest rate and cross currencycross-currency swaps in several tranches. The aggregate notional value of the interest rate and cross currency swaps terminated duringtranches beginning in the fourth quarter of 2006 was $2.5 billion. In October 2006,2006. During the first quarter of 2007, we terminated the remaining contracts with a total notional amount of $0.6 billion, resulting in an aggregate terminated notional amount of $3.1 billion. The settlement of these swaps resulted in a net cash inflow of $55 million.$63 million for the first quarter of 2007. Since the interest rate swaps were designated as hedging instruments of outstanding debt, the related $32 million loss adjustment to the carrying value of the related debt will be amortized over the remaining life of the related debt instruments. In connection with the debt tender offer, $9 million of unamortized loss on interest rate swaps was accelerated and recorded as a loss on retirement of debt and included in other expense, net (see Note 13). At September 28, 2007 there were no interest rate swaps outstanding.
Commodity Exposures
In December 2006, dueWe are exposed to required changesvolatility in the prices of raw materials used in some of our products and may, in limited circumstances, enter into hedging contracts to the legal entity structure to facilitate the Proposed Separation,manage those exposures. These exposures are monitored as an integral part of our risk management program. At September 28, 2007, the Company determined that it will no longerdid not hedge its exposure attributable to changes in commodity prices but may consider certain intercompany foreign currency transactions to be long-term investments. As a result, the related foreign currency transaction gains and losses on such investments will be recordedstrategies in the income statement rather than to the currency translation component of shareholders' equity. Forward contracts that were previously designated as hedges of these net investments will continue to be used to manage this exposure but will no longer be designated as net investment hedges.future.
We utilize established risk management policies and procedures in executing derivative financial instrument transactions. We do not execute transactions or hold derivative financial instruments for trading or speculative purposes. Derivative financial instruments related to interest rate sensitivity of debt obligations, intercompany cross-border transactions and anticipated non-functional currency cash flows, are used with the goal of mitigating a significant portion of these exposures when it is cost effective to do so. Counterparties to derivative financial instruments are limited to financial institutions with at least an A/A2 long-term debt rating.
Interest Rate Sensitivity
The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations, the table presents cash flows of principal repayment and weighted-average interest rates. For interest rate and cross-currency swaps, the table presents notional amounts at the current market price rate and weighted average interest rates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The amounts included in the table below are in U.S. Dollars ($ in millions):
| | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Fair Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total debt: | |||||||||||||||||||
| Fixed rate (US$) | 3 | 110 | 1,591 | 5 | 1,002 | 3,911 | 6,622 | 7,231 | |||||||||||
| Average interest rate | 1.3 | % | 6.9 | % | 6.2 | % | 14.8 | % | 6.8 | % | 5.7 | % | — | — | |||||
| Fixed rate (Euro) | 771 | 3 | 872 | 2 | 2 | 6 | 1,656 | 1,676 | |||||||||||
| Average interest rate | 6.1 | % | 6.3 | % | 5.5 | % | 8.2 | % | 7.4 | % | 7.2 | % | — | — | |||||
| Fixed rate (Yen) | 3 | 1 | 1 | — | — | 51 | 56 | 56 | |||||||||||
| Average interest rate | 1.9 | % | 1.9 | % | 1.9 | % | — | — | 5.0 | % | — | — | |||||||
| Fixed rate (British Pound) | 1 | 1 | — | — | — | 924 | 926 | 1,009 | |||||||||||
| Average interest rate | 7.3 | % | 6.9 | % | — | — | — | 6.5 | % | — | — | ||||||||
| Fixed rate (Other) | 2 | 2 | 2 | 2 | 1 | 4 | 13 | 13 | |||||||||||
| Average interest rate | 6.9 | % | 6.9 | % | 6.6 | % | 6.5 | % | 6.5 | % | 6.9 | % | — | — | |||||
| Variable rate (US$) | 9 | 711 | 94 | 10 | 1 | 2 | 827 | 827 | |||||||||||
| Average interest rate(1) | 13.3 | % | 5.9 | % | 7.8 | % | 13.0 | % | 8.4 | % | 9.1 | % | — | — | |||||
| Variable rate (Euro) | 13 | 14 | 13 | 1 | 1 | 1 | 43 | 43 | |||||||||||
| Average interest rate(1) | 4.4 | % | 4.4 | % | 4.4 | % | 4.6 | % | 4.6 | % | 4.7 | % | — | — | |||||
| Variable rate (Other) | 6 | 5 | 4 | 3 | 2 | 10 | 30 | 30 | |||||||||||
| Average interest rate(1) | 7.0 | % | 7.7 | % | 8.2 | % | 8.7 | % | 10.0 | % | 10.3 | % | — | — | |||||
| Cross Currency Swap: | |||||||||||||||||||
| British Pound to US$ | — | — | — | — | — | 216 | 216 | 52 | |||||||||||
| Average pay rate(1) | — | — | — | — | — | 6.6 | % | — | — | ||||||||||
| Average receive rate | — | — | — | — | — | 6.5 | % | — | — | ||||||||||
| Interest rate swaps: | |||||||||||||||||||
| Fixed to variable (US$) | — | — | — | — | — | 375 | 375 | (6 | ) | ||||||||||
| Average pay rate(1) | — | — | — | — | — | 7.0 | % | — | — | ||||||||||
| Average receive rate | — | — | — | — | — | 6.4 | % | — | — | ||||||||||
| Fixed to variable (British Pound) | — | — | — | — | — | 216 | 216 | — | |||||||||||
| Average pay rate(1) | — | — | — | — | — | 6.6 | % | — | — | ||||||||||
| Average receive rate | — | — | — | — | — | 6.5 | % | — | — | ||||||||||
Exchange Rate Sensitivity
The table below provides information about our financial instruments that are sensitive to foreign currency exchange rates. These instruments include debt obligations and forward foreign currency exchange contracts. For debt obligations, the table presents cash flows of principal repayment and weighted-average interest rates. For forward foreign currency exchange contracts, the table presents notional amounts and weighted-average contractual exchange rates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The amounts included in the table below are in U.S. Dollars ($ in millions):
| | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Fair Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt: | |||||||||||||||||||
| Fixed rate (Euro) | 771 | 3 | 847 | 2 | 2 | 6 | 1,631 | 1,676 | |||||||||||
| Average interest rate | 6.1 | % | 6.3 | % | 5.5 | % | 8.2 | % | 7.4 | % | 13.1 | % | — | — | |||||
| Fixed rate (Yen) | 3 | 1 | 1 | — | — | 51 | 56 | 56 | |||||||||||
| Average interest rate | 1.9 | % | 1.9 | % | 1.9 | % | — | — | 1.9 | % | — | — | |||||||
| Fixed rate (British Pound) | 1 | 1 | — | — | — | 917 | 919 | 1,009 | |||||||||||
| Average interest rate | 6.8 | % | 6.9 | % | — | — | — | 6.5 | % | — | — | ||||||||
| Fixed rate (Other) | 2 | 2 | 2 | 2 | 1 | 4 | 13 | 13 | |||||||||||
| Average interest rate | 6.9 | % | 6.9 | % | 6.6 | % | 6.5 | % | 6.5 | % | 6.9 | % | — | — | |||||
| Variable rate (Euro) | 13 | 14 | 13 | 1 | 1 | 1 | 43 | 43 | |||||||||||
| Average interest rate(1) | 4.4 | % | 4.4 | % | 4.4 | % | 4.6 | % | 4.6 | % | 4.7 | % | — | — | |||||
| Variable rate (Other) | 6 | 5 | 4 | 3 | 3 | 9 | 30 | 30 | |||||||||||
| Average interest rate(1) | 7.0 | % | 7.7 | % | 8.2 | % | 8.7 | % | 10.0 | % | 10.3 | % | — | — | |||||
| Forward contracts (economic hedges): | |||||||||||||||||||
| Pay US$/Receive Euro | 2,939 | — | — | — | — | — | 2,939 | 12 | |||||||||||
| Average contractual exchange rate | 1.27 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive British Pound | 837 | — | — | — | — | — | 837 | 13 | |||||||||||
| Average contractual exchange rate | 1.86 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Yen | 680 | — | — | — | — | — | 680 | (16 | ) | ||||||||||
| Average contractual exchange rate | 114.37 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Canada Dollars | 395 | — | — | — | — | — | 395 | 11 | |||||||||||
| Average contractual exchange rate | 1.14 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Singapore Dollar | 255 | — | — | — | — | — | 255 | (2 | ) | ||||||||||
| Average contractual exchange rate | 1.57 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Australian Dollar | 228 | — | — | — | — | — | 228 | (3 | ) | ||||||||||
| Average contractual exchange rate | 0.76 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Hong Kong Dollar | 159 | — | — | — | — | — | 159 | — | |||||||||||
| Average contractual exchange rate | 7.76 | — | — | — | — | — | — | — | |||||||||||
| Pay Euro/Receive British Pounds | 138 | — | — | — | — | — | 138 | 1 | |||||||||||
| Average contractual exchange rate | 0.68 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Swiss Francs | 124 | — | — | — | — | — | 124 | — | |||||||||||
| Average contractual exchange rate | 1.24 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Mexican Peso | 103 | — | — | — | — | — | 103 | 2 | |||||||||||
| Average contractual exchange rate | 11.26 | — | — | — | — | — | — | — | |||||||||||
| Pay Yen/Receive Euro | 86 | — | — | — | — | — | 86 | 3 | |||||||||||
| Average contractual exchange rate | 143.60 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive South Korean Won | 81 | — | — | — | — | — | 81 | 1 | |||||||||||
| Average contractual exchange rate | 948.86 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive New Zealand Dollars | 78 | — | — | — | — | — | 78 | 2 | |||||||||||
| Average contractual exchange rate | 0.64 | — | — | — | — | — | — | — | |||||||||||
| Pay Euro/Receive Canada Dollars | 63 | — | — | — | — | — | 63 | 1 | |||||||||||
| Average contractual exchange rate | 1.43 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Swedish Krona | 52 | — | — | — | — | — | 52 | (1 | ) | ||||||||||
| Average contractual exchange rate | 7.15 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Hungary Forint | 42 | — | — | — | — | — | 42 | 1 | |||||||||||
| Average contractual exchange rate | 219.16 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Czech Koruna | 34 | — | — | — | — | — | 34 | (1 | ) | ||||||||||
| Average contractual exchange rate | 21.76 | — | — | — | — | — | — | — | |||||||||||
| Pay Taiwan Dollar/Receive US$ | 25 | — | — | — | — | — | 25 | 1 | |||||||||||
| Average contractual exchange rate | 31.56 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Polish Zloty | 25 | — | — | — | — | — | 25 | — | |||||||||||
| Average contractual exchange rate | 3.12 | — | — | — | — | — | — | — | |||||||||||
| Pay Thai Baht/Receive US$ | 23 | — | — | — | — | — | 23 | — | |||||||||||
| Average contractual exchange rate | 37.98 | — | — | — | — | — | — | — | |||||||||||
| Pay Australian Dollar/Receive Euro | 19 | — | — | — | — | — | 19 | — | |||||||||||
| Average contractual exchange rate | 1.70 | — | — | — | — | — | — | — | |||||||||||
| Pay Malaysian Ringgit /Receive US$ | 19 | — | — | — | — | — | 19 | — | |||||||||||
| Average contractual exchange rate | 3.63 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Denmark Kroner | 12 | — | — | — | — | — | 12 | — | |||||||||||
| Average contractual exchange rate | 5.77 | — | — | — | — | — | — | — | |||||||||||
| Pay Polish Zloty/Receive Euro | 12 | — | — | — | — | — | 12 | — | |||||||||||
| Average contractual exchange rate | 4.01 | — | — | — | — | — | — | — | |||||||||||
| Pay South African Rand/Receive Euro | 10 | — | — | — | — | — | 10 | 1 | |||||||||||
| Average contractual exchange rate | 9.05 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Norwegian Krone | 10 | — | — | — | — | — | 10 | (1 | ) | ||||||||||
| Average contractual exchange rate | 6.19 | — | — | — | — | — | — | — | |||||||||||
| Pay New Turkish Lira/Receive Euro | 8 | — | — | — | — | — | 8 | — | |||||||||||
| Average contractual exchange rate | 2.09 | — | — | — | — | — | — | — | |||||||||||
| Pay Swedish Krona/Receive Euro | 7 | — | — | — | — | — | 7 | — | |||||||||||
| Average contractual exchange rate | 9.29 | — | — | — | — | — | — | — | |||||||||||
| Pay New Turkish Lira/Receive US$ | 7 | — | — | — | — | — | 7 | — | |||||||||||
| Average contractual exchange rate | 1.54 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Chinese Yuan | 6 | — | — | — | — | — | 6 | — | |||||||||||
| Average contractual exchange rate | 7.74 | — | — | — | — | — | — | — | |||||||||||
| Pay US$/Receive Indonesian Rupiah | 5 | — | — | — | — | — | 5 | — | |||||||||||
| Average contractual exchange rate | 9,138 | — | — | — | — | — | — | — | |||||||||||
| Forward contracts (net investment hedges): | |||||||||||||||||||
| Pay Euro/Receive US$ | 1,772 | — | — | — | — | — | 1,772 | 19 | |||||||||||
| Average contractual exchange rate | 1.29 | — | — | — | — | — | — | — | |||||||||||
| Pay British Pound /Receive US$ | 1,465 | — | — | — | — | — | 1,465 | 2 | |||||||||||
| Average contractual exchange rate | 1.89 | — | — | — | — | — | — | — | |||||||||||
| Pay Australian Dollar /Receive US$ | 645 | — | — | — | — | — | 645 | 12 | |||||||||||
| Average contractual exchange rate | 0.76 | — | — | — | — | — | — | — | |||||||||||
| Pay Canada Dollars /Receive US$ | 441 | — | — | — | — | — | 441 | (5 | ) | ||||||||||
| Average contractual exchange rate | 1.12 | — | — | — | — | — | — | — | |||||||||||
| Pay Yen /Receive US$ | 231 | — | — | — | — | — | 231 | 3 | |||||||||||
| Average contractual exchange rate | 115.10 | — | — | — | — | — | — | — | |||||||||||
| Pay New Zealand Dollars /Receive US$ | 126 | — | — | — | — | — | 126 | (4 | ) | ||||||||||
| Average contractual exchange rate | 0.63 | — | — | — | — | — | — | — | |||||||||||
| Pay South African Rand /Receive US$ | 91 | — | — | — | — | — | 91 | 7 | |||||||||||
| Average contractual exchange rate | 7.10 | — | — | — | — | — | �� | — | |||||||||||
| Pay Hungary Forint /Receive US$ | 42 | — | — | — | — | — | 42 | — | |||||||||||
| Average contractual exchange rate | 215.93 | — | — | — | — | — | — | — | |||||||||||
| Pay Czech Koruna /Receive US$ | 27 | — | — | — | — | — | 27 | 1 | |||||||||||
| Average contractual exchange rate | 21.81 | — | — | — | — | — | — | — | |||||||||||
| Pay Singapore Dollar /Receive US$ | 21 | — | — | — | — | — | 21 | — | |||||||||||
| Average contractual exchange rate | 1.57 | — | — | — | — | — | — | — | |||||||||||
| Pay Polish Zloty /Receive US$ | 17 | — | — | — | — | — | 17 | — | |||||||||||
| Average contractual exchange rate | 3.03 | — | — | — | — | — | — | — | |||||||||||
| Pay Hong Kong Dollar /Receive US$ | 11 | — | — | — | — | — | 11 | — | |||||||||||
| Average contractual exchange rate | 7.76 | — | — | — | — | — | — | — | |||||||||||
| Pay Swedish Krona /Receive US$ | 11 | — | — | — | — | — | 11 | — | |||||||||||
| Average contractual exchange rate | 7.15 | — | — | — | — | — | — | — | |||||||||||
| Pay Denmark Kroner /Receive US$ | 5 | — | — | — | — | — | 5 | — | |||||||||||
| Average contractual exchange rate | 5.80 | — | — | — | — | — | — | — | |||||||||||
In addition to the forward foreign currency exchange contracts presented in the table above, the Company held forward contracts in 15 different currency pairs, with individual notional amounts that are not material.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and schedule specified by this Item, together with the report thereon of Deloitte & Touche LLP, are presented following Item 15 of this report:
Financial Statements:
Management's Responsibility for Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of IncomeOperations for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004
Consolidated Balance Sheets at September 28, 2007 and September 29, 2006
Consolidated Statements of Shareholders' Equity for the years ended September 28, 2007, September 29, 2006 and September 30, 2005
Consolidated Statements of Shareholders' Equity for the years ended September 29, 2006, September 30, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004
Notes to Consolidated Financial Statements
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 consolidated financial statements and related notes or because they are either not applicable or not required under the rules of Regulation S-X.
Information on quarterly results of operations is set forth in Note 2624 to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The information required by Regulation S-K, Item 304(a) has previously been reported by the Company. There have been no disagreements with our accountants, as defined in Regulation S-K, Item 304(b).None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 29, 2006,28, 2007, our disclosure controls and procedures were effective.
To ensure thatnot effective because of a material weakness in our internal controlcontrols over financial reporting, continuesrelating to operate effectivelyaccounting for income taxes, which we view as an integral part of our disclosure controls and efficiently,procedures.
Over the past five years, significant internal control, informational systems and process improvements have been implemented in our tax accounting processes, including certain recently implemented controls in response to the identified material weakness. During the third and fourth quarters of 2007, the following significant changes were made to our internal controls over financial reporting:
While progress has been made, several new tax accounting and control procedures have only recently been implemented and our current environment is still characterized by a highly complex structure of approximately 1,200 legal entities. In light of this, the Company believes the material weakness relating to accounting for income taxes has not been remediated and the Company plans to implement further improvements to achieve appropriate levels of controls, reliability and sustainability in this area.
In addition to the above, we continue to proactively identify opportunities for control improvements. During the fourth quarter of 2006, the Company initiated an internal review of its historical stock option grant practices to determine whether the Company's stock option award actions were appropriately governed and were accurately reflected in the Company's financial statements. The review was conducted by our Internal Audit staff under the direct supervision of our Audit Committee. The results of the Internal Audit review were subject to the same controls and quality reviews associated with their normal recurring activities and were reviewed regularly with the Audit Committee. The review identified controls that were not properly designed in prior years and, as described in Note 1 to the Consolidated Financial Statements, resulted in a restatement of our 2000 through 2005 Consolidated Financial Statements. While the Company had instituted a number of control improvements in recent years, including the implementation of a grant nomination tool, other procedural enhancements and periodic audit reviews by Internal Audit, we consider the previously discussed special review performed by Internal Audit to be a further enhancement to our equity-based compensation controls.
We also have ongoing initiatives to standardize, consolidate and upgrade various financial operating systems and eliminate many of the manual and redundant tasks previously performed under older systems or processes. These changes will be implemented in stages over the next several years. We continued to enhance the internal controls relating to income tax accounting including further strengthening the coordination between the tax and controllership functions, incorporating enhanced monitoring controls and implementing additional process level controls. Additionally, in preparation of our previously announced separation into three separate public companies, we have begun the process of designing the necessary controls to allow the two new entities to properly function as independent public companies. As we execute the steps necessary to effectuate the separation, we will begin migrating certain processes, applications and functions previously performed by us to these two entities. We believe that these initiatives further strengthen our internal control over financial reporting, as well as automate a number of our processes and activities. We believe that the necessary procedures are in place to maintain effective internal control over financial reporting as these initiatives continue.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 29, 2006.28, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework. Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit
Committee of our Board of Directors. Based on our assessment, we believe that our internal controls over financial reporting were not effective as a result of a material weakness related to certain aspects of accounting for income taxes as of September 28, 2007.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. We have determined that further improvements are required in our tax accounting processes before we can consider the material weakness remediated. Management's procedures and those criteria,testing identified errors that, although not material to the consolidated financial statements, led management believesto conclude that control deficiencies exist related to tax effecting consolidating entries, analysis and reconciliation of taxes receivable and taxes payable in non-U.S. jurisdictions, certain aspects of deferred taxes, and procedures with respect to classification of tax amounts in the Company maintained effectiveconsolidated balance sheet. As a result of these deficiencies, it is reasonably possible that internal controls over financial reporting may not have prevented or detected errors from occurring that could have been material, either individually or in the aggregate.
Our internal control over financial reporting as of September 29, 2006.
Our management's assessment of the effectiveness of our internal control over financial reporting as of September 29, 200628, 2007, has been audited by Deloitte & Touche LLP, the independent registered public accounting firm that audited and reported on the consolidated financial statements included in this Form 10-K, as stated inand their report which is also included herein.in this Form 10-K.
December 8, 2006November 27, 2007
Remediation Plan
Over the next year, we will continue to focus on our internal controls over accounting for income taxes, and will take further steps to those mentioned earlier to strengthen controls, including the following planned actions:
Item 9B. Other Information
None.
Item 10. Directors, and Executive Officers of the Registrantand Corporate Governance
Information concerning Directors and Executive Officers may be found under the captions "Proposal Number One—Election of Directors," "—Committees of the Board of Directors," "—Nomination of Directors," and "—Executive Officers" in our definitive proxy statement for our 20072008 Annual General Meeting of Shareholders (the "2007"2008 Proxy Statement"), which will be filed with the Commission within 120 days after the close of our fiscal year. Such information is incorporated herein by reference. The information in the 20072008 Proxy Statement set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. Information regarding shareholder communications with our Board of Directors may be found under the caption "Communications with the Board of Directors" in our 20072008 Proxy statementStatement and is incorporated herein by reference.
Code of Ethics
We have adopted the Tyco Guide to Ethical Conduct, which applies to all employees, officers and directors of Tyco. Our Guide to Ethical Conduct meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K and applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as well as all other employees, as indicated above.employees. Our Guide to Ethical Conduct also meets the requirements of a code of business conduct and ethics under the listing standards of the New York Stock Exchange, Inc. Our Guide to Ethical Conduct is posted on our website atwww.tyco.com under the heading "Our Commitment—"Corporate Responsibility—Governance." We will also provide a copy of our Guide to Ethical Conduct to shareholders upon request. We intend to disclose any amendments to our Guide to Ethical Conduct, as well as any waivers for executive officers or directors, on our website.
Item 11. Executive Compensation
Information concerning executive compensation may be found under the captions "Executive Officer Compensation," "Compensation of Non-Employee Directors," "Board Compensation and Human Resources Report on Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" of our 20072008 Proxy Statement. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in our 20072008 Proxy Statement set forth under the captions "Executive Officer Compensation—Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information in our 20072008 Proxy Statement set forth under the captioncaptions "Certain Relationships and Related Transactions"Transactions," "Independence of Nominees for Director" and "Committees of the Board" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information in our 20072008 Proxy Statement set forth under the captions "Proposal Number Two—Re-Appointment of Independent Auditors and Authorization of the Audit Committee to Set Their Remuneration," "—Audit and Non-Audit Fees" and "—Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditors" is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
| Exhibit Number | Exhibit | |
|---|---|---|
2.1 | Stock and Asset Purchase Agreement dated December 20, 2005 among Tyco Group S.A.R.L., TP&A Acquisition Corporation and for a limited purpose Tyco International Group S.A. (Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 2005 filed on February 7, 2006). | |
Separation and Distribution Agreement by and among Tyco International Ltd., Covidien Ltd., and Tyco Electronics Ltd., dated June 29, 2007 (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | ||
| 3.1 | Memorandum of Association (as altered) (Incorporating all amendments to July 2, 1997) (Incorporated by reference to Exhibit 3.1 | |
3.2 | Certificate of Incorporation (Incorporating all amendments to July 2, 1997) (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 filed on May 15, 2003 to make this exhibit electronically available because it was last filed with the Commission in paper format). | |
3.3 | Amended and Restated Bye-Laws of Tyco International Ltd. | |
4.1 | Form of Indenture, dated as of June 9, 1998, among Tyco International Group S.A. ("TIGSA"), Tyco and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.1 to Post-effective Amendment No. 1 to the Registrant's and TIGSA's Co-Registration Statement on Form S-3 (No. 333-50855) filed on June 9, 1998). | |
4.2 | Indenture by and among TIGSA, Tyco, and State Street Bank and Trust Company, as trustee, dated as of February 12, 2001 relating to Zero Coupon Convertible Debentures due 2021 (Incorporated by reference to Exhibit 4.1 to the Registrants' and TIGSA's Co-Registration Statement on Form S-3 (No. 333-57180) filed March 16, 2001). | |
4.3 | Indenture between Tyco and State Street Bank and Trust Company, as trustee, dated as of November 17, 2000 relating to Zero Coupon Convertible Debentures due 2020 (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (No. 333-51548) filed on December 8, 2000). | |
4.4 | Indenture by and among TIGSA and U.S. Bank, N.A., as trustee, dated as of January 13, 2003 relating to Series A 2.75% Convertible Senior Debentures due 2018 and Series B 3.125% Convertible Senior Debentures due 2023 (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2002 filed on February 14, 2003). | |
4.5 | Supplemental Indenture No. 1, dated January 10, 2003, by and among TIGSA, Tyco International Ltd. and U.S. Bank, N.A. (Incorporated by reference to Exhibit 99(D)(2) to the Registrants' and TIGSA's Schedule TO filed on January 14, 2003). | |
4.6 | Indenture dated as of November 12, 2003, among Tyco International Group S.A., Tyco International Ltd. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003 filed on February 17, 2004). | |
4.7 | First Supplemental Indenture dated as of November 12, 2003, among Tyco International Group S.A., Tyco International Ltd. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003 filed on February 17, 2004). | |
4.8 | Supplemental Indenture No. 3, dated as of January 9, 1998 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.4 to the Registrant's Post-Effective Amendment No. 1 Registration Statement on Form S-3 (333-50855) filed on June 9, 1998). | |
4.9 | Supplemental Indenture No. 6, dated as of November 2, 1998 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 (333-71493) filed on January 29, 1999). | |
4.10 | Supplemental Indenture No. 7, dated as of January 12, 1999 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.7 to the Registrant's Post-Effective Amendment No. 2 Registration Statement on Form S-3 (333-50855) filed on January 26, 1999). | |
4.11 | Supplemental Indenture No. 8, dated as of January 12, 1999 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.7 to the Registrant's Post-Effective Amendment No. 2 to Registration Statement on Form S-3 (333-50855) filed on January 26, 1999). | |
4.12 | ||
Supplemental Indenture No. 16, dated as of February 21, 2001 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.3 to Tyco International Group | ||
| 4.13 |
Supplemental Indenture No. 20, dated as of October 26, 2001 among Tyco International Group S.A., Tyco International Ltd. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.4 to the Registrant's Post-Effective Amendment No. 1 to Form S-3 (333-68508) filed on November 2, 2001). | ||
The Tyco International Ltd. Long Term Incentive Plan (formerly known as the ADT 1993 Long-Term Incentive Plan) (as amended May 12, 1999) (Incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 (No. 333-80391) filed on June 10, 1999).(1) | ||
10.2 | 1994 Restricted Stock Ownership Plan for Key Employees (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (No. 333-93261) filed on December 21, 1999).(1) | |
10.3 | Tyco International (US) Inc. Supplemental Executive Retirement Plan, amended and restated as of October 1, 2000, dated December 30, 2000 (Incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | |
10.4 | Second Amendment to Tyco International (US) Inc. Supplemental Executive Retirement Plan, dated February 14, 2002 (Incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | |
| 10.5 | Third Amendment to Tyco International (US) Inc. Supplemental Executive Retirement Plan, dated July 30, 2002 (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | |
10.6 | Amendments to the Tyco International Ltd. Supplemental Executive Retirement Plan, dated December 24, 2003 (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1)(2) | |
10.7 | December 2003 Amendment to Tyco International (US) Inc. Supplemental Executive Retirement Plan, dated December 24, 2003 (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | |
| 10.8 |
Amendment No. 2004-1 to the Tyco International (US) Inc. Supplemental Executive Retirement Plan, dated April 30, 2004 (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | ||
10.9 | The Amended and Restated Tyco International Ltd. Deferred Compensation Plan for Directors (Effective January 1, 2005) (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2005 filed December 9, 2005).(1) | |
10.10 | The Tyco International Ltd. Long Term Incentive Plan II (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (No. 333-75037) filed March 25, 1999).(1) | |
10.11 | Change in Control Severance Plan for Certain U.S. Officers and Executives dated January 1, 2005 | |
10.12 | Retention Agreement for L. Dennis Kozlowski dated January 22, 2001 and Amendment thereto dated August 1, 2001 (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed December 28, 2001).(1) | |
10.13 | Retention Agreement for Mark H. Swartz dated January 22, 2001 and Amendment thereto dated August 1, 2001 (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed December 28, 2001).(1) | |
10.14 | ||
Edward D. Breen Employment Contract dated July 25, 2002 (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 filed August 14, 2002).(1) | ||
| 10.15 |
Employment Offer Letter dated February 14, 2005 between Tyco International Ltd. and Christopher J. Coughlin | ||
Tyco International Ltd. UK Savings Related Share Option Plan (Incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 filed on December 30, 2002).(1) | ||
Tyco Employee Stock Purchase Plan, as amended May 2003 (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated July 30, 2003).(1) | ||
| 10.18 | ||
Tyco Supplemental Savings and Retirement Plan, amended and restated effective January 1, 2005 (Incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2005 filed on December 9, 2005).(1) | ||
Juergen Gromer Employment Contract effective October 1, 1999 and executed on June 19, 2000. (Incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2003 filed on December 17, 2003).(1) | ||
Tyco International Ltd. 2004 Stock and Incentive Plan | ||
Terms and Conditions of Option Award, Restricted Stock Award, and Restricted Unit Award and Form of Director Deferred Stock Unit Award Letter under the 2004 Stock and Incentive Plan (Incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed on December 14, 2004).(1) | ||
| 10.22 |
Tyco International (US) Inc. Severance Plan for U.S. Officers and Executives | ||
Retention Agreement between Dr. Juergen W. Gromer, President and Vice Chairman of Tyco Electronics and Tyco International Ltd. dated as of March 22, 2006 (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 filed May 9, 2006). | ||
| 10.26 | Amendment No. 1 to 364-day Senior Bridge Loan Agreement, dated as of May 25, 2007, among Tyco International Group S.A., Tyco International Ltd., | |
| 10.27 | Amendment No. 2 to 364-Day Senior Bridge Loan Agreement, dated as of | |
| 10.28 | Senior Bridge Letter of Credit Agreement, dated as of | |
| 10.29 | Amendment No. 1 to Senior Bridge Letter of Credit Agreement, dated as of October 19, 2007, among Tyco International Ltd., Tyco International Finance S.A., the | |
| 10.30 | Tax Sharing Agreement by and among Tyco International Ltd., Covidien Ltd., and Tyco Electronics Ltd., dated June 29, 2007 (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | |
| 10.31 | Guarantor Assumption Agreement by and among Tyco International Ltd. and Tyco Electronics Ltd., dated as of June 29, 2007 (Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on | |
| 10.33 | Guarantor Assumption Agreement by and among Tyco International | |
| 10.34 | Guarantor Assumption Agreement by and among Tyco International Ltd. and Covidien Ltd., dated as of June 29, 2007 (Incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | |
| 10.35 | Founders' Grant Option Award (Incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | |
| 10.36 | Founders' Grant Restricted Unit Award (Incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | |
| 10.37 | Founders' Grant Performance Share Unit Award (Incorporated by reference to Exhibit 10.8 to the Registrant's Current Report on Form 8-K filed on July 6, 2007). | |
| 10.38 | Settlement Agreement, dated April 10, 2007, between Tyco Electronics AMP Gmbh, Tyco Electronics Logistics, Tyco International Ltd., | |
| 21.1 |
Subsidiaries of the registrant (Filed herewith). | ||
23.1 | Consent of Deloitte and Touche LLP (Filed herewith). | |
24.1 | Power of Attorney (Filed herewith). | |
31.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). | |
31.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). | |
32.1 | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
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 LTD. | |||
By: | /s/ CHRISTOPHER J. COUGHLIN | ||
Christopher J. Coughlin Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||
Date: December 8, 2006November 27, 2007
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 on December 8, 2006November 27, 2007 in the capacities indicated below.
| Name | Title | |
|---|---|---|
| /s/ EDWARD D. BREEN Edward D. Breen | Chairman, Chief Executive Officer and Director | |
/s/ CHRISTOPHER J. COUGHLIN Christopher J. Coughlin | Executive Vice President and Chief Financial Officer | |
/s/ CAROL ANTHONY DAVIDSON Carol Anthony Davidson | Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | |
* Adm. Dennis C. Blair | Director | |
* Brian Duperreault | Director | |
* Bruce S. Gordon | Director | |
* Rajiv L. Gupta | Director | |
* John A. Krol | Director | |
* H. Carl McCall | Director | |
* | Director | |
* | Director | |
* Sandra S. Wijnberg | Director | |
* Jerome B. York | Director |
| By: | /s/ JUDITH A. REINSDORF Attorney-in-fact |
TYCO INTERNATIONAL LTD.
Index to Consolidated Financial Information
| | Page | |
|---|---|---|
| Management's Responsibility for Financial Statements | ||
| Reports of Independent Registered Public Accounting Firm | ||
| Consolidated Statements of | ||
| Consolidated Balance Sheets | ||
| Consolidated Statements of Shareholders' Equity | ||
| Consolidated Statements of Cash Flows | ||
| Notes to Consolidated Financial Statements | ||
| Schedule II—Valuation and Qualifying Accounts |
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Discussion of Management's Responsibility
We are responsible for the preparation, integrity and fair presentation of the consolidated financial statements and related information appearing in this report. We take these responsibilities very seriously and are committed to being recognized as a leader in governance, controls, clarity and transparency of financial statements. We are committed to making honesty, integrity and transparency the hallmarks of how we run Tyco. We believe that to succeed in today's environment requires more than just compliance with laws and regulations—it requires a culture based upon the highest levels of integrity and ethical values. Expected behavior starts with our Board of Directors and our senior team leading by example and includes every one of Tyco's 238,200118,000 global employees, as well as our customers, suppliers and business partners. One of our most crucial objectives is continuing to restoremaintain and build on the public, employee and shareholder confidence that has been restored in Tyco. We believe this is being accomplished; first, by issuing financial information and related disclosures that are accurate, complete and transparent so investors are well informed; second, by supporting a leadership culture based on an ethic of uncompromising integrity and accountability; and third, by recruiting, training and retaining high-performance individuals who have the highest ethical standards. We take full responsibility for meeting this objective. We maintain appropriate accounting standards, and disclosure controls and devote our full commitment and the necessary resources to these items.
Dedication to Governance, Controls and Financial Reporting
Throughout 2006,2007, we continued to maintain and enhance internal controls over financial reporting, disclosures and corporate governance practices. We believe that a strong control environment is a dynamic process. Therefore, we intend to continue to devote the necessary resources to maintain and improve our internal controls and corporate governance.
Our Audit Committee meets regularly and separately with management, Deloitte & Touche LLP, our independent auditors, and our internal auditors to discuss financial reports, controls and auditing.
We, our Board and our Audit Committee are all committed to excellence in governance, financial reporting and controls.
| /s/ EDWARD D. BREEN | ||
| Edward D. Breen Chairman and Chief Executive Officer | /s/ CHRISTOPHER J. COUGHLIN Christopher J. Coughlin Executive Vice President and Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tyco International Ltd.
We have audited the accompanying consolidated balance sheets of Tyco International Ltd. and subsidiaries (the "Company") as of September 29, 200628, 2007 and September 30, 2005,29, 2006, and the related consolidated statements of income,operations, shareholders' equity, and cash flows for each of the three years in the period ended September 29, 2006.28, 2007. Our audits also included the financial statement schedule for the years ended September 29, 2006, September 30, 2005 and 2004, listed in the Index at Item 15a.15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the CompanyTyco International Ltd. and subsidiaries as of September 28, 2007 and September 29, 2006, and September 30, 2005, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended September 29, 2006,28, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in NotesNote 1 and 9 to the consolidated financial statements,statements: i) the Company changed the depreciation method and estimated useful life used to account for pooled subscriber system assets and related deferred revenue from the straight-line method with lives ranging from 10 to 14 years to an accelerated method with lives up to 15 years effective as of the beginning of the fiscal third quarter of 2007, and ii) the Company adopted the recognition and related disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,158,Share—Based PaymentEmployers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R), on October 1, 2005 and effective September 28, 2007.
As discussed in Note 7 to the consolidated financial statements: i) the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143, during the fourth quarter of 2006.
As discussed in Notes 9 effective September 29, 2006, and 19 to the consolidated financial statements, in 2005,ii) the Company changed the measurement date of its pension and post retirement plans from September 30 to August 31.31 in fiscal year 2005.
As discussed in Note 1,19 to the accompanying 2005 and 2004 consolidated financial statements, have been restated.the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, effective October 1, 2005.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of September 29, 2006,28, 2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 8, 2006November 27, 2007 expressed an unqualifiedadverse opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectivenessbecause of the Company's internal control over financial reporting.a material weakness.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New YorkDecember 8, 2006November 27, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tyco International Ltd.
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Tyco International Ltd. and subsidiariessubsidiaries' (the "Company""Company's") maintained effective internal control over financial reporting as of September 29, 2006,28, 2007 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment:
The Company did not maintain effective internal controls over accounting for income taxes. Control deficiencies existed related to tax effecting consolidating entries, analysis and reconciliation of taxes receivable and taxes payable in non-U.S. jurisdictions, certain aspects of deferred taxes, and procedures with respect to classification of tax amounts in the consolidated balance sheet. The design and operation of procedural and monitoring controls may not have
prevented or detected, errors from occurring that could have been material, either individually or in the aggregate.
This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the fiscal year ended September 28, 2007, of the Company and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion management's assessment thatbecause of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 29, 2006, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 29, 2006,28, 2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 29, 200628, 2007 of the Company and our report dated December 8, 2006November 27, 2007 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraphs regardingparagraph noting that i) the Company's adoptionCompany changed the depreciation method and estimated useful life used to account for pooled subscriber system assets and related deferred revenue from the straight-line method with lives ranging from 10 to 14 years to an accelerated method with lives up to 15 years effective as of the beginning of the fiscal third quarter of 2007 and ii) the Company adopted the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 123R,158,Share—Based Payment,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) on October 1, 2005 and Financial Accounting Standards Board ("FASB") Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143, during the fourth quarter of 2006.effective September 28, 2007.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New YorkDecember 8, 2006November 27, 2007
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
Years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004
(in millions, except per share data)
| | | 2006 | 2005 (Restated) | 2004 (Restated) | | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue from product sales | Revenue from product sales | $ | 33,146 | $ | 31,533 | $ | 29,886 | Revenue from product sales | $ | 12,095 | $ | 10,974 | $ | 10,342 | ||||||||
| Service revenue | Service revenue | 7,814 | 7,772 | 8,074 | Service revenue | 6,686 | 6,362 | 6,323 | ||||||||||||||
| Net revenue | 40,960 | 39,305 | 37,960 | Net revenue | 18,781 | 17,336 | 16,665 | |||||||||||||||
| Cost of product sales | Cost of product sales | 22,503 | 20,804 | 19,115 | Cost of product sales | 8,723 | 7,874 | 7,232 | ||||||||||||||
| Cost of services | Cost of services | 4,780 | 4,767 | 5,145 | Cost of services | 3,718 | 3,553 | 3,503 | ||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 7,988 | 8,229 | 8,182 | Selling, general and administrative expenses | 4,828 | 4,475 | 4,699 | ||||||||||||||
| Class action settlement, net | Class action settlement, net | 2,862 | — | — | ||||||||||||||||||
| Separation costs | Separation costs | 169 | — | — | Separation costs | 105 | 49 | — | ||||||||||||||
| (Gains) losses on divestitures | (44 | ) | (274 | ) | 116 | |||||||||||||||||
| Restructuring and other charges, net | 20 | 5 | 204 | |||||||||||||||||||
| Impairment of long-lived assets | 7 | 6 | 52 | |||||||||||||||||||
| In-process research and development | 63 | — | — | |||||||||||||||||||
| Goodwill impairment | Goodwill impairment | 46 | — | — | ||||||||||||||||||
| Restructuring and asset impairment charges, net | Restructuring and asset impairment charges, net | 210 | 13 | 17 | ||||||||||||||||||
| Losses on divestitures | Losses on divestitures | 4 | 2 | 23 | ||||||||||||||||||
| Operating income | 5,474 | 5,768 | 5,146 | Operating (loss) income | (1,715 | ) | 1,370 | 1,191 | ||||||||||||||
| Interest income | Interest income | 134 | 123 | 91 | Interest income | 102 | 43 | 39 | ||||||||||||||
| Interest expense | Interest expense | (713 | ) | (815 | ) | (956 | ) | Interest expense | (313 | ) | (279 | ) | (322 | ) | ||||||||
| Other expense, net | Other expense, net | (11 | ) | (911 | ) | (286 | ) | Other expense, net | (255 | ) | — | (296 | ) | |||||||||
| Income from continuing operations before income taxes and minority interest | 4,884 | 4,165 | 3,995 | (Loss) income from continuing operations before income taxes and minority interest | (2,181 | ) | 1,134 | 612 | ||||||||||||||
| Income taxes | Income taxes | (799 | ) | (1,112 | ) | (1,112 | ) | Income taxes | (334 | ) | (310 | ) | (29 | ) | ||||||||
| Minority interest | Minority interest | (10 | ) | (9 | ) | (14 | ) | Minority interest | (4 | ) | (1 | ) | (2 | ) | ||||||||
| Income from continuing operations | 4,075 | 3,044 | 2,869 | (Loss) income from continuing operations | (2,519 | ) | 823 | 581 | ||||||||||||||
| Loss from discontinued operations, net of income taxes | (348 | ) | (46 | ) | (49 | ) | ||||||||||||||||
| Income from discontinued operations, net of income taxes | Income from discontinued operations, net of income taxes | 777 | 2,781 | 2,492 | ||||||||||||||||||
| Income before cumulative effect of accounting change | 3,727 | 2,998 | 2,820 | (Loss) income before cumulative effect of accounting change | (1,742 | ) | 3,604 | 3,073 | ||||||||||||||
| Cumulative effect of accounting change, net of income taxes | Cumulative effect of accounting change, net of income taxes | (14 | ) | 21 | — | Cumulative effect of accounting change, net of income taxes | — | (14 | ) | 21 | ||||||||||||
| Net income | $ | 3,713 | $ | 3,019 | $ | 2,820 | Net (loss) income | $ | (1,742 | ) | $ | 3,590 | $ | 3,094 | ||||||||
| Basic earnings per share: | Basic earnings per share: | Basic earnings per share: | ||||||||||||||||||||
| Income from continuing operations | $ | 2.03 | $ | 1.51 | $ | 1.43 | (Loss) income from continuing operations | $ | (5.09 | ) | $ | 1.64 | $ | 1.15 | ||||||||
| Loss from discontinued operations | (0.17 | ) | (0.02 | ) | (0.02 | ) | Income from discontinued operations | 1.57 | 5.53 | 4.96 | ||||||||||||
| Income before cumulative effect of accounting change | 1.86 | 1.49 | 1.41 | (Loss) income before cumulative effect of accounting change | (3.52 | ) | 7.17 | 6.11 | ||||||||||||||
| Cumulative effect of accounting change | (0.01 | ) | 0.01 | — | Cumulative effect of accounting change | — | (0.03 | ) | 0.04 | |||||||||||||
| Net income | $ | 1.85 | $ | 1.50 | $ | 1.41 | Net (loss) income | $ | (3.52 | ) | $ | 7.14 | $ | 6.15 | ||||||||
| Diluted earnings per share: | Diluted earnings per share: | Diluted earnings per share: | ||||||||||||||||||||
| Income from continuing operations | $ | 1.97 | $ | 1.44 | $ | 1.34 | (Loss) income from continuing operations | $ | (5.09 | ) | $ | 1.60 | $ | 1.13 | ||||||||
| Loss from discontinued operations | (0.17 | ) | (0.02 | ) | (0.02 | ) | Income from discontinued operations | 1.57 | 5.38 | 4.68 | ||||||||||||
| Income before cumulative effect of accounting change | 1.80 | 1.42 | 1.32 | (Loss) income before cumulative effect of accounting change | (3.52 | ) | 6.98 | 5.81 | ||||||||||||||
| Cumulative effect of accounting change | — | 0.01 | — | Cumulative effect of accounting change | — | (0.03 | ) | 0.04 | ||||||||||||||
| Net income | $ | 1.80 | $ | 1.43 | $ | 1.32 | Net (loss) income | $ | (3.52 | ) | $ | 6.95 | $ | 5.85 | ||||||||
| Weighted-average number of shares outstanding: | Weighted-average number of shares outstanding: | Weighted-average number of shares outstanding: | ||||||||||||||||||||
| Basic | 2,010 | 2,012 | 2,001 | Basic | 495 | 503 | 503 | |||||||||||||||
| Diluted | 2,084 | 2,167 | 2,220 | Diluted | 495 | 521 | 542 | |||||||||||||||
See Notes to Consolidated Financial Statements.
TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
As of September 29, 200628, 2007 and September 30, 200529, 2006
(in millions, except share data)
| | | 2006 | 2005 (Restated) | | 2007 | 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | Assets | Assets | ||||||||||||||
| Current Assets: | Current Assets: | Current Assets: | ||||||||||||||
| Cash and cash equivalents | $ | 1,894 | $ | 2,193 | ||||||||||||
| Cash and cash equivalents | $ | 2,926 | $ | 3,212 | Accounts receivable, less allowance for doubtful accounts of $195 and $203, respectively | 3,010 | 2,748 | |||||||||
| Accounts receivable, less allowance for doubtful accounts of $336 and $421, respectively | 7,064 | 6,657 | Inventories | 1,835 | 1,619 | |||||||||||
| Inventories | 4,794 | 4,144 | Class action settlement escrow | 2,992 | — | |||||||||||
| Prepaid expenses and other current assets | 2,585 | 1,861 | Prepaid expenses and other current assets | 1,178 | 1,158 | |||||||||||
| Deferred income taxes | 1,171 | 1,220 | Deferred income taxes | 467 | 629 | |||||||||||
| Assets held for sale | 245 | 1,568 | Assets of discontinued operations | 969 | 34,224 | |||||||||||
| Total current assets | 18,785 | 18,662 | Total current assets | 12,345 | 42,571 | |||||||||||
| Property, plant and equipment, net | Property, plant and equipment, net | 9,309 | 9,092 | Property, plant and equipment, net | 3,556 | 3,501 | ||||||||||
| Goodwill | Goodwill | 24,858 | 24,557 | Goodwill | 11,691 | 11,293 | ||||||||||
| Intangible assets, net | Intangible assets, net | 5,128 | 5,085 | Intangible assets, net | 2,697 | 2,730 | ||||||||||
| Other assets | Other assets | 5,642 | 5,290 | Other assets | 2,526 | 2,916 | ||||||||||
| Total Assets | $ | 63,722 | $ | 62,686 | Total Assets | $ | 32,815 | $ | 63,011 | |||||||
| Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | ||||||||||||||
| Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | 808 | $ | 1,930 | Loans payable and current maturities of long-term debt | $ | 380 | $ | 771 | |||||||
| Accounts payable | 3,527 | 3,019 | Accounts payable | 1,715 | 1,557 | |||||||||||
| Accrued and other current liabilities | 5,834 | 5,769 | Class action settlement liability | 2,992 | — | |||||||||||
| Deferred revenue | 841 | 771 | Accrued and other current liabilities | 2,921 | 3,012 | |||||||||||
| Liabilities held for sale | 56 | 320 | Deferred revenue | 584 | 476 | |||||||||||
| Liabilities of discontinued operations | 509 | 7,997 | ||||||||||||||
| Total current liabilities | 11,066 | 11,809 | ||||||||||||||
| Total current liabilities | 9,101 | 13,813 | ||||||||||||||
| Long-term debt | Long-term debt | 9,365 | 10,599 | Long-term debt | 4,076 | 8,853 | ||||||||||
| Deferred revenue | Deferred revenue | 1,194 | 1,200 | |||||||||||||
| Other liabilities | Other liabilities | 7,818 | 7,702 | Other liabilities | 2,753 | 3,704 | ||||||||||
| Total Liabilities | 28,249 | 30,110 | Total Liabilities | 17,124 | 27,570 | |||||||||||
| Commitments and contingencies (Note 18) | ||||||||||||||||
| Commitments and contingencies (Note 16) | Commitments and contingencies (Note 16) | |||||||||||||||
| Minority interest | Minority interest | 54 | 61 | Minority interest | 67 | 54 | ||||||||||
| Shareholders' Equity: | Shareholders' Equity: | Shareholders' Equity: | ||||||||||||||
| Preference shares, $1 par value, 125,000,000 shares authorized, none outstanding | — | — | Preference shares, $4 par value, 31,250,000 shares authorized, none outstanding | — | — | |||||||||||
| Common shares, $0.20 par value, 4,000,000,000 shares authorized; 1,992,120,380 and 2,014,853,113 shares outstanding, net of 104,982,780 and 12,024,224 shares owned by subsidiaries, respectively | 398 | 403 | Common shares, $0.80 par value, 1,000,000,000 shares authorized; 496,301,846 and 498,030,095 shares outstanding, net of 1,277,449 and 26,245,695 shares owned by subsidiaries, respectively | 397 | 398 | |||||||||||
| Capital in excess: | Capital in excess: | |||||||||||||||
| Share premium | 8,787 | 8,540 | Share premium | 9,189 | 8,787 | |||||||||||
| Contributed surplus, net | 14,493 | 15,507 | Contributed surplus, net | 5,439 | 14,493 | |||||||||||
| Accumulated earnings | 10,706 | 7,800 | Accumulated earnings | 34 | 10,692 | |||||||||||
| Accumulated other comprehensive income | 1,035 | 265 | Accumulated other comprehensive income | 565 | 1,017 | |||||||||||
| Total Shareholders' Equity | 35,419 | 32,515 | Total Shareholders' Equity | 15,624 | 35,387 | |||||||||||
| Total Liabilities and Shareholders' Equity | $ | 63,722 | $ | 62,686 | Total Liabilities and Shareholders' Equity | $ | 32,815 | $ | 63,011 | |||||||
See Notes to Consolidated Financial Statements.
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004
(in millions)
| | Number of Common Shares | Common Shares $0.20 Par Value | Share Premium | Contributed Surplus, Net (Restated) | Accumulated Earnings (Restated) | Accumulated Other Comprehensive (Loss) Income | Total (Restated) | |||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at October 1, 2003 | 1,998 | $ | 400 | $ | 8,161 | $ | 15,291 | $ | 2,840 | $ | (273 | ) | $ | 26,419 | ||||||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | 2,820 | 2,820 | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation | 704 | 704 | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities, net of income taxes | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivative instruments, net of income taxes | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability, net of income taxes | 86 | 86 | ||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | 3,609 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (100 | ) | (100 | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted share grants, net of forfeitures | 3 | 1 | (1 | ) | — | |||||||||||||||||||||||||||||||||||||||
| Share options exercised, including tax benefit of $153 | 8 | 1 | 154 | 153 | 308 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense | 122 | 122 | ||||||||||||||||||||||||||||||||||||||||||
| Other | 1 | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||
| | Number of Common Shares | Common Shares $0.80 Par Value | Share Premium | Contributed Surplus, Net | Accumulated Earnings | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2004 | Balance at September 30, 2004 | 2,010 | 402 | 8,315 | 15,569 | 5,560 | 516 | 30,362 | Balance at September 30, 2004 | 503 | $ | 402 | $ | 8,315 | $ | 15,569 | $ | 5,594 | $ | 519 | $ | 30,399 | ||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 3,019 | 3,019 | Net income | 3,094 | 3,094 | |||||||||||||||||||||||||||||||||||||||
| Currency translation | (48 | ) | (48 | ) | Currency translation | (56 | ) | (56 | ) | |||||||||||||||||||||||||||||||||||
| Unrealized loss on marketable securities, net of income taxes | (3 | ) | (3 | ) | Unrealized loss on marketable securities and derivative instruments, net of income taxes | (3 | ) | (3 | ) | |||||||||||||||||||||||||||||||||||
| Minimum pension liability, net of income taxes | (200 | ) | (200 | ) | Minimum pension liability, net of income taxes | (200 | ) | (200 | ) | |||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | 2,768 | Total comprehensive income | $ | 2,835 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | (805 | ) | (805 | ) | Dividends declared | (805 | ) | (805 | ) | ||||||||||||||||||||||||||||||||||
| Restricted share grants, net of forfeitures | Restricted share grants, net of forfeitures | 2 | 1 | (1 | ) | — | Restricted share grants, net of forfeitures | 1 | 1 | (1 | ) | — | ||||||||||||||||||||||||||||||||
| Share options exercised, including tax benefit of $110 | Share options exercised, including tax benefit of $110 | 11 | 2 | 223 | 110 | 335 | Share options exercised, including tax benefit of $110 | 3 | 2 | 223 | 110 | 335 | ||||||||||||||||||||||||||||||||
| Repurchase of common shares by subsidiary | Repurchase of common shares by subsidiary | (10 | ) | (2 | ) | (298 | ) | (300 | ) | Repurchase of common shares by subsidiary | (3 | ) | (2 | ) | (298 | ) | (300 | ) | ||||||||||||||||||||||||||
| Compensation expense | Compensation expense | 101 | 101 | Compensation expense | 101 | 101 | ||||||||||||||||||||||||||||||||||||||
| Exchange of convertible debt | Exchange of convertible debt | 2 | 25 | 25 | Exchange of convertible debt | — | 25 | 25 | ||||||||||||||||||||||||||||||||||||
| Reporting calendar alignment, net of income taxes | Reporting calendar alignment, net of income taxes | 26 | 26 | Reporting calendar alignment, net of income taxes | 26 | 26 | ||||||||||||||||||||||||||||||||||||||
| Other | Other | 2 | 1 | 3 | Other | 2 | 1 | 3 | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2005 | Balance at September 30, 2005 | 2,015 | 403 | 8,540 | 15,507 | 7,800 | 265 | 32,515 | Balance at September 30, 2005 | 504 | 403 | 8,540 | 15,507 | 7,909 | 260 | 32,619 | ||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 3,713 | 3,713 | Net income | 3,590 | 3,590 | |||||||||||||||||||||||||||||||||||||||
| Currency translation | 619 | 619 | Currency translation | �� | 606 | 606 | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities, net of income taxes | 2 | 2 | Unrealized gain on marketable securities and derivative instruments, net of income taxes | 2 | 2 | |||||||||||||||||||||||||||||||||||||||
| Minimum pension liability, net of income taxes | 149 | 149 | Minimum pension liability, net of income taxes | 149 | 149 | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | 4,483 | Total comprehensive income | $ | 4,347 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | (807 | ) | (807 | ) | Dividends declared | (807 | ) | (807 | ) | ||||||||||||||||||||||||||||||||||
| Restricted share grants, net of forfeitures | Restricted share grants, net of forfeitures | 4 | 1 | (1 | ) | — | Restricted share grants, net of forfeitures | 1 | 1 | (1 | ) | — | ||||||||||||||||||||||||||||||||
| Share options exercised, including tax expense of $13 | Share options exercised, including tax expense of $13 | 14 | 2 | 247 | (13 | ) | 236 | Share options exercised, including tax expense of $13 | 4 | 2 | 247 | (13 | ) | 236 | ||||||||||||||||||||||||||||||
| Repurchase of common shares by subsidiary | Repurchase of common shares by subsidiary | (95 | ) | (19 | ) | (2,525 | ) | (2,544 | ) | Repurchase of common shares by subsidiary | (24 | ) | (19 | ) | (2,525 | ) | (2,544 | ) | ||||||||||||||||||||||||||
| Compensation expense | Compensation expense | 281 | 281 | Compensation expense | 281 | 281 | ||||||||||||||||||||||||||||||||||||||
| Exchange of convertible debt | Exchange of convertible debt | 54 | 11 | 1,224 | 1,235 | Exchange of convertible debt | 13 | 11 | 1,224 | 1,235 | ||||||||||||||||||||||||||||||||||
| Other | Other | 20 | 20 | Other | 20 | 20 | ||||||||||||||||||||||||||||||||||||||
| Balance at September 29, 2006 | Balance at September 29, 2006 | 1,992 | $ | 398 | $ | 8,787 | $ | 14,493 | $ | 10,706 | $ | 1,035 | $ | 35,419 | Balance at September 29, 2006 | 498 | 398 | 8,787 | 14,493 | 10,692 | 1,017 | 35,387 | ||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | (1,742 | ) | (1,742 | ) | ||||||||||||||||||||||||||||||||||||||||
| Currency translation | 883 | 883 | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities and derivative instruments, net of income taxes | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability, net of income taxes | 249 | 249 | ||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | (607 | ) | |||||||||||||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | (668 | ) | (668 | ) | |||||||||||||||||||||||||||||||||||||||
| Share options exercised, including tax benefit of $23 | Share options exercised, including tax benefit of $23 | 5 | 4 | 402 | 23 | 429 | ||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares by subsidiary | Repurchase of common shares by subsidiary | (7 | ) | (5 | ) | (722 | ) | (727 | ) | |||||||||||||||||||||||||||||||||||
| Compensation expense | Compensation expense | 295 | 295 | |||||||||||||||||||||||||||||||||||||||||
| Exchange of convertible debt | Exchange of convertible debt | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||
| Distribution of Covidien and Tyco Electronics | Distribution of Covidien and Tyco Electronics | (8,651 | ) | (8,248 | ) | (1,476 | ) | (18,375 | ) | |||||||||||||||||||||||||||||||||||
| Initial adoption of SFAS No. 158, net of income taxes (see Note 17) | Initial adoption of SFAS No. 158, net of income taxes (see Note 17) | (111 | ) | (111 | ) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 28, 2007 | Balance at September 28, 2007 | 496 | $ | 397 | $ | 9,189 | $ | 5,439 | $ | 34 | $ | 565 | $ | 15,624 | ||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004
(in millions)
| | | 2006 | 2005 (Restated) | 2004 (Restated) | | 2007 | 2006 | 2005 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | ||||||||||||||||||||||||
| Net income | $ | 3,713 | $ | 3,019 | $ | 2,820 | ||||||||||||||||||||
| Net (loss) income | Net (loss) income | $ | (1,742 | ) | $ | 3,590 | $ | 3,094 | ||||||||||||||||||
| Loss from discontinued operations, net of income taxes | 348 | 46 | 49 | Income from discontinued operations, net of income taxes | (777 | ) | (2,781 | ) | (2,492 | ) | ||||||||||||||||
| Cumulative effect of accounting change, net of income taxes | 14 | (21 | ) | — | Cumulative effect of accounting change, net of income taxes | — | 14 | (21 | ) | |||||||||||||||||
| Income from continuing operations | 4,075 | 3,044 | 2,869 | |||||||||||||||||||||||
| (Loss) income from continuing operations | (Loss) income from continuing operations | (2,519 | ) | 823 | 581 | |||||||||||||||||||||
| Adjustments to reconcile net cash provided by operating activities: | Adjustments to reconcile net cash provided by operating activities: | Adjustments to reconcile net cash provided by operating activities: | ||||||||||||||||||||||||
| (Gains) losses on divestitures | (44 | ) | (271 | ) | 111 | |||||||||||||||||||||
| Non-cash restructuring and other charges (credits), net | 2 | (19 | ) | (35 | ) | Depreciation and amortization | 1,151 | 1,182 | 1,204 | |||||||||||||||||
| Impairment of long-lived assets | 7 | 6 | 51 | Non-cash compensation expense | 173 | 151 | 72 | |||||||||||||||||||
| In-process research and development | 63 | — | — | Deferred income taxes | (11 | ) | (414 | ) | (227 | ) | ||||||||||||||||
| (Gains) loss on investments, net | (30 | ) | (24 | ) | 1 | Provision for losses on accounts receivable and inventory | 94 | 56 | 102 | |||||||||||||||||
| Depreciation and amortization | 2,065 | 2,084 | 2,098 | Loss on the retirement of debt | 259 | 1 | 405 | |||||||||||||||||||
| Non-cash compensation expense | 275 | 99 | 121 | Goodwill impairment | 46 | — | — | |||||||||||||||||||
| Deferred income taxes | 72 | (28 | ) | 167 | Non-cash restructuring and asset impairment charges, net | 24 | 2 | 2 | ||||||||||||||||||
| Provision for losses on accounts receivable and inventory | 174 | 232 | 317 | Losses on divestitures | 4 | 2 | 23 | |||||||||||||||||||
| Debt and refinancing cost amortization | 16 | 30 | 55 | Gains on investments, net | (10 | ) | (12 | ) | — | |||||||||||||||||
| Loss on the retirement of debt | 2 | 1,013 | 284 | Debt and refinancing cost amortization | 7 | 6 | 12 | |||||||||||||||||||
| Other non-cash items | (14 | ) | 49 | 39 | Other non-cash items | 31 | (30 | ) | 28 | |||||||||||||||||
| Changes in assets and liabilities, net of the effects of acquisitions and divestitures: | Changes in assets and liabilities, net of the effects of acquisitions and divestitures: | |||||||||||||||||||||||||
| Accounts receivable, net | (206 | ) | (701 | ) | (149 | ) | Accounts receivable, net | (128 | ) | (151 | ) | (190 | ) | |||||||||||||
| Decrease in sale of accounts receivable | (9 | ) | (18 | ) | (929 | ) | Contracts in progress | (47 | ) | (50 | ) | 2 | ||||||||||||||
| Contracts in progress | (66 | ) | (43 | ) | 16 | Inventories | (166 | ) | (106 | ) | (104 | ) | ||||||||||||||
| Inventories | (680 | ) | (125 | ) | (247 | ) | Other current assets | 154 | 207 | (53 | ) | |||||||||||||||
| Other current assets | 31 | 79 | 91 | Accounts payable | 54 | 172 | 238 | |||||||||||||||||||
| Accounts payable | 435 | 422 | 84 | Accrued and other liabilities | (56 | ) | (166 | ) | 126 | |||||||||||||||||
| Accrued and other liabilities | (332 | ) | 144 | (108 | ) | Income taxes, net | (244 | ) | 408 | 377 | ||||||||||||||||
| Income taxes | (140 | ) | 328 | 404 | Class action settlement liability | 2,992 | — | — | ||||||||||||||||||
| Other | (102 | ) | (147 | ) | (35 | ) | Other | 28 | (88 | ) | (271 | ) | ||||||||||||||
| Net cash provided by operating activities | 5,594 | 6,154 | 5,205 | Net cash provided by operating activities | 1,836 | 1,993 | 2,327 | |||||||||||||||||||
| Net cash (used in) provided by discontinued operating activities | (28 | ) | 64 | 206 | Net cash provided by discontinued operating activities | 2,475 | 3,574 | 3,891 | ||||||||||||||||||
| Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | ||||||||||||||||||||||||
| Capital expenditures | Capital expenditures | (1,569 | ) | (1,354 | ) | (1,127 | ) | Capital expenditures | (669 | ) | (558 | ) | (516 | ) | ||||||||||||
| Proceeds from disposal of assets | Proceeds from disposal of assets | 55 | 91 | 140 | Proceeds from disposal of assets | 23 | 39 | 53 | ||||||||||||||||||
| Acquisition of customer accounts (ADT dealer program) | Acquisition of customer accounts (ADT dealer program) | (373 | ) | (328 | ) | (254 | ) | Acquisition of customer accounts (ADT dealer program) | (409 | ) | (373 | ) | (328 | ) | ||||||||||||
| Acquisition of businesses, net of cash acquired | Acquisition of businesses, net of cash acquired | (413 | ) | (82 | ) | (15 | ) | Acquisition of businesses, net of cash acquired | (31 | ) | (5 | ) | (6 | ) | ||||||||||||
| Purchase accounting and holdback liabilities | (19 | ) | (47 | ) | (104 | ) | ||||||||||||||||||||
| Divestiture of businesses, net of cash retained | Divestiture of businesses, net of cash retained | 934 | 295 | 236 | Divestiture of businesses, net of cash retained | 8 | 11 | 21 | ||||||||||||||||||
| Class action settlement escrow | Class action settlement escrow | (2,960 | ) | — | — | |||||||||||||||||||||
| Liquidation of rabbi trust investments | Liquidation of rabbi trust investments | 271 | — | — | ||||||||||||||||||||||
| Decrease (increase) in investments | Decrease (increase) in investments | 58 | (272 | ) | 423 | Decrease (increase) in investments | 4 | 58 | (314 | ) | ||||||||||||||||
| Decrease (increase) in restricted cash | 12 | (2 | ) | 342 | ||||||||||||||||||||||
| Decrease in restricted cash | Decrease in restricted cash | 5 | 20 | 7 | ||||||||||||||||||||||
| Other | Other | (11 | ) | (16 | ) | (25 | ) | Other | 14 | (20 | ) | (12 | ) | |||||||||||||
| Net cash used in investing activities | (1,326 | ) | (1,715 | ) | (384 | ) | Net cash (used in) provided by investing activities | (3,744 | ) | (828 | ) | (1,095 | ) | |||||||||||||
| Net cash used in discontinued investing activities | (100 | ) | (39 | ) | (48 | ) | Net cash used in discontinued investing activities | (805 | ) | (599 | ) | (659 | ) | |||||||||||||
| Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | ||||||||||||||||||||||||
| Net repayment of short-term debt | (1,901 | ) | (2,023 | ) | (2,650 | ) | ||||||||||||||||||||
| Proceeds from issuance of short-term debt | Proceeds from issuance of short-term debt | 1,517 | 4 | 2 | ||||||||||||||||||||||
| Repayment of short-term debt | Repayment of short-term debt | (1,151 | ) | (28 | ) | (10 | ) | |||||||||||||||||||
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | 700 | — | 2,224 | Proceeds from issuance of long-term debt | 308 | 700 | — | ||||||||||||||||||
| Repayment of long-term debt, including debt tenders | Repayment of long-term debt, including debt tenders | (32 | ) | (2,956 | ) | (4,332 | ) | Repayment of long-term debt, including debt tenders | (6,602 | ) | (1,766 | ) | (4,782 | ) | ||||||||||||
| Proceeds from exercise of share options | Proceeds from exercise of share options | 250 | 226 | 155 | Proceeds from exercise of share options | 406 | 249 | 226 | ||||||||||||||||||
| Dividends paid | Dividends paid | (806 | ) | (628 | ) | (100 | ) | Dividends paid | (791 | ) | (806 | ) | (628 | ) | ||||||||||||
| Repurchase of common shares by subsidiary | Repurchase of common shares by subsidiary | (2,544 | ) | (300 | ) | (1 | ) | Repurchase of common shares by subsidiary | (727 | ) | (2,544 | ) | (300 | ) | ||||||||||||
| Transfer (to) from discontinued operations | (241 | ) | (78 | ) | 169 | |||||||||||||||||||||
| Transfer from discontinued operations | Transfer from discontinued operations | 8,567 | 2,429 | 3,080 | ||||||||||||||||||||||
| Other | Other | (22 | ) | (23 | ) | (24 | ) | Other | 12 | (10 | ) | (11 | ) | |||||||||||||
| Net cash used in financing activities | (4,596 | ) | (5,782 | ) | (4,559 | ) | Net cash provided by (used in) financing activities | 1,539 | (1,772 | ) | (2,423 | ) | ||||||||||||||
| Net cash provided by (used in) discontinued financing activities | 137 | (16 | ) | (186 | ) | Net cash used in discontinued financing activities | (932 | ) | (2,687 | ) | (3,375 | ) | ||||||||||||||
| Effect of currency translation on cash | Effect of currency translation on cash | 42 | 65 | 45 | Effect of currency translation on cash | 70 | 21 | 52 | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (277 | ) | (1,269 | ) | 279 | |||||||||||||||||||||
| Effect of currency translation on cash related to discontinued operations | Effect of currency translation on cash related to discontinued operations | 33 | 21 | 13 | ||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 472 | (277 | ) | (1,269 | ) | ||||||||||||||||||||
| Less: net (increase) decrease in cash related to discontinued operations | Less: net (increase) decrease in cash related to discontinued operations | (9 | ) | (9 | ) | 28 | Less: net (increase) decrease in cash related to discontinued operations | (771 | ) | (309 | ) | 130 | ||||||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 3,212 | 4,490 | 4,183 | Cash and cash equivalents at beginning of year | 2,193 | 2,779 | 3,918 | ||||||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 2,926 | $ | 3,212 | $ | 4,490 | Cash and cash equivalents at end of year | $ | 1,894 | $ | 2,193 | $ | 2,779 | ||||||||||||
| Supplementary Cash Flow Information: | Supplementary Cash Flow Information: | Supplementary Cash Flow Information: | ||||||||||||||||||||||||
| Interest paid | Interest paid | $ | 717 | $ | 850 | $ | 975 | Interest paid | $ | 317 | $ | 285 | $ | 338 | ||||||||||||
| Income taxes paid, net of refunds | Income taxes paid, net of refunds | 862 | 798 | 550 | Income taxes paid, net of refunds | $ | 650 | $ | 316 | $ | 209 | |||||||||||||||
See Notes to Consolidated Financial Statements.
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation Restatement and Summary of Significant Accounting Policies
Basis of Presentation—The Consolidated Financial Statements include the consolidated accounts of Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Tyco") and have been prepared in United States dollars and in accordance with generally accepted accounting principles in the United States ("GAAP"). Unless otherwise indicated, references in the Consolidated Financial Statements to 2007, 2006 2005 and 20042005 are to Tyco's fiscal year ended September 28, 2007, September 29, 2006 and September 30, 2005, and September 30, 2004, respectively.
Restatement—Reviews Effective June 29, 2007, Tyco completed the spin-offs of Prior Period Stock Option Grant PracticesCovidien and Equity Plan Compliance
Review of Prior Period Stock Option Grant Practices
Following publicity in 2006 regarding the granting of stock options at a number ofTyco Electronics, formerly Healthcare and Electronics businesses, respectively, into separate, publicly traded companies the Company initiated an internal review of its historical stock option grant practices to determine whether the Company's stock option award actions were appropriately governed and were accurately reflected(the "Separation") in the Company's financial statements.form of a distribution to Tyco shareholders. The Company's Internal Audit staff, which reports directlydistribution was made on June 29, 2007, to Tyco shareholders of record on June 18, 2007, the record date. Each Tyco shareholder received 0.25 of a common share of each of Covidien and Tyco Electronics for each Tyco common share held on the record date. Tyco shareholders received cash in lieu of fractional shares for amounts of less than one Covidien or Tyco Electronics common share. The distribution was structured to be tax-free to Tyco shareholders except to the Audit Committeeextent of the Boardcash received in lieu of Directors, beganfractional shares. While we are a reviewparty to Separation and Distribution, Tax Sharing and certain other agreements, we have determined that there is no significant continuing involvement between us and Covidien or Tyco Electronics as discussed in Statement of the Company's equity incentive plan practices and associated approvals over the period October 1999 through June 2006. In addition to its review of plan administration, the Internal Audit staff performed detailed audit procedures on more than 95% of share options granted through the regular and off-cycle grants during this period. The audit procedures covered 100% of named executive officers and Section 16 officers and directors. The Company's review included an evaluation of grant authorizations, an assessment of the appropriate measurement dates underFinancial Accounting Principles BoardStandards ("APB"SFAS") Opinion No. 25,144, "Accounting for Stock Issued to Employeesthe Impairment or Disposal of Long-Lived Assets," and Emerging Issues Task Force ("EITF") Issue No. 03-13, "Applying the applicationConditions of appropriate equity pricing methodology.Paragraph 42 of SFAS No. 144 in Determining Whether to Report Discontinued Operations." Therefore, we have classified Covidien and Tyco Electronics as discontinued operations in all periods presented.
The Company has determined that between October 1999 and 2002, there were several grants for which complete documentation was not available. As such, validation ofAdditionally, on the appropriate measurement date under APB Opinion No. 25 was difficult to determine with precision. For such grants, the Company determined an appropriate measurement date in reliance upon all available evidence and consideration of alternatives, including the communication date to grantees for all grants, to establish a reasonable date upon which equity recipients and share awards were known, fixed and ready to be communicated to employees. To the extent the Company was able to conclude that grant date lists were fixed and ready to be communicated to employees, the measurement date was considered to be the grant date. However, in many instances, the measurementdistribution date, the Company, usedas approved by its Board of Directors, effected a reverse stock split of Tyco's common shares, at a split ratio of one for four. Shareholder approval for the reverse stock split was obtained at the date thatMarch 8, 2007 Special General Meeting of Shareholders. Share and per share data for all periods presented have been adjusted to reflect the equity award was communicated to the recipient.reverse stock split.
The Company has concluded that errors relating to the Company's stock option accounting primarily resulted from: (a) incomplete documentation to enable application of accounting principles under APB Opinion No. 25; (b) the unintentional misapplication of generally accepted accounting principles;During 2007 and (c) the absence of adequate control procedures in 1999 through early 2002 designed to ensure equity recipients and share awards were fixed and certain prior to the legal grant date.
The amount of aggregate compensation expense related to this item, which2006, the Company should have recorded in prior periods, is $252 millionincurred pre-tax and $173 million after-tax, relating to grants awarded prior to the end of 2002. None of this amount relates to 2006, $17 million pre-tax ($8 million after-tax) relates to 2005 and $66 million pre-tax ($46 million after-tax) relates to 2004, as awards vested over the relevant vesting periods. Had the Company used the communication date as the measurement date in all instances, the difference in the amount recorded would not have been material to any period or in the aggregate.
Review of Equity Plan Compliance
Separately, the Company identified an errorcosts related to the recognitionSeparation of compensation expense under the Company's employee stock purchase program$1,083 million and $169 million, respectively. The costs include loss on early extinguishment of debt, debt refinancing, tax restructuring, professional services and employee-related costs. Of this amount, $105 million and $49 million is included in the United Kingdom. The aggregate compensation expenseseparation costs, $259 million in 2007 related to this itemloss on early extinguishment of debt is included in other expense, net and $719 million and $120 million is included in discontinued operations, respectively. Additionally, 2007 includes tax charges related to the Separation primarily for the write-off of deferred tax assets that will no longer be realizable of $183 million, of which the Company should have recorded$95 million is included in 2002-2005income taxes and $88 million is $29 million pre-tax and $20 million after-tax. None of this amount relates to 2006, $7 million pre-tax ($5 million after-tax) relates to 2005 and $19 million pre-tax ($13 million after-tax) relates to 2004.
Effect of Restatementincluded in discontinued operations.
Taken together, these prior period errors result in an aggregate understatement of compensation expense of $281 million pre-tax and $193 million after-tax. Based onIn connection with the findings of the items discussed above,Separation, the Company has restatedrealigned its reported results for prior periods to reflect the impact of additional stock-based compensation expense in Corporate.management and segment reporting structure. See Note 23.21.
The impact onDuring the Consolidated Statementsfirst quarter of Income2007, we sold Aguas Industriales de Jose, C.A. ("AIJ"), a joint venture that was majority owned by Infrastructure Services. Additionally, during the fourth quarter of 2007, the remaining portion of Infrastructure Services met the held for the years ended September 30, 2005sale criteria and 2004, and the Consolidated Balance Sheet asits results of September 30, 2005, as a result of the above restatement, is summarizedoperations have been included in the tables below. There was no impact on total cash flows from operating, investing or financing activities within the Consolidated Statements of Cash Flowsdiscontinued operations for the years ended September 30, 2005 and 2004. The amounts previously reported are derived from theall periods presented.
Form 10-K for References to the year ended September 30, 2005 filed on December 9, 2005 andsegment data are to the Company's continuing operations. Prior period amounts have been reclassified forto exclude the effectsresults of discontinued operations.
| | Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | ||||||
| | ($ in millions) | |||||||
| Operating income, as previously reported | $ | 5,792 | $ | 5,231 | ||||
| Adjustments: | ||||||||
| Prior Period Stock Option Grant Practices | (17 | ) | (66 | ) | ||||
| Equity Plan Compliance | (7 | ) | (19 | ) | ||||
| Decrease | (24 | ) | (85 | ) | ||||
| Operating income, as restated | $ | 5,768 | $ | 5,146 | ||||
| | Net Income | Accumulated Earnings | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years Ended September 30, | ||||||||||
| | At October 1, | ||||||||||
| | 2005 | 2004 | 2003 | ||||||||
| | ($ in millions) | ||||||||||
| As previously reported | $ | 3,032 | $ | 2,879 | $ | 2,961 | |||||
| Adjustments: | |||||||||||
| Prior Period Stock Option Grant Practices | (8 | ) | (46 | ) | (119 | ) | |||||
| Equity Plan Compliance | (5 | ) | (13 | ) | (2 | ) | |||||
| Decrease(1) | (13 | ) | (59 | ) | (121 | ) | |||||
| As restated | $ | 3,019 | $ | 2,820 | $ | 2,840 | |||||
| | Years Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | ||||||||||||
| | Amounts Previously Reported | As Restated | Amounts Previously Reported | As Restated | ||||||||||
| | ($ in millions, except per share data) | |||||||||||||
| Consolidated Statements of Income Data: | ||||||||||||||
| Selling, general and administrative expenses | $ | 8,205 | $ | 8,229 | $ | 8,097 | $ | 8,182 | ||||||
| Operating income | 5,792 | 5,768 | 5,231 | 5,146 | ||||||||||
| Income from continuing operations before income taxes and minority interest | 4,189 | 4,165 | 4,080 | 3,995 | ||||||||||
| Income taxes | (1,123 | ) | (1,112 | ) | (1,138 | ) | (1,112 | ) | ||||||
| Income from continuing operations | 3,057 | 3,044 | 2,928 | 2,869 | ||||||||||
| Income before cumulative effect of accounting change | 3,011 | 2,998 | 2,879 | 2,820 | ||||||||||
| Net income | $ | 3,032 | $ | 3,019 | $ | 2,879 | $ | 2,820 | ||||||
| Basic earnings per share: | ||||||||||||||
| Income from continuing operations | $ | 1.52 | $ | 1.51 | $ | 1.46 | $ | 1.43 | ||||||
| Income before cumulative effect of accounting change | 1.50 | 1.49 | 1.44 | 1.41 | ||||||||||
| Net income | $ | 1.51 | $ | 1.50 | $ | 1.44 | $ | 1.41 | ||||||
| Diluted earnings per share: | ||||||||||||||
| Income from continuing operations | $ | 1.45 | $ | 1.44 | $ | 1.37 | $ | 1.34 | ||||||
| Income before cumulative effect of accounting change | 1.42 | 1.42 | 1.35 | 1.32 | ||||||||||
| Net income | $ | 1.43 | $ | 1.43 | $ | 1.35 | $ | 1.32 | ||||||
| | As of September 30, 2005 | ||||||
|---|---|---|---|---|---|---|---|
| | Amounts Previously Reported | As Restated | |||||
| | ($ in millions) | ||||||
| Consolidated Balance Sheet Data: | |||||||
| Assets | |||||||
| Other assets | $ | 5,225 | $ | 5,290 | |||
| Total Assets | $ | 62,621 | $ | 62,686 | |||
| Liabilities and Shareholders' Equity | |||||||
| Contributed surplus, net | $ | 15,249 | $ | 15,507 | |||
| Accumulated earnings(1) | 7,993 | 7,800 | |||||
| Total Shareholders' Equity | 32,450 | 32,515 | |||||
| Total Liabilities and Shareholders' Equity | $ | 62,621 | $ | 62,686 | |||
Principles of Consolidation—Tyco is a holding company which conducts its business through its operating subsidiaries. The Company is a global, diversified company that provides products and services in four business segments: Electronics, Fire and Security, Healthcare and Engineered Products and Services (see Note 23). The Company consolidates companies in which it owns or controls more than fifty percent of the voting shares or has the ability to control through similar rights. Also, the Company consolidates variable interest entities in which the Company bears a majority of the risk to the entities' expected losses or stands to gain from a majority of the entities' expected returns. All intercompany transactions have been eliminated. The results of companies acquired or disposed of
during the year are included in the Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal.
During 2006, Tyco completed the sale of the Plastics and Adhesives segment and entered into a definitive agreement to sell the Printed Circuit Group ("PCG") business, a business of the Electronics segment. As the held for sale and discontinued operations criteria were met, the operations of the Plastics and Adhesives segment and PCG are reflected as discontinued operations for all periods presented.
Use of Estimates—The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues and expenses. Significant estimates in these Consolidated Financial Statements include restructuring and other charges, and credits, acquisition liabilities, allowances for doubtful accounts receivable, estimates of future cash flows associated with asset impairments, useful lives for depreciation and amortization, loss contingencies, net realizable value of inventories, fair values of financial instruments, estimated contract revenue and related costs, environmental and legal liabilities, income taxes and tax valuation allowances, and pension and postretirement employee benefit expenses. Actual results could differ materially from these estimates.
Change in Fiscal Year and Reporting Calendar Alignment—Effective October 1, 2004, Tyco changed its fiscal year end from a calendar fiscal year ending September 30 to a "52-53 week" year ending on the last Friday of September, such that each quarterly period will be 13 weeks in length. In addition, certain of the Company's subsidiaries had consistently closed their books up to one month prior to the Company's fiscal period end. These subsidiaries now report results for the same period as the reported results of the consolidated Company. The impact of this change was not material to the Consolidated Financial Statements. Net income for the transition period related to this change was $26 million and was reported within Shareholders' Equity during 2005. References to 2006, 2005 and 2004 are to Tyco's fiscal year ending in September unless otherwise indicated.
Revenue Recognition—The Company recognizes revenue principally on four types of transactions—sales of products, sales of security systems, subscriber billings for monitoring and maintenance services and contract sales.
Revenue from the sales of products is recognized at the time title and risks and rewards of ownership pass. This is generally when the products reach the free-on-board shipping point, the sales price is fixed and determinable and collection is reasonably assured.
Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in determining sales in the same period the related sales are recorded. These provisions are based on terms of arrangements with direct, indirect and other market participants. Rebates are estimated based on sales terms, historical experience and trend analysis.
Sales of security monitoring systems includemay have multiple elements, including equipment, installation, monitoring services and maintenance agreements. Amounts assigned to each component of the arrangement are based on that component's objectively determined fair value. If fair value cannot be objectively determined for a sale involving multiple elements, the Company recognizes the revenue from installation of services, along with the associated direct incremental costs, over the contract life.
Revenue from the sale of services is recognized as services are rendered. Customer billings for services not yet rendered are deferred and recognized as revenue as the services are rendered and the associated deferred revenue is included in current liabilities or long-term liabilities, as appropriate.
Contract sales for the installation of fire protection systems, large security intruder systems undersea fiber optic cable systems and other construction relatedconstruction-related projects are recorded primarily onunder the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related total cost toof the project at completion. Cost toThe extent of progress toward completion is generally measured
based on the ratio of actual cost incurred to total estimated cost.cost at completion. Revisions into cost estimates as contracts progress have the effect of increasing or decreasing profits in the currenteach period. Provisions for anticipated losses are made in the period in which they first become determinable.
Certain of the Company's long-term contracts have warranty obligations. Estimated warranty costs for each contract are determined based on the contract terms and technology specific issues. These costs are included in total estimated contract costs and are accrued over the construction period of the respective contracts under percentage-of-completion accounting.
At September 29, 200628, 2007 and September 30, 2005,29, 2006, accounts receivable and other long-term receivables included retainage provisions of $91$63 million in both years of which $36$41 million and $31$36 million are unbilled, respectively. These retainage provisions consist primarily of electronics contracts, fire protection contracts as well as transportation, water and environmental-related contracts and become due upon contract completion and acceptance. At September 29, 200628, 2007 the retainage provision included $58$62 million, whichthat is expected to be collected during 2007. In addition, at September 29, 2006 and September 30, 2005, $56 million and $28 million, respectively, of accounts receivable were unbilled related to long-term contracts.2008.
Research and Development—Research and development expenditures are expensed when incurred and are included in cost of product sales. Research and development expenses include salaries, direct costs incurred and building and overhead expenses. Customer-funded research and development are costs incurred by Tyco that are reimbursed by customers. There is no net impact on research and development expense on the Consolidated Statements of Income for customer-funded research and development. Research and development expense in our Consolidated Statements of Income reflects company-sponsored research and development only. See Note 24.22.
Advertising—Advertising costs are expensed when incurred and are included in selling, general and administrative expenses. See Note 24.22.
Translation of Foreign Currency—For the Company's non-U.S. subsidiaries that account in a functional currency other than U.S. Dollars and do not operate in highly inflationary environments,dollars, assets and liabilities are translated into U.S. Dollarsdollars using year-end exchange rates. Revenue and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) within 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 the date the assets were acquired, while other assets and liabilities are translated at year-end exchange rates. Translation adjustments for the assets and liabilities of these subsidiaries are included in net income.
Gains and losses resulting from foreign currency transactions, includedincluding the impact of our foreign currency derivatives, reflected in net incomeselling, general and administrative expenses were $105$60 million, $52$77 million and $66$21 million in 2007, 2006 and 2005, and 2004, respectively.
Cash and Cash Equivalents—All highly liquid investments purchased with maturitymaturities of three months or less from the time of purchase are considered to be cash equivalents.
On occasion, the Company is required to post cash collateral to secure obligations in respect of various construction projects, contractual obligations related to acquisitions or divestitures or other legal obligations. The amount of restricted cash in collateral was $77 million (of which $39 million is included in current assets and $38 million is included in long-term assets) and $86 million (of which $44 million is included in current assets and $42 million is included in long-term assets) at September 29, 2006 and September 30, 2005, respectively.
Allowance for Doubtful Accounts—The allowance for doubtful accounts receivable reflects the best estimate of probable losses inherent in Tyco's receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.
Inventories—Inventories are recorded at the lower of cost (primarily first-in, first-out) or market value.
Property, Plant and Equipment, Net—Property, plant and equipment, net is recorded at cost less accumulated depreciation. Depreciation expense for 2007, 2006 and 2005 and 2004 was $1,415$638 million, $1,431$665 million and $1,407$676 million, respectively. Maintenance and repair expenditures are charged to expense when incurred. DepreciationExcept for pooled subscriber systems, depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows:
| Buildings and related improvements | 5 to 50 years | ||
| Leasehold improvements | Lesser of remaining term of the lease or economic useful life | ||
| Subscriber systems | |||
| Other machinery, equipment and | |||
| furniture and fixtures | 2 to 20 years |
See below for discussion of depreciation method and estimated useful lives related to subscriber systems.
Subscriber System Assets and Related Deferred Revenue Accounts—The Company generally considers assets related to the acquisition of new customers in its electronic security assetsbusiness in three asset pools:categories: internally generated residential subscriber systems, internally generated commercial subscriber systems (collectively referred to as subscriber system assets) and customer accounts acquired through the ADT dealer program.program (referred to as dealer intangibles). Subscriber systems represent internally generated residential systemssystem assets include installed property, plant and internally generated commercial systems (customerequipment for which Tyco retains ownership and deferred costs directly related to the customer acquisition and system installation. Subscriber system assets and any deferred revenue resulting from the customer acquisition are accounted for over the expected life of the subscriber. In certain geographical areas where the Company has a large number of customers that behave in a similar manner over time, the Company accounts acquired throughfor subscriber system assets and related deferred revenue using pools, with separate pools for the ADT dealer program are recordedcomponents of subscriber system assets and any related deferred revenue based on the month and year of acquisition.
Effective as intangible assets). The internally generated residentialof the beginning of the third quarter of 2007, Tyco changed the depreciation method and commercialestimated useful life used to account pools are generally amortized usingfor pooled subscriber system assets (primarily in North America) and related deferred revenue from the straight-line method over a ten-year period (a fourteen-year period is used for national commercial accounts and a fourteen-year period with write-off of specific accounts upon discontinuance is usedlives ranging from 10 to 14 years to an accelerated method with lives up to 15 years. The accelerated method utilizes declining balance rates based on geographical area ranging from 160% to 195% for residential subscriber pools and 145% to 265% for commercial subscriber pools and converts to a straight line methodology when the resulting depreciation charge is greater than that from the accelerated method. The Company will continue to use a straight-line method with a 14-year life for non-pooled subscriber system assets (primarily in Europe and Asia) and related deferred revenue, with remaining balances written off upon customer termination.
The change in the method and estimated useful life used to account for pooled subscriber system assets and related deferred revenue resulted from our ongoing analysis of all pertinent factors, including actual customer attrition data specific to customer categories and geographical areas, demand, competition, and the estimated technological life of the installed systems. The pertinent factors have been influenced by management's ongoing customer retention programs, as well as tactical and strategic initiatives to improve service delivery, customer satisfaction, and the credit worthiness of the subscriber customer base. In accordance with SFAS No. 154, "Accounting Changes and Error Correction," the change in method used to account for pooled subscriber system assets and related deferred revenue accounts represents a change in certain non-U.S. locations).accounting estimate effected by a change in accounting principle and is accounted for prospectively. The change in method is based on information obtained by continued observation of the expected benefits inherent in the pooled subscriber system assets by customer category and is preferable, as it results in depreciation and amortization that are more reflective of the pattern of expected benefits derived from these assets. All pertinent factors, including actual customer attrition data specific to customer categories and geographical areas, demand, competition, and the estimated technological life of the installed systems, will continue to be reviewed by the Company at each balance sheet date to assess the continued appropriateness of methods and estimated useful lives.
The effects of the change described above decreased net revenue by $21 million, decreased depreciation expense by $37 million, and decreased loss from continuing operations and net loss by $10 million each and increased basic and diluted earnings per share by $0.02 for 2007.
Long-Lived Assets—Tyco reviews long-lived assets, including property, plant and equipment and amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. Tyco performs undiscounted operating cash flow analyses to determine if impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Tyco groups assets and liabilities at the lowest level for which cash flows are separately identified. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are assessed for impairment annually and more frequently if a triggering event occurs.events occur (see Note 11). In making this assessment,performing these assessments, management relies on a number ofvarious factors, including operating results, business plans, economic projections, anticipated future cash flows, andcomparable transactions and other market place data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill and indefinite-lived intangible assets for impairment. The Company performed its annual impairment test intests for goodwill and indefinite-lived intangible assets on the first day of the fourth quarter of 2006 and no impairment occurred.2007.
�� When testing for goodwill impairment, first, the Company performs a step I goodwill impairment test to identify a potential impairment. In doing so, the Companyfirst compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and a step II goodwill impairment test isfurther tests are performed to measure the amount of impairment loss. In the second step IIof the goodwill impairment test, the Company compares the implied fair value of reporting unit goodwill with the carrying amount of thatthe reporting unit's goodwill. If the carrying amount of reporting unitunit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities isrepresents the implied fair value of goodwill.
Dealer and Other Amortizable Intangible Assets, Net—Intangible assets primarily include contracts and related customer relationships and intellectual property. Certain contracts and related customer relationships result from purchasing residential security monitoring contracts from an external network of independent dealers who operate under the ADT dealer program. Acquired contracts and related customer relationships are recorded at their contractually determined purchase price. The Company incurs costs associated with maintaining and operating its ADT dealer program, including brand advertising and due diligence, which are expensed as incurred.
During the first six months (twelve months in certain circumstances) after the purchase of the customer contract, any cancellation of monitoring service, including those that result from customer payment delinquencies, results in a chargeback by the Company to the dealer for the full amount of the contract purchase price. The Company records the amount charged back to the dealer as a reduction of the previously recorded intangible asset.
Intangible assets arising from the ADT dealer program described above are amortized in pools determined by the month of contract acquisition on an accelerated basis over the period and pattern of
economic benefit that is expected to be obtained from the customer relationship. Based upon analysesEffective as of the period and pattern of economic benefit associated with the intangibles, which utilize information contained in attrition studiesbeginning of the ADTthird quarter of 2007, Tyco changed the estimated useful life of dealer program customer base, conducted by a third party appraiser, the Company believes that the accelerated method that presently best achieves the matching objective above is the double-declining balance method based on a ten-year life for the first eight yearsintangibles in geographical areas comprising approximately 90% of the net carrying value of dealer intangibles from 12 to 15 years. The Company continues to amortize dealer intangible assets on an accelerated basis. The change in the estimated useful life used to account for dealer intangibles resulted from our ongoing analysis of all pertinent factors, including actual customer attrition data, demand, competition, and the estimated technological life of the installed systems. The pertinent factors have been influenced by management's ongoing customer relationship, convertingretention programs, as well as tactical and strategic initiatives to improve service delivery, customer satisfaction, and the straight-line method of amortization for the remaining four yearscredit worthiness of the subscriber customer base. In accordance with SFAS No. 154, the change in estimated relationship period. Actual attrition datauseful life of dealer intangibles is regularly reviewed in order to assess the continued appropriatenessaccounted for prospectively. The effect of the accelerated method of amortization described above.change in estimated useful life for dealer intangibles decreased loss from continuing operations and net loss by $6 million each and increased basic and diluted earnings per share by $0.01 for 2007.
Other contracts and related customer relationships, as well as intellectual property consisting primarily of patents, trademarks and unpatented technology, are amortized on a straight-line basis over fivefour to forty years. The Company evaluates the amortization methods and remaining useful lifelives of intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the amortization method or remaining useful life.lives.
Investments—The Company invests in debt and equity securities. Long-term investments in marketable equity securities that represent less than twenty percent ownership are marked to market at the end of each accounting period. Unrealized gains and losses are credited or charged to other comprehensive income within shareholders' equity for available for sale securities unless an unrealized loss is deemed to be other than temporary, in which case such loss is charged to earnings. Management determines the proper classification of investments in debt obligations with fixed maturities and equity securities for which there is a readily determinable market value at the time of purchase and reevaluates such classifications as of each balance sheet date. Realized gains and losses on sales of investments are included in the Consolidated Statements of Income.Operations.
Other equity investments for which the Company does not have the ability to exercise significant influence and for which there is not a readily determinable market value are accounted for under the cost method of accounting. TheEach reporting period, the Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting, such that they are recorded at the lower of cost or estimated net realizable value. For equity investments in which the Company exerts significant influence over operating and financial policies but do not control, the equity method of accounting is used. The Company's share of net income or losses of equity investments is included in the Consolidated Statements of IncomeOperations and was not material in any period presented.
Product Warranty—The Company records estimated product warranty costs at the time of sale. Manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Generally, product warranties are implicit in the sale; however, the customer may purchase an extended warranty. Manufactured equipment is also warranted in the same manner as product warranties. However, in most instances the warranty is either negotiated in the contract or sold as a separate component. Warranty period terms range from 90 days (e.g., consumablevarious products) up to 2015 years (e.g., power system batteries)pressure reducers and floor heating products). The warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage.
Environmental Costs—Tyco is subject to laws and regulations relating to protecting the environment. Tyco provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reliably determinable. The impact of the discount on the Consolidated Balance Sheets at both September 29, 2006 and September 30, 2005 was to reduce the obligation by approximately $14 million.
TYCO INTERNATIONAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes—Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Consolidated Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax bases of particular assets and liabilities and operating loss carryforwards, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Insurable Liabilities—The Company records liabilities for its workers' compensation, product, general and auto liabilities. The determination of these liabilities and related expenses is dependent on claims experience. For most of these liabilities, claims incurred but not yet reported are estimated by utilizing actuarial valuations based upon historical claims experience. Certain insurable liabilities are discounted using a risk-free rate of return when the pattern and timing of the future obligation is reliably determinable. The impact of the discount on the Consolidated Balance Sheets at September 29, 200628, 2007 and September 30, 200529, 2006 was to reduce the obligation by $47$38 million and $31$47 million, respectively. The Company maintains captive insurance companies to manage certain of its insurable liabilities. Additionally, the Company records receivables from third party insurers when recovery has been determined to be probable.
Financial Instruments—The Company usesmay use interest rate swaps, currency swaps and forward and option contracts to manage risks generally associated with foreign exchange rate and interest rate risk. Derivatives used for hedging purposes are designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract are highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
All derivative financial instruments are reported on the Consolidated Balance Sheets at fair value. Derivatives used to economically hedge foreign currency denominated balance sheet items are reported directly in earningsselling, general and administrative expenses along with offsetting transaction gains and losses on the items being hedged. Gains and losses on net investment hedges are included in the cumulative translation adjustment component of other comprehensive income to the extent they are effective. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in earnings. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings.
Share Premium and Contributed Surplus—In accordance with the Bermuda Companies Act 1981, when Tyco issues shares for cash at a premium to their par value, the resulting premium is credited to a share premium account, a non-distributable reserve. When Tyco issues shares in exchange for shares of another company, the excess of the fair value of the shares acquired over the par value of the shares issued by Tyco is credited, where applicable, to contributedContributed surplus, which is, subject to certain conditions, is a distributable reserve.
Reclassifications—Certain prior year amounts have been reclassified to conform with current year presentation. In 2007, the Company presented proceeds from the divestiture of businesses classified as discontinued operations within net cash used in discontinued investing activities. Such proceeds were
$71 million, $866 million and $158 million for 2007, 2006 and 2005, respectively. All prior periods have been reclassified to conform to the current period presentation.
Recently Adopted Accounting Pronouncements—Effective October 1, 2005, Tyco adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as
amended, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Tyco adopted SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost is recognized for the unvested portion of share-based payments granted prior to October 1, 2005 and all share-based payments granted subsequent toIn September 30, 2005 over the related vesting period. Prior to October 1, 2005, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock-based compensation. Prior period results have not been restated upon the adoption of SFAS No. 123R. Due to the adoption of SFAS No. 123R, the Company's results from continuing operations for 2006, include incremental share-based compensation expense totaling $161 million. As such, basic and diluted earnings per share from continuing operations were impacted by $0.06 and $0.05, respectively, in 2006.
On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff PositionSFAS No. FAS 123R-3,158, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." The Company elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R in the fourth quarter of fiscal 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are fully vested and outstanding upon adoption of SFAS No. 123R. The adoption did not have a material impact on our results of operations and financial condition.
The Company adopted FASB Interpretation ("FIN") No. 47,"Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143," during the fourth quarter of 2006. This Interpretation clarifies the timing of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Interpretation requires that conditional asset retirement obligations, along with the associated capitalized asset retirement costs, be reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and an increase of $10 million in the carrying amount of the related assets. The initial recognition resulted in a cumulative effect of accounting change of $22 million, pre-tax, reflecting the accumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47 been in effect at the time. Certain obligations relating to the handling and disposal of asbestos have not been recorded due to the fact that fair value cannot be reasonably estimated because the Company does not have sufficient information about the range of time over which the obligation may be settled. The undiscounted cash flows relating to the asset retirement obligations that have not been recognized in the financial statements are approximately $8 million. The Company will continue to monitor such legal asset retirement obligations and recognize a liability in the period sufficient information becomes available to reasonably estimate the fair value.
In June 2005, the FASB issued Staff Position ("FSP") No. 143-1,"Accounting for Electronic Equipment Waste Obligations," which provides guidance on accounting for historical waste obligations associated with the European Union Waste, Electrical and Electronic Equipment Directive ("WEEE Directive"). Under the directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the
equipment is replaced, at which time the waste management obligation may be transferred to the producer of the replacement equipment. FSP No. 143-1 is effective for the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. The financial statement impact depends heavily on the respective laws and regulations adopted by the EU member countries, their implementation guidance and the type of recycling programs and systems that are established. The Company evaluated the effects of FSP No. 143-1 and determined that it did not have a material impact on the Company's results of operations, financial position or cash flows.
Recently Issued Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 158,"Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)."." SFAS No. 158 requires that employers recognize the funded status of defined benefit pension and other postretirement benefit plans as a net asset or liability on the balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as a component of net periodic benefit cost. Under SFAS No. 158, companies are required to measure plan assets and benefit obligations as of their fiscal year end. The Company presently uses a measurement date of August 31st. SFAS No. 158 also requires additional disclosure in the notes to the financial statements. The recognition provisions of SFAS No. 158 are effective for fiscal 2007, while the measurement date provisions become effective in fiscal 2009. The Company is currently assessingadopted the impactrecognition and disclosure provisions of SFAS No. 158 on its consolidated financial statements. Based on the funded status of defined benefit and other postretirement plans as of September 29, 2006, the28, 2007. The Company estimates that it would recognizerecognized a net $356$111 million liability through a reduction in shareholders' equity.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 requires that companies utilize a "dual approach" in assessing the quantitative effects of financial statement misstatements. The ultimate amounts recorded are highly dependentdual approach includes both an income statement focused and balance sheet focused assessment. SAB No. 108 is effective for Tyco in fiscal 2007. The implementation of SAB No. 108 did not have a material impact on various estimatesTyco's results of operations, financial position or cash flows.
Recently Issued Accounting Pronouncements—In February 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and assumptions including, among other things, the discount rate selected, future compensation levels and performance of plan assets. Changes in these assumptions could increase or decrease the estimated impact of implementingFinancial Liabilities." SFAS No. 158.159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for Tyco in the first quarter of fiscal 2009. The Company is currently assessing the impact that SFAS No. 159 will have on the results of its operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, ""Fair Value Measurements"," which enhances existing guidance for measuring assets and liabilities at fair value. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for Tyco beginning September 29, 2008.in fiscal 2009. The Company is currently assessing the impact, if any, that SFAS No. 157 will have on the results of its operations, financial position or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 requires that companies utilize a "dual-approach" to assessing the quantitative effects of financial statement misstatements. The dual approach includes both an income statement focused and balance sheet focused assessment. SAB No. 108 is applicable for Tyco's fiscal year ending September 28, 2007. The Company is currently assessing the impact of the adoption of SAB No. 108, but does not expect that it will have a significant impact on its financial position or results of operations.
In June 2006, the FASB issued FINFinancial Accounting Standards Board Interpretation ("FIN") No. 48, ""Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109."109." This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for Tyco in the first quarter of fiscal 2008. The Company is currently implementing and assessing the expected impact thatof adopting FIN No. 48 will48. Based on the assessment to
date, management does not expect the adoption to have a material effect on the results of its operations, financial position or cash flows.
2. Separation Transaction
On January 13, 2006, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies—Tyco Healthcare, Tyco Electronics and a combination of Tyco Fire and Security and Engineered Products and Services (the "Proposed Separation"). The Company intends to accomplish the Proposed Separation through tax-free stock dividends to Tyco shareholders. Following the Proposed Separation, Tyco's shareholders will own 100% of the equity in all three companies. Tyco expects to file Registration Statements in connection with the Proposed Separation during the second quarter of 2007.
In connection with the Proposed Separation, the Company expects to incur cost related primarily to tax restructuring, debt refinancing, professional services and employee-related costs. During 2006, the Company incurred $169 million of costs related to the Proposed Separation primarily related to legal, accounting and consulting work associated with executing the transaction.
Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, the filing and effectiveness of registration statements with the Securities and Exchange Commission ("SEC") and the completion of any necessary debt refinancings. Approval by the Company's shareholders is not required as a condition to the consummation of the Proposed Separation. Tyco has received an initial private letter ruling from the IRS regarding the U.S. federal income tax consequences of the Proposed Separation noting it will qualify for favorable tax treatment.
3. Discontinued Operations and Divestitures
Discontinued Operations
During the third quarter of 2007, Tyco completed the Separation and has presented its Healthcare and Electronics businesses as discontinued operations in all periods presented.
In each period prior to the Separation, net interest and loss on early extinguishment of debt, which is included in other expense, net in the Consolidated Statements of Operations, amounts were proportionally allocated to Covidien and Tyco Electronics based on the debt amounts that Tyco believes were utilized by Covidien and Tyco Electronics historically inclusive of amounts directly incurred. Allocated net interest was calculated using our historical weighted-average interest rate on debt including the impact of interest rate swap agreements. These allocated amounts were included in discontinued operations. During 2007, allocated interest income, interest expense and other expense, net was $35 million, $242 million and $388 million, respectively. During 2006, allocated interest income, interest expense and other expense, net was $53 million, $378 million and $0 million, respectively. During 2005, allocated interest income, interest expense and other expense, net was $43 million, $433 million and $608 million, respectively.
The Company has used available information to develop its best estimates for certain assets and liabilities related to the Separation. In limited instances, final determination of the balances will be made in subsequent periods. During the fourth quarter of 2007, $72 million was recorded through shareholders' equity, primarily related to the cash true-up adjustment and other items, as specified in the Separation and Distribution Agreement, adjustments to certain pre-Separation tax liabilities, and the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of Tyco, Covidien and/or Tyco Electronics legal entities. Additional adjustments are not expected to be material and will be recorded through shareholder's equity in subsequent periods as tax returns are finalized.
During 2007, AIJ, a joint venture that was majority owned by Infrastructure Services, was sold for $42 million in net cash proceeds and a pre-tax gain on sale of $19 million was recorded. Additionally, during the fourth quarter of 2007, the remaining portion of Infrastructure Services met the held for sale criteria and its results of operations have been included in discontinued operations for all periods presented. Infrastructure Services provides consulting, engineering, construction management and operating services for the water, wastewater, environmental, transportation and facilities market. The Company has assessed the recoverability of these businesses carrying values and will continue to assess recoverability based on current fair value, less cost to sell, until the businesses are sold. On September 17, 2007, the Company consummatedexecuted a definitive agreement to sell for approximately $295 million in cash 100% of the salestock of ETEO—Empresa de Transmissao de Energia do Oeste Ltda., a Brazilian subsidiary of Infrastructure Services. The transaction is subject to Brazilian regulatory approval and normal closing conditions and is expected to close by the end of the second quarter of fiscal 2008. The Company expects to sell the remaining portion of Infrastructure Services by the end of fiscal 2008.
The AIJ, Infrastructure Services, Plastics, Adhesives and Ludlow Coated Products businesses as well as theand A&E Products business for $975 million and $6 million in gross cash proceeds, respectively. Working capital and other adjustments resulted in net proceeds of $882 million for the sale of the Plastics, Adhesives and Ludlow Coated Products businesses. During 2006, the Company also recorded a $30 million receivable due from the purchaser of the Plastics, Adhesives and Ludlow Coated Products businesses based on the decline of average resin prices during fiscal year 2006, as contemplated in the definitive sale agreement. This amount is payable to Tyco no later than January 2007. Net cash proceeds received for the sale of the A&E Products business was $2 million, which does not include working capital provisions which are expected to be settled prior to the end of calendar year 2006. Both businesses met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented.
Net revenue, income from operations, (loss) gain on sale, separation costs and income tax expense for discontinued operations for 2007, 2006 and 2005 are as follows ($ in millions):
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | $ | 18,966 | $ | 24,797 | $ | 25,092 | ||||
| Pre-tax income from discontinued operations | $ | 2,802 | $ | 3,831 | $ | 3,336 | ||||
| Pre-tax (loss) gain on sale of discontinued operations | (550 | ) | (245 | ) | 34 | |||||
| Separation costs | (719 | ) | (120 | ) | — | |||||
| Income tax expense | (756 | ) | (685 | ) | (878 | ) | ||||
| Income from discontinued operations, net of income taxes | $ | 777 | $ | 2,781 | $ | 2,492 | ||||
Balance sheet information for discontinued operations at September 28, 2007 and September 29, 2006 is as follows ($ in millions):
| | 2007 | 2006 | |||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | — | $ | 732 | |||
| Accounts receivable, net | 327 | 4,398 | |||||
| Inventories | 12 | 3,231 | |||||
| Prepaid expenses and other current assets | 19 | 1,652 | |||||
| Property, plant and equipment, net | 137 | 5,910 | |||||
| Goodwill and other intangibles, net | — | 15,976 | |||||
| Other assets | 474 | 2,325 | |||||
| Total assets | $ | 969 | $ | 34,224 | |||
| Current maturities of long-term debt | $ | 5 | $ | 37 | |||
| Accounts payable | 150 | 2,007 | |||||
| Accrued and other current liabilities | 267 | 2,469 | |||||
| Long-term debt | 24 | 512 | |||||
| Other liabilities | 63 | 2,972 | |||||
| Total liabilities | $ | 509 | $ | 7,997 | |||
| Minority interest | $ | 30 | $ | 36 | |||
Losses on divestitures
During 2007, 2006 and 2005, the Company recorded a $261$4 million, $2 million and $26 million pre-tax loss on sale from discontinued operations related to the Plastics, Adhesives and Ludlow Coated Products businesses and A&E Products business, respectively, which include $275 million and $22$23 million, respectively, of pre-tax impairmentdivestiture charges to write the businesses down to their fair values less costs to sell. Fair values used for the respective impairment assessments were based on existing market conditions and the terms and conditions included or expected to be included in the respective sale agreements.
During 2006, the Company approved a plan to divest the Printed Circuit Group ("PCG") business, a component of the Electronics segment, and also entered into a definitive sale agreement to sell PCG for $226 million in cash. During 2006, the Company recorded a $4 million pre-tax loss on sale from discontinued operations for PCG related to the divestiture of the PCG Spain business as well as certain other costs to sell. The sale of PCG was completed in October 2006. See Note 28—Subsequent Events. The PCG business met the held for sale and discontinued operations criteria and has been included in discontinuedcontinuing operations in all periods presented.
In 2005, Tyco announced its intentconnection with the write-down to explore the divesture of its Plastics, Adhesives and Ludlow Coated Products businesses, as well as the A&E Products business, a global manufacturer of plastic film, specialty tapes and adhesives, coated products and garment hangers. As a result of consideration for potential sale and deteriorating operating results in the A&E Products business, the Company performed an interim assessment of the recoverability of both goodwill and long-lived assets and determined that the book value of certain long-lived assets in the A&E Products business was greater than their estimated fair value and consequently recorded a long-lived asset impairment of $40 million and goodwill impairment charge of $162 million. Fair value used for the impairment assessment was based on probability-weighted expected future cash flow of the assets.
During 2005, the Company divested 8 businesses which were reported as discontinued operations within Fire and Security, Engineered Products and Services and the Plastics and Adhesives business segment. The Company reported losses on sale or additional impairments to write the carrying value of such assets down to their estimated fair value less costs to sell of $60 million during 2005.
During 2004, the Company reported losses on the sale of discontinued operations of $132 million to write the carrying value of such assets down to their fair value, less cost to sell.
For the additional 8 businesses in 2005 and the divested businesses in 2004,sell, of certain businesses. The fair value used for the impairment assessmentassessments was primarily based on the terms and conditions included or expected to be included in the sales agreements.
3. Restructuring and Asset Impairment Charges, Net
Net revenue, income from operations, loss on saleRestructuring and income taxes for discontinued operations forasset impairment charges, net, during the years ended September 28, 2007, September 29, 2006 2005 and 2004September 30, 2005 are as follows ($ in millions):
| | 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | $ | 1,195 | $ | 2,475 | $ | 3,082 | ||||
| Pre-tax income from discontinued operations | $ | 16 | $ | 87 | $ | 76 | ||||
| Pre-tax loss on sale of discontinued operations | (291 | ) | (262 | ) | (132 | ) | ||||
| Income taxes | (73 | ) | 129 | 7 | ||||||
| Loss from discontinued operations, net of income taxes | $ | (348 | ) | $ | (46 | ) | $ | (49 | ) | |
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ADT Worldwide | $ | 83 | $ | 3 | $ | 2 | ||||
| Fire Protection Services | 33 | — | — | |||||||
| Flow Control | 25 | 2 | 4 | |||||||
| Safety Products | 29 | 7 | 8 | |||||||
| Electrical and Metal Products | 7 | — | — | |||||||
| Corporate and Other | 40 | 1 | 4 | |||||||
| 217 | 13 | 18 | ||||||||
| Inventory charges in cost of sales | (7 | ) | — | (1 | ) | |||||
| Restructuring and asset impairment charges, net | $ | 210 | $ | 13 | $ | 17 | ||||
(Gains) losses on divestitures
During 2004, the Company divested twenty-one and liquidated four non-core businesses across all business segments primarily within Fire and Security. During 2004, the Company recorded net losses and impairments on divestitures of $116 million in continuing operations in connection with the divestiture or write-down to fair value of certain held for sale businesses.
During 2005, Tyco agreed to sell the TGN, its undersea fiber optic telecommunication network. The sale was consummated on June 30, 2005. As part of the sale transaction, Tyco received gross cash proceeds of $130 million, and the purchaser assumed certain liabilities. In connection with this sale, Tyco recorded a $301 million gain which is reflected in (gains) losses on divestitures in the Consolidated Statement of Income for 2005. The Company has presented the operations of the TGN in continuing operations as the criteria for discontinued operations were not met.
During 2005, the Company divested 10 businesses that were reported as continuing operations in Fire and Security, Healthcare and Engineered Products and Services. The Company recorded net losses and impairments on divestitures of $32 million, including a $3 million charge reflected in cost of sales,
in connection with the divestiture and liquidation of these businesses, as well as the write-down to estimated fair value of certain held for sale businesses.
During 2006, the Company divested 6 businesses that were reported as continuing operations in Fire and Security and Healthcare. The Company recorded net gains on divestitures of $46 million in connection with the divestiture of these businesses, less $2 million of divestiture charges related to the write-down to estimated fair value and costs to sell certain other held for sale businesses.
For the divested businesses during 2006, 2005 and 2004, fair value used for the impairment assessment was primarily based on the terms and conditions included or expected to be included in the sales agreements.
Businesses held for sale
Balance sheet information for discontinued operations and other businesses held for sale at September 29, 2006 and September 30, 2005 is as follows ($ in millions):
| | 2006 | 2005 | |||||
|---|---|---|---|---|---|---|---|
| Accounts receivable, net | $ | 82 | $ | 300 | |||
| Inventories | 57 | 237 | |||||
| Other current assets | 2 | 22 | |||||
| Property, plant and equipment, net | 102 | 438 | |||||
| Goodwill | — | 547 | |||||
| Intangible assets, net | — | 15 | |||||
| Other non-current assets | 2 | 9 | |||||
| Total assets | $ | 245 | $ | 1,568 | |||
| Accounts payable | $ | 37 | $ | 140 | |||
| Accrued and other current liabilities | 17 | 158 | |||||
| Other liabilities | 2 | 22 | |||||
| Total liabilities | $ | 56 | $ | 320 | |||
4. Restructuring and Other Charges (Credits), Net
Restructuring and other charges (credits), net, during the years ended September 29, 2006, September 30, 2005 and 2004 are as follows ($ in millions):
| | 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Electronics | $ | 13 | $ | (10 | ) | $ | (35 | ) | ||
| Fire and Security | 9 | 9 | 175 | |||||||
| Healthcare | — | 3 | 11 | |||||||
| Engineered Products and Services | 1 | 5 | 53 | |||||||
| Corporate | 3 | (1 | ) | 6 | ||||||
| 26 | 6 | 210 | ||||||||
| Inventory charges in cost of sales | (6 | ) | (1 | ) | (6 | ) | ||||
| Restructuring and other charges, net | $ | 20 | $ | 5 | $ | 204 | ||||
20062007 Charges and Credits
During 2006,the first quarter of 2007, the Company recorded netlaunched a restructuring program across the segments including the corporate organization which will streamline some of the businesses and reduce the operational footprint. The Company expects to incur charges related to the program of $26approximately $350 million including $6to $400 million through the end of 2008.
The restructuring program includes numerous actions which are designed to improve operating efficiency and strengthen the Company's competitive position in the future. To date, many of the actions initiated relate to improving field efficiencies and consolidating certain administrative functions in the European operations of ADT Worldwide and Fire Protection Services. In addition, Corporate consolidated certain headquarter functions. The restructuring actions were largely reductions in workforce and are expected to be completed by the end of 2008.
Net restructuring and asset impairment charges during 2007 were $217 million, which include $7 million reflected in cost of sales for the non-cash write down in carrying value of inventory. RestructuringThe remaining charge is comprised of restructuring charges of $199 million, which include $183 million of employee severance and benefits and $16 million of facility exit charges and other cash charges, and $15 million of asset impairments. During 2007, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $4 million of restructuring reserves as a restructuring credit.
During 2007, the Company paid $59 million related to actions initiated in 2007 and has $127 million accrued related to these actions as of September 28, 2007.
Activity in the Company's 2007 restructuring reserves related to actions initiated in 2007 is summarized as follows ($ in millions):
| | Employee Severance and Benefits | Facility Exit Charges | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Charges | $ | 183 | $ | 15 | $ | 198 | ||||
| Reversals | (1 | ) | — | (1 | ) | |||||
| Utilization | (53 | ) | (6 | ) | (59 | ) | ||||
| Reclass/transfers | (15 | ) | (1 | ) | (16 | ) | ||||
| Currency translation | 5 | — | 5 | |||||||
| Balance at September 28, 2007 | $ | 119 | $ | 8 | $ | 127 | ||||
2006 Charges and Credits
During 2006, the Company recorded net restructuring and asset impairment charges during 2006 were $39of $13 million, which includes $27$11 million of employee severance and $12benefits and $2 million of facility exit costs and other charges. Theseasset impairments. The restructuring charges related to several restructuring actions and facility exit plans which were initiated in 2006 for $30$16 million as well as costs incurred in 2006 related to actions initiated prior to 2006 for $9$2 million. During 2006, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $15$7 million of restructuring reserves. The Company also recorded other non-cash credits of $4 million related to the Electronics segment. Most of the restructuring initiatives undertaken during 2006 as well as actions taken in prior periods, which impact restructuring charges incurred during 2006, relate to the ElectronicsADT Worldwide and Fire and SecuritySafety Products segments.
During 2006,Through 2007, the Company paid $21$14 million related to these actions and has $9$1 million accrued as of September 29, 2006.28, 2007.
2005 Charges and Credits
During 2005, the Company recorded restructuring and asset impairment charges of $6$18 million, including $1 million reflected in cost of sales for the non-cash write down in carrying value of inventory. RestructuringThe remaining charge is comprised of restructuring charges during 2005 were $48of $28 million, which includes $22$13 million of employee severance and benefits, $15$11 million of facility exit costscharges and $11$4 million of other costs.charges. These charges related to several restructuring actions and facility exit plans which were initiated in 2005 as well as incremental costs incurred in 2005 related to actions initiated during 2004. Of these charges, $22$13 million related to actions initiated and completed in 2005 while the remaining $27$15 million related to actions which commenced prior to 2005. During 2005, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $23$11 million of restructuring reserves as a restructuring credit. In addition, the Company also sold assets which were previously written down to their net realizable value in prior years for amounts greater than originally estimated and recorded related gains as restructuring credits of $20 million. The restructuring credits were mainly incurred by Electronics.
The $22 million of charges for 2005 restructuring initiatives were largely a result of actions taken by ElectronicsFlow Control, Safety Products and Fire and SecurityADT Worldwide segments which incurred employee severance and benefits of $9$4 million, $3 million and $6$3 million, respectively. Through 2006,2007, the Company has substantially paid these obligations and the Company has less than $1 million accrued as of September 29, 2006. In addition, during 2005, the Company transferred $4 million of severance liabilities from liabilities held for sale, which resulted from the sale of TGN, that has also been substantially paid at September 29, 2006.28, 2007.
2004 Charges and Credits
Activity in the Company's 2004 restructuring reserves is summarized as follows ($ in millions):
| | Employee Severance and Benefits | Facilities Exit Costs | Other | Non-cash Charges | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Charges | $ | 196 | $ | 60 | $ | 22 | $ | 6 | $ | 284 | ||||||
| Utilization | (88 | ) | (15 | ) | (19 | ) | (6 | ) | (128 | ) | ||||||
| Credits | (8 | ) | — | — | — | (8 | ) | |||||||||
| Currency translation | 1 | 1 | — | — | 2 | |||||||||||
| Balance at September 30, 2004 | 101 | 46 | 3 | — | 150 | |||||||||||
| Charges | 6 | 7 | 6 | — | 19 | |||||||||||
| Utilization | (77 | ) | (21 | ) | (7 | ) | — | (105 | ) | |||||||
| Credits | (13 | ) | — | — | — | (13 | ) | |||||||||
| Currency translation | 1 | — | — | — | 1 | |||||||||||
| Balance at September 30, 2005 | 18 | 32 | 2 | — | 52 | |||||||||||
| Charges | — | 1 | — | 1 | ||||||||||||
| Utilization | (11 | ) | (7 | ) | (1 | ) | — | (19 | ) | |||||||
| Credits | (3 | ) | (1 | ) | — | — | (4 | ) | ||||||||
| Reclass/transfers | — | (1 | ) | (1 | ) | — | (2 | ) | ||||||||
| Balance at September 29, 2006 | $ | 4 | $ | 24 | $ | — | $ | — | $ | 28 | ||||||
During 2004, the Company approved and announced to employees various plans to exit 181 facilities primarily in the United States. These plans included the termination of approximately 8,616 employees resulting in restructuring charges totaling $284 million, including $6 million reflected in cost of sales for the non-cash write-down in carrying value of inventory, $196 million for employee severance and benefits, $60 million for facility exit costs and $22 million for other related cost. Through September 29, 2006, a total of $176 million, $43 million and $27 million related to employee severance and benefits, facilities exit costs and other, respectively, had been expended related to these plans. Through September 29, 2006, the Company completed certain activities related to these plans for amounts less than originally estimated, and accordingly the Company reversed $25 million of restructuring reserves as a restructuring credit.
During 2004, the Company also sold certain cable-laying sea vessels and other assets that were written down to their expected net realizable value in prior years for amounts greater than originally estimated and recorded related gains as restructuring credits of $40 million. During 2004, the Company also completed certain restructuring activities announced in prior years for amounts less than originally estimated, and accordingly the Company reversed $34 million of restructuring reserves as a restructuring credit.
Restructuring and other charges (credits), net recorded by each segment were as follows:
During 2004, Fire and Security recorded restructuring charges of $184 million related to 2004 restructuring plans, including $4 million reflected in cost of sales for the non-cash write down in carrying value of inventory. Additionally, Fire and Security completed certain restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $9 million of restructuring reserves as a restructuring credit.
During 2004, Electronics recorded restructuring charges of $15 million related to 2004 restructuring plans, including $1 million reflected in cost of sales for the non-cash write-down in
carrying value of inventory. Additionally, during 2004, Electronics sold certain cable-laying sea vessels and other assets that were impaired in prior years for amounts greater than originally anticipated and recorded the related gain as a restructuring credit of $34 million. Electronics also completed certain restructuring activities for amounts less than originally estimated, and accordingly reversed $16 million of restructuring reserves as a restructuring credit.
During 2004 Healthcare recorded restructuring charges of $13 million related to 2004 restructuring plans. Additionally, Healthcare completed restructuring activities announced in prior years for amounts less than originally anticipated, and accordingly reversed $2 million of restructuring reserves as a credit.
During 2004, Engineered Products and Services recorded restructuring charges of $55 million related to 2004 restructuring plans including $1 million reflected in cost of sales for the non-cash write-down in carrying value of inventory. Additionally, Engineered Products and Services completed certain restructuring activities for amounts less than originally anticipated, and accordingly reflected $2 million as a restructuring credit during 2004.
During 2004, Corporate recorded restructuring charges of $17 million related to the 2004 restructuring plans. In addition, Corporate completed certain restructuring activities announced in prior years for amounts less than originally anticipated, and accordingly reversed $7 million of restructuring reserves as a restructuring credit. In addition, during 2004, Corporate sold certain TGN assets that were written down to their expected net realizable value in prior years for amounts greater than originally anticipated and recorded the related gain as a restructuring credit of $4 million.
2003 and Prior Charges and Credits
The Company continues to maintain restructuring reserves related to certain actions initiated prior to 2004.2005. The total amount of these reserves are $69$21 million and $82$30 million at September 29, 200628, 2007 and September 30, 2005,29, 2006, respectively. These balances primarily include facility exit costs for long-term non-cancelable lease obligations within the Electronics segment,ADT Worldwide and Fire Protection Services segments, with expiration dates which range from 2008 to 2022.
Total Restructuring Reserves
Restructuring reserves from September 29, 2006 to September 28, 2007 by the year in which the restructuring action was initiated are as follows ($ in millions):
| | Year of Restructuring Action | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | Prior | Total | |||||||
| Balance at September 29, 2006 | $ | — | $ | 34 | $ | 34 | ||||
| Charges | 198 | 1 | 199 | |||||||
| Reversals | (1 | ) | (3 | ) | (4 | ) | ||||
| Utilization | (59 | ) | (11 | ) | (70 | ) | ||||
| Reclass/transfers | (16 | ) | — | (16 | ) | |||||
| Currency translation | 5 | 1 | 6 | |||||||
| Balance at September 28, 2007 | $ | 127 | $ | 22 | $ | 149 | ||||
Restructuring reserves by segment at September 29, 200628, 2007 and September 30, 200529, 2006 are as follows ($ in millions):
| | 2006 | 2005 | ||||
|---|---|---|---|---|---|---|
| Electronics | $ | 71 | $ | 81 | ||
| Fire and Security | 28 | 45 | ||||
| Healthcare | — | 1 | ||||
| Engineered Products and Services | 5 | 9 | ||||
| Corporate | 3 | 3 | ||||
| Restructuring reserves | $ | 107 | $ | 139 | ||
| | 2007 | 2006 | ||||
|---|---|---|---|---|---|---|
| ADT Worldwide | $ | 72 | $ | 20 | ||
| Fire Protection Services | 33 | 6 | ||||
| Flow Control | 13 | 2 | ||||
| Safety Products | 10 | 2 | ||||
| Electrical and Metal Products | 6 | 1 | ||||
| Corporate and Other | 15 | 3 | ||||
| $ | 149 | $ | 34 | |||
At September 29, 200628, 2007 and September 30, 2005,29, 2006, restructuring reserves were included in the Company's Consolidated Balance Sheets as follows ($ in millions):
| | 2006 | 2005 | 2007 | 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued and other current liabilities | $ | 33 | $ | 52 | $ | 125 | $ | 16 | ||||
| Other liabilities | 74 | 87 | 24 | 18 | ||||||||
| Restructuring reserves | $ | 107 | $ | 139 | ||||||||
| $ | 149 | $ | 34 | |||||||||
5. Impairment of Long-Lived Assets
During 2006 and 2005, there were no significant charges in continuing operations related to the impairment of long-lived assets.
During 2004, the Company recorded total charges in continuing operations for the impairment of long-lived assets of $52 million. Fire and Security recorded charges of $34 million primarily related to the write-down of a United States facility to its estimated fair value, and to a lesser extent, to the write-off of cash management software. In addition, Corporate, Engineered Products and Services, Electronics and Healthcare recorded combined charges of $18 million related to the impairment of property, plant and equipment.
6.4. Acquisitions
Acquisitions
During 2006, Tyco's Healthcare segment acquired over 90% ownership2007, cash paid for acquisitions included in Floreane Medical Implants, S.A. ("Floreane") for approximately $123 million in cash, net of cash acquired of $3continuing operations, primarily within ADT Worldwide, Safety Products and Flow Control, totaled $31 million. Floreane is an innovator in the development of surgical support implants for parietal, urological and gynecological surgery. The remaining outstanding shares would be acquired if they become available. The Company recorded a $3 million in-process research and development charge in conjunction with the acquisition.
During 2006, Tyco's Healthcare segment also acquired over 50% ownership of Airox S.A. ("Airox") for approximately $59 million, net of cash acquired of $4 million. Airox is a leading European company in the home respiratory ventilation systems business. Tyco expects to acquire the remaining Airox shares in a mandatory tender offer. The initial share purchase and the subsequent tender offer combined are expected to total approximately $108 million. The Company has also recorded an $11 million in-process research and development charge in conjunction with the acquisition. The charge relates to the development of second generation technology which has not yet obtained regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use.
During 2006, Tyco's Healthcare segment also acquired Confluent Surgical, Inc. ("Confluent"). The total purchase price is expected to be $246 million. As of September 29, 2006, the Company has paid approximately $200 million in cash, net of cash acquired of $12 million. The Company has also deposited approximately $34 million of the total purchase price into an escrow account related to closing balance sheet adjustments and certain indemnifications to be resolved through fiscal 2008. The Company recorded a $49 million in-process research and development charge in conjunction with the acquisition related to technology which Confluent is developing for numerous applications across several surgical disciplines which have not yet received regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use.
Cash paid for other acquisitions by businesses included in continuing operations during 2006 and 2005 totaled $31$5 million net of $8and $6 million, cash acquired.
In July 2005, Tyco's Healthcare segment acquired Vivant Medical Inc. ("Vivant"), a developer of microwave ablation medical technology. The transaction is valued at approximately $66 million cash, with up to approximately $35 million additional cash to be paid in the future based on achieving certain milestones.
Cash paid, net of cash acquired, for various other acquisitions totaled $16 million.
During 2004, the Company completed the acquisition of two businesses within Engineered Products and Services and Fire and Security for an aggregate cost of $9 million.respectively.
These acquisitions were funded utilizing cash from operations. The results of operations of the acquired companies have been included in Tyco's consolidated results from the respective acquisition dates. These acquisitions did not have a material effect on the Company's financial position, results of operations or cash flows.
Acquisition Liabilities
At September 29, 200628, 2007 and September 30, 2005,29, 2006, acquisition liabilities were included in the Company's Consolidated Balance Sheets as follows ($ in millions):
| | 2006 | 2005 | 2007 | 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued and other current liabilities | $ | 14 | $ | 24 | $ | 4 | $ | 7 | ||||
| Other liabilities | 26 | 46 | 10 | 11 | ||||||||
| $ | 40 | $ | 70 | $ | 14 | $ | 18 | |||||
Acquisition liabilities were established in connection with acquisitions in 2002relate to facility exit costs, employee severance and priorbenefits, distributor and relate primarily to long-term non-cancelable lease obligations.supplier cancellation fees and other costs. The Company paid $17$5 million, $30$5 million and $54$9 million to fund acquisition liabilities during 2007, 2006 2005 and 2004, respectively. Of the total cash paid, $1 million and $2 million was reported in discontinued operations in 2005, and 2004, respectively.
Holdback Liabilities
The Company paid cash of approximately $84$5 million, $18$2 million and $53$5 million during 2007, 2006 2005 and 2004,2005, respectively, relating to holdback liabilities related to certain prior period acquisitions. Of the total cash paid, $82 million, $0 and $1 million, respectively, was reported in discontinued operations. Holdback liabilities represent a portion of the purchase price withheld from the seller pending finalization of the acquisition balance sheet and other contingencies. Certain acquisitions have provisions that would require Tyco to make additional payments to the sellers if the acquired company achieves certain milestones subsequent to its acquisition by Tyco. These payments are tied to certain performance measures, such as revenue, gross margin or earnings growth and are generally treated as additional purchase price.
At September 29, 200628, 2007 and September 30, 2005,29, 2006, holdback liabilities were included in the Company's Consolidated Balance Sheets as follows ($ in millions):
| | 2006 | 2005 | 2007 | 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued and other current liabilities | $ | 23 | $ | 79 | $ | — | $ | 7 | ||||
| Other liabilities | 89 | 69 | 16 | 9 | ||||||||
| $ | 112 | $ | 148 | $ | 16 | $ | 16 | |||||
Approximately $53 million and $134 million of the total holdback liabilities at September 29, 2006 and September 30, 2005, respectively, are retained liabilities of discontinued operations.
ADT Dealer Program
During 2007, 2006 2005 and 2004,2005, Tyco paid $409 million, $373 million $328 million and $254$328 million of cash, respectively, to acquire approximately 415,000, 401,000 364,000 and 302,000364,000 customer contracts for electronic security services through the ADT dealer program.
7.5. Other Expense, Net
Other expense, net was $255 million in 2007 and $296 million in 2005. During 2006,2007, other expense, net consisted primarily of a $259 million loss relatingon early extinguishment of debt incurred in connection with the debt tender offers (see Note 13), for which no tax benefit is available. This charge consists primarily of premiums paid and the write-off of unamortized debt issuance costs and discounts. The total loss on early extinguishment of debt was $647 million, with $259 million included in continuing operations and $388 million allocated to the write-down of certain investments to their net realizable value.Covidien and Tyco Electronics and included in discontinued operations.
During 2005, other expense, net includedconsisted primarily of losses related to the repurchase of outstanding convertible debt prior to its scheduled maturity, partially offset by a loss on$109 million court-ordered restitution award.
During 2005, the retirement of debt. The Company repurchased $1,241 million principal amount of its outstanding 2.75% convertible senior debentures for $1,823 million and $750 million principal amount of its outstanding 3.125% convertible senior debentures for $1,147 million. These repurchases resulted in a $1,013 million loss on the retirement of debt, including the write-off of unamortized debt issuance costs.costs, with $405 included in continuing operations and $608 million allocated to Covidien and Tyco Electronics and included in discontinued operations.
Also duringAdditionally, in September 2005, other expense, net included incomewe were awarded a total of $109$134 million related to a court-orderedas restitution award. On September 12, 2002, indictments were filed in the Supreme Court of the State of New Yorkconnection with our litigation against Mr. L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, and Mr. Mark H. Swartz, our former Chief Financial Officer and director (together, the "Defendants"), alleging enterprise corruption, fraud, conspiracy, grand larceny, falsifying certain business records and other crimes. On June 17, 2005, a jury convicted the Defendants on 22 of 23 counts in the indictment. On September 19, 2005, the Defendants were sentenced in New York State Supreme Court to serve eight and one third years to twenty five years in prison and to make joint restitution to the Company in the amount of $134 million, resulting from the larceny convictions.
Director. The restitution award is comprised of $109 million of previously expensed compensation made to the defendantsDefendants and reported as other expense, net in prior years and $25 million related to a loan receivable from one of the DefendantsMr. L. Dennis Kozlowski which had been and remains reflected in the Company's consolidated financial statementsConsolidated Financial Statements as a receivable. The Defendants have filed a notice of appeal of the convictions. The Company considered the collectibility of the restitution award and assessed the likelihood of the Defendants' success upon appeal of the larceny convictions, which, if successful, could result in a change to the restitution order, and has concluded that receipt of the restitution award is probable. The Court ordered the restitution payment to be made by no later than one year from the date of sentencing. Tyco has initiated the process of collecting the restitution payment owed, subject to the pending appeal. See Note 28—Subsequent Events.
During 2004, other expense, net consisted primarily of a loss on the retirement of debt. The Company repurchased $303 million of its 7.2% notes due 2008 for cash of $341 million, which resulted in a $38 million loss, including the write-off of unamortized debt issuance costs. Additionally,2007, the Company repurchased $517 million of its outstanding 2.75% convertible senior debentures with a 2008 put option. The total purchase price paid was $750 million and the repurchase resulted in a $241 million loss on the retirement of debt, including the write-off of unamortized debt issuance costs.received payment for these amounts.
Significant components of income tax provision for each year2007, 2006 and 2005 are as follows ($ in millions):
| | | 2006 | 2005 (Restated) | 2004 (Restated) | | 2007 | 2006 | 2005 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current: | Current: | Current: | |||||||||||||||||||||
| United States: | United States: | ||||||||||||||||||||||
| Federal | $ | (157 | ) | $ | 630 | $ | 504 | Federal | $ | 100 | $ | 62 | $ | (123 | ) | ||||||||
| State | (50 | ) | 66 | 9 | State | 36 | (17 | ) | 7 | ||||||||||||||
| Non-U.S. | 744 | 728 | 507 | Non-U.S. | 171 | 345 | 222 | ||||||||||||||||
| Current income tax provision | 537 | 1,424 | 1,020 | Current income tax provision | 307 | 390 | 106 | ||||||||||||||||
Deferred: | Deferred: | Deferred: | |||||||||||||||||||||
| United States: | United States: | ||||||||||||||||||||||
| Federal | 408 | (227 | ) | 14 | Federal | 96 | 78 | 56 | |||||||||||||||
| State | 36 | 4 | 31 | State | 3 | (8 | ) | (27 | ) | ||||||||||||||
| Non-U.S. | (182 | ) | (89 | ) | 47 | Non-U.S. | (72 | ) | (150 | ) | (106 | ) | |||||||||||
| Deferred income tax provision | 262 | (312 | ) | 92 | Deferred income tax provision | 27 | (80 | ) | (77 | ) | |||||||||||||
| $ | 799 | $ | 1,112 | $ | 1,112 | $ | 334 | $ | 310 | $ | 29 | ||||||||||||
Non-U.S. (loss) income from continuing operations before income taxes was $3,560$(2,572) million, $2,516$1,052 million and $3,340$402 million for 2007, 2006 2005 and 2004,2005, respectively.
The reconciliation between U.S. federal income taxes at the statutory rate and the Company's provision for income taxes on continuing operations for the years ended September 28, 2007, September 29, 2006, and September 30, 2005 and 2004 is as follows ($ in millions):
| | | 2006 | 2005 (Restated) | 2004 (Restated) | | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Notional U.S. federal income tax expense at the statutory rate | $ | 1,709 | $ | 1,458 | $ | 1,398 | ||||||||||||||||
| Notional U.S. federal income tax (benefit) expense at the statutory rate | Notional U.S. federal income tax (benefit) expense at the statutory rate | $ | (763 | ) | $ | 397 | $ | 214 | ||||||||||||||
| Adjustments to reconcile to the income tax provision: | Adjustments to reconcile to the income tax provision: | Adjustments to reconcile to the income tax provision: | ||||||||||||||||||||
| U.S. state income tax (benefit) provision, net | 46 | 48 | 40 | U.S. state income tax provision, net | 23 | 35 | 26 | |||||||||||||||
| Asset impairments | 22 | (109 | ) | (19 | ) | Non-U.S. net earnings(1) | (55 | ) | (207 | ) | (221 | ) | ||||||||||
| Non-U.S. net earnings (1) | (557 | ) | (577 | ) | (651 | ) | Nondeductible charges | 1,176 | 83 | 45 | ||||||||||||
| Nondeductible charges | 34 | 321 | 289 | Valuation allowance | (129 | ) | 39 | (134 | ) | |||||||||||||
| Valuation allowance | (187 | ) | (284 | ) | (6 | ) | Loss on retirement of debt | 91 | (98 | ) | 155 | |||||||||||
| Loss on retirement of debt | (243 | ) | 354 | 98 | Other | (9 | ) | 61 | (56 | ) | ||||||||||||
| Other | (25 | ) | (99 | ) | (37 | ) | ||||||||||||||||
| Provision for income taxes | $ | 334 | $ | 310 | $ | 29 | ||||||||||||||||
| Provision for income taxes | $ | 799 | $ | 1,112 | $ | 1,112 | ||||||||||||||||
Included in non-deductiblethe nondeductible charges for 20062007 is the class action settlement, net of $2.862 billion. Additionally, the nondeductible charges include $105 million associated with Separation costs which were not fully deductible as well as a $127 million favorable adjustmentwrite-off of deferred tax assets in entities that were liquidated as part of the Separation. The loss on retirement of debt includes charges related to the early extinguishment of debt of $259 million for which no tax benefit is available. The valuation allowance benefit includes a correction to 2005 tax reserves on legacy tax matters and a $31impact of $72 million unfavorable adjustment associated with proposed correctionsidentification of tax planning to prior period incomeensure realization of certain deferred tax returns.assets as well as a net benefit of $51 million associated with changes in valuation allowances driven primarily by increased profitability in certain jurisdictions.
Included in the loss on retirement of debt in 2006 is a cumulative one-time benefit of $243 million associated with the receipt of a
favorable tax ruling in the fourth quarter of 2006 permitting the deduction of prior year debt retirement costs.costs not previously benefited. This benefit is partially offset by an increaseda valuation allowance of $173 million relating toon the deferred tax asset associated with net operating losses created by the debt retirement deductions. This $173 million is reflected on the valuation allowance line in the table above.
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax asset at September 29, 200628, 2007 and September 30, 2005, as restated,29, 2006 are as follows ($ in millions):
| | | 2006 | 2005 (Restated) | | 2007 | 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | ||||||||||||||
| Accrued liabilities and reserves | $ | 993 | $ | 1,432 | Accrued liabilities and reserves | $ | 382 | $ | 379 | |||||||
| Tax loss and credit carryforwards | 3,293 | 3,170 | Tax loss and credit carryforwards | 1,433 | 1,567 | |||||||||||
| Inventories | 150 | 154 | Postretirement benefits | 257 | 287 | |||||||||||
| Postretirement benefits | 486 | 587 | Deferred revenue | 271 | 259 | |||||||||||
| Deferred revenue | 266 | 225 | Other | 338 | 545 | |||||||||||
| Other | 465 | 584 | ||||||||||||||
| 2,681 | 3,037 | |||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | 5,653 | 6,152 | Deferred tax liabilities: | ||||||||||||
| Property, plant and equipment | (651 | ) | (788 | ) | ||||||||||||
| Property, plant and equipment | (555 | ) | (513 | ) | Intangibles assets | (270 | ) | (205 | ) | |||||||
| Intangibles assets | (867 | ) | (784 | ) | Other | (219 | ) | (218 | ) | |||||||
| Other | (60 | ) | (230 | ) | ||||||||||||
| (1,140 | ) | (1,211 | ) | |||||||||||||
| (1,482 | ) | (1,527 | ) | |||||||||||||
| Net deferred tax asset before valuation allowance | Net deferred tax asset before valuation allowance | 4,171 | 4,625 | Net deferred tax asset before valuation allowance | 1,541 | 1,826 | ||||||||||
| Valuation allowance | Valuation allowance | (1,731 | ) | (1,871 | ) | Valuation allowance | (666 | ) | (800 | ) | ||||||
| Net deferred tax asset | $ | 2,440 | $ | 2,754 | Net deferred tax asset | $ | 875 | $ | 1,026 | |||||||
At September 29, 2006,28, 2007, the Company had $5,673$3,584 million of net operating loss carryforwards in certain non-U.S. jurisdictions. Of these, $3,747$2,581 million have no expiration, and the remaining $1,926$1,003 million will expire in future years through 2016.2027. Due to a favorable tax ruling in the fourth quarter of 2006, the Company was able to recognize $1,157$98 million of net operating loss carryforwards associated with deduction of debt retirement costs. In the U.S., there were approximately $5,133$1,292 million of federal and $4,675$1,715 million of state net operating loss carryforwards at September 29, 2006,28, 2007, which will expire in future years through 2026.2027.
The valuation allowance for deferred tax assets of $1,731$666 million and $1,871$800 million at September 29, 200628, 2007 and September 30, 2005,29, 2006, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, "Accounting"Accounting for Income Taxes," which requires that a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. At September 29, 2006,28, 2007, approximately $153$123 million of the valuation allowance will ultimately reduce goodwill if the net operating losses are utilized.
The Company and its subsidiaries' income tax returns periodically are periodically examined by various tax authorities. See "Income Taxes" in Note 18.16.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Further, management has reviewed with tax counsel certain of the issues raised by these taxing authorities and the adequacy of these recorded amounts. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not expected within one year.
Except for earnings that are currently distributed, no additional material provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of the distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
See "Income Taxes" in Note 16 for information related to the Tax Sharing Agreement with Covidien and Tyco Electronics.
9.7. Cumulative Effect of Accounting Change
During 2006, the Company adopted FIN No. 47. Accordingly,47,"Accounting for Conditional Asset Retirement Obligations—an Interpretation of FASB Statement No. 143." FIN No. 47 clarifies the Company has recognizedtiming of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 requires that conditional asset retirement obligations, along with the associated capitalized asset retirement costs, be initially reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and property, plant and equipment, netan increase of $10 million in its Consolidated Balance Sheet at September 29, 2006. In addition, the Company recordedcarrying amount of the related assets, of which $19 million and $5 million are reflected in liabilities and assets of discontinued operations, respectively. The initial recognition resulted in a cumulative effect of accounting change which resulted in aof $14 million after-tax loss ($22 million pre-tax). Refer to Note 1 for additional information on, reflecting the accumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47.47 been in effect at the time.
During 2005, the Company changed the measurement date for its pension and postretirement benefit plans, from September 30th to August 31st, effective October 1, 2004. The Company believes that the one-month change of measurement date is a preferable change as it allows management adequate time to evaluate and report the actuarial information in the Company's Consolidated
Financial Statements under the accelerated reporting deadlines. As a result of this change, the Company recorded a $21 million after-tax gain ($28 million pre-tax) cumulative effect of accounting change. Refer to Note 19 for additional information on retirement plans.
10.8. Earnings Per Share
As discussed in Note 1, the Company effected a reverse stock split of Tyco's common shares, at a split ratio of one for four. Share and per share data for all periods presented have been adjusted to reflect the reverse stock split.
The reconciliations between basic and diluted earnings per share for 2007, and 2006 and 2005 and 2004, as restated, are as follows ($ in millions, except per share data):
| | 2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| | | | | | (Restated) | | (Restated) | (Restated) | (Restated) | (Restated) | | Loss | Shares | Per Share Amount | Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | ||||||||||||||||||||||||||||||
| Basic earnings per share: | Basic earnings per share: | Basic earnings per share: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 4,075 | 2,010 | $ | 2.03 | $ | 3,044 | 2,012 | $ | 1.51 | $ | 2,869 | 2,001 | $ | 1.43 | (Loss) income from continuing operations | $ | (2,519 | ) | 495 | $ | (5.09 | ) | $ | 823 | 503 | $ | 1.64 | $ | 581 | 503 | $ | 1.15 | |||||||||||||||||
| Share options, restricted share awards and deferred stock units | — | 16 | — | 17 | — | 14 | Share options, restricted share awards and deferred stock units | — | — | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||
| Exchange of convertible debt | 31 | 58 | 74 | 138 | 113 | 205 | Exchange of convertible debt | — | — | 12 | 14 | 30 | 35 | |||||||||||||||||||||||||||||||||||||
| Diluted earnings per share: | Diluted earnings per share: | Diluted earnings per share: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations, giving effect to dilutive adjustments | $ | 4,106 | 2,084 | $ | 1.97 | $ | 3,118 | 2,167 | $ | 1.44 | $ | 2,982 | 2,220 | $ | 1.34 | (Loss) income from continuing operations, giving effect to dilutive adjustments | $ | (2,519 | ) | 495 | $ | (5.09 | ) | $ | 835 | 521 | $ | 1.60 | $ | 611 | 542 | $ | 1.13 | |||||||||||||||||
The computation of diluted earnings per share prior to the Separation, includes the impact of equity instruments which were converted to give effect to the distribution, in 2007, 2006 2005 and 20042005 excludes the effect of the potential exercise of options to purchase approximately 8529 million, 7221 million and 6718 million shares, respectively, because the effect would be anti-dilutive. Additionally, the computation of diluted earnings per common share for 2007 excludes the impact of convertible debt of approximately 6 million shares because the effect would be anti-dilutive.
The computation of diluted earnings per share in 2007 excludes restricted share awards and deferred stock units of approximately 5 million because the effect would be anti-dilutive. The computation of diluted earnings per share in 2006 and 2005 excludes restricted share awards of approximately 62 million and 21 million, respectively, because the effect would be anti-dilutive.
11.9. Sale of Accounts Receivable
Historically, Tyco utilized several programs under which it sold participating interests in accounts receivable to investors who, in turn, purchased and received ownership and security interests in those receivables. These transactions qualified as true sales. TheCertain of Tyco's international businesses utilize the sale proceeds were less than the face amount of accounts receivable sold, and the discount from the face amount was included in selling, general and administrative expenses in the Consolidated Statements of Income. Such discount aggregated $18 million, or 3.1% of the weighted-average balance of the receivables outstanding, during 2004.
During 2004, the Company reduced outstanding balances under its accounts receivable programs by $929 million, of which $812 million related to its corporate accounts receivable programs which were terminated in 2005. No amounts were utilized under these programs at September 30, 2004, and through the date of termination. The remaining reduction of $117 million related to certain of the Company's international businesses selling fewer accounts receivable as a short-term financing mechanism.mechanisms. The aggregate amount outstanding under the Company's remaining international accounts receivable programs was $76 million, $75 million and $80$79 million at September 28, 2007, September 29, 2006 and September 30, 2005, respectively.
12.10. Investments
At September 29, 200628, 2007 and September 30, 2005,29, 2006, Tyco had available-for-sale investments with a fair market value of $318$352 million and $265$334 million and a cost basis of $323$352 million and $268$337 million,
respectively. These investments consist primarily of debt securities and are included in prepaid expenses and other current assets and other assets within the Consolidated Balance Sheets. As of September 29, 2006, $6128, 2007, $117 million of these debt securities were due to mature within one year, with the remainder substantially due in one to five years. The unrealized gains and losses related to these investments are immaterial and have been included as a separate component of shareholders' equity.
13.11. Goodwill and Intangible Assets
TheIn connection with the Separation, during the third quarter of 2007 Tyco reorganized into a new management and segment reporting structure. As part of these organizational changes, inthe Company assessed new reporting units and conducted valuations to determine the assignment of goodwill to the new reporting units based on their estimated relative fair values. Following the relative fair value goodwill allocation, the Company then tested goodwill for impairment by comparing the fair value of each reporting unit with its carrying value amount. If the carrying amount of a reporting unit exceeded its fair value, goodwill for 2006was considered potentially impaired. Where goodwill was potentially impaired, the Company compared the implied fair value of the reporting unit goodwill to the carrying amount of that goodwill. The carrying amount of goodwill exceeded the implied fair value of goodwill in the Australia and 2005New Zealand Security Services business, part of the ADT Worldwide segment. As a result, the Company recognized a goodwill impairment of $46 million in the third quarter of 2007.
In determining fair value, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and market place data. There are as follows ($ in millions):
| | Electronics | Fire and Security | Healthcare | Engineered Products and Services | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at September 30, 2004 | $ | 7,433 | $ | 8,078 | $ | 6,123 | $ | 3,166 | $ | 24,800 | ||||||
| Purchase accounting adjustments(1) | (34 | ) | (54 | ) | (161 | ) | 2 | (247 | ) | |||||||
| Acquisitions | 2 | 4 | 12 | — | 18 | |||||||||||
| Divestitures | — | (5 | ) | — | — | (5 | ) | |||||||||
| Held for sale | — | (2 | ) | — | — | (2 | ) | |||||||||
| Currency translation | (6 | ) | 11 | (1 | ) | (11 | ) | (7 | ) | |||||||
| Balance at September 30, 2005 | 7,395 | 8,032 | 5,973 | 3,157 | 24,557 | |||||||||||
| Purchase accounting adjustments(1) | — | (63 | ) | (15 | ) | 3 | (75 | ) | ||||||||
| Acquisitions | 6 | 9 | 151 | 1 | 167 | |||||||||||
| Divestitures | — | (7 | ) | (12 | ) | — | (19 | ) | ||||||||
| Currency translation | 22 | 113 | 16 | 77 | 228 | |||||||||||
| Balance at September 29, 2006 | $ | 7,423 | $ | 8,084 | $ | 6,113 | $ | 3,238 | $ | 24,858 | ||||||
There were no goodwill impairments related to continuing operations during 2006 2005 and 2004.2005.
The changes in the carrying amount of goodwill for 2007 and 2006 are as follows ($ in millions):
| | Total | |||
|---|---|---|---|---|
| Balance at September 30, 2005 | $ | 11,161 | ||
| Purchase accounting adjustments | (60 | ) | ||
| Acquisitions | 9 | |||
| Divestitures | (7 | ) | ||
| Currency translation | 190 | |||
| Balance at September 29, 2006 | 11,293 | |||
| Purchase accounting adjustments | 5 | |||
| Acquisitions | 16 | |||
| Divestitures | (5 | ) | ||
| Impairments | (46 | ) | ||
| Currency translation | 428 | |||
| Balance at September 28, 2007 | $ | 11,691 | ||
The changes in the carrying amount of goodwill from the reallocation in the third quarter of 2007 to September 28, 2007 was as follows ($ in millions):
| | ADT Worldwide | Fire Protection Services | Flow Control | Safety Products | Electrical and Metal Products | Corporate and Other | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, as reallocated on March 31, 2007 | $ | 4,992 | $ | 1,474 | $ | 1,917 | $ | 2,058 | $ | 1,047 | $ | 60 | $ | 11,548 | |||||||
| Less: goodwill impairment | 46 | — | — | — | — | — | 46 | ||||||||||||||
| Balance at June 29, 2007 | 4,946 | 1,474 | 1,917 | 2,058 | 1,047 | 60 | 11,502 | ||||||||||||||
| Purchase accounting adjustments | 4 | (1 | ) | — | 11 | — | — | 14 | |||||||||||||
| Acquisitions | 1 | — | — | — | — | — | 1 | ||||||||||||||
| Currency translation | 74 | 22 | 58 | 13 | 7 | — | 174 | ||||||||||||||
| Balance at September 28, 2007 | $ | 5,025 | $ | 1,495 | $ | 1,975 | $ | 2,082 | $ | 1,054 | $ | 60 | $ | 11,691 | |||||||
Intangible assets, net were $5,128$2,697 million and $5,085$2,730 million at September 29, 20062007 and September 30, 2005,29, 2006, respectively. The following table sets forth the gross carrying amount and
accumulated amortization of the Company's intangible assets at September 29, 200628, 2007 and September 30, 200529, 2006 ($ in millions):
| | | September 29, 2006 | September 30, 2005 | | September 28, 2007 | September 29, 2006 | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Gross Carrying Amount | Accumulated Amortization | Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted Average Amortization Period | | Gross Carrying Amount | Accumulated Amortization | Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted Average Amortization Period | ||||||||||||||||||||
| Amortizable: | Amortizable: | Amortizable: | ||||||||||||||||||||||||||||||||
| Contracts and related customer relationships | $ | 5,319 | $ | 3,046 | 12 years | $ | 4,974 | $ | 2,638 | 12 years | Contracts and related customer relationships | $ | 5,808 | $ | 3,565 | 14 years | $ | 5,251 | $ | 3,028 | 12 years | |||||||||||||
| Intellectual property | 3,213 | 1,169 | 20 years | 2,921 | 992 | 20 years | Intellectual property | 542 | 354 | 15 years | 518 | 295 | 14 years | |||||||||||||||||||||
| Other | 200 | 70 | 28 years | 211 | 70 | 27 years | Other | 20 | 14 | 11 years | 15 | 9 | 11 years | |||||||||||||||||||||
| Total | Total | $ | 8,732 | $ | 4,285 | 16 years | $ | 8,106 | $ | 3,700 | 16 years | Total | $ | 6,370 | $ | 3,933 | 14 years | $ | 5,784 | $ | 3,332 | 12 years | ||||||||||||
| Non-Amortizable: | Non-Amortizable: | Non-Amortizable: | ||||||||||||||||||||||||||||||||
| Intellectual property | $ | 653 | $ | 652 | Intellectual property | $ | 255 | $ | 264 | |||||||||||||||||||||||||
| Other | 28 | 27 | Other | 5 | 14 | |||||||||||||||||||||||||||||
| Total | Total | $ | 681 | $ | 679 | Total | $ | 260 | $ | 278 | ||||||||||||||||||||||||
Intangible asset amortization expense for 2007, 2006 and 2005 and 2004 was $650$513 million, $653$517 million and $691$528 million, respectively. The estimated aggregate amortization expense on intangible assets currently owned by the Company is expected to be approximately $650 million for 2007, $550$450 million for 2008, $500$400 million for 2009, $400$300 million for 2010, and $350$250 million for 2011.2011 and $200 million for 2012.
See Note 1 for discussion regarding changes in the estimated lives of dealer intangibles.
14.12. Related Party Transactions
The Company has amounts due related to loans and advances issued to employees in prior years under the Company's Key Employee Loan Program, relocation programs and other advances made to executives. Loans were provided to employees under the Company's Key Employee Loan Program, which is now discontinued, except for outstanding loans for the payment of taxes upon the vesting of shares granted under our Restricted Share Ownership Plans. No loans are outstanding to any of our current executives. The loans are not collateralized and bear interest, payable annually, at a rate based on the six-month LIBOR, calculated annually as the average of the 12 rates in effect on the first day of each of the month.preceding 12 months. Loans are generally repayable in ten years; however, earlier payments are required under certain circumstances, such as when an employee is terminated. In addition, the Company made mortgage loans to certain employees under employee relocation programs. These loans are generally payable in 15 years and are collateralized by the underlying property. During 20062007 and 2005,2006, the maximum amount outstanding under these programs was $69$52 million and $70$69 million, respectively. Loans receivable under these programs, as well as other unsecured advances outstanding, were $52$24 million and $68$52 million at September 29, 200628, 2007 and September 30, 2005.29, 2006. The total outstanding loans receivable includes loans to L. Dennis Kozlowski, the Company's former Chairman and Chief Executive Officer (until June 2002). The amount outstanding under these loans, plus accrued interest, was $26 million and $52 million at both September 28, 2007 and $49 million at September 29, 2006, and September 30, 2005, respectively, and the rate of interest charged on such loans was 5.4% and 5.0% for 2007 and 3.2% for 2006, and 2005, respectively. Interest income on these interest bearing loans totaled $2$1 million, $2 million, and $1$2 million in 2007, 2006 2005 and 2004,2005, respectively. Certain of the above loans totaling $30$4 million and $20$30 million at September 28, 2007 and September 29, 2006, and September 30, 2005, respectively, are
non-interest bearing. The total non-interest bearing loans in 2005 include loans to Mark A. Belnick, the Company's former Executive Vice President and Chief Corporate Counsel. The amount outstanding under these loans at September 30, 2005 was $15 million and was repaid in 2006.
During the fourth quarter of 2002, the Board of Directors and new senior management adopted a policy under which no new loans are allowed to be granted to any officers of the Company and existing loans are not allowed to be extended or modified.
During 2007, the Company engaged in commercial transactions in the normal course of business with companies where the Company's Directors were employed and served as officers, including VF Corporation and Rohm and Haas Company. Mackey J. McDonald, a Director who retired effective March 7, 2007, is an executive officer of VF Corporation. Rajiv L. Gupta, a Director, is an executive officer of Rohm and Haas Company. Purchases from other companies noted above during 2007 aggregated less than 1 percent of consolidated net revenue.
During 2006, the Company engaged in commercial transactions in the normal course of business with companies where the Company's Directors were employed and served as officers, including Marsh & McLennan Companies, Inc., VF Corporation and Rohm and Haas Company. Sandra S. Wijnberg, a Director, was an executive officer of Marsh & McLennan Companies, Inc. prior to her resignation from that company on March 31, 2006. Mackey J. McDonald, a Director during such period, is an executive officer of VF Corporation. Rajiv L. Gupta, a Director, is an executive officer of Rohm and Haas Company. Purchases from Marsh & McLennan Companies, Inc. during 2006 were approximately $16 million. Purchases from other companies noted above during 2006 aggregated less than 1 percent of consolidated net revenue.
During 2005, the Company engaged in commercial transactions in the normal course of business with companies where the Company's Directors were employed and served as officers, including Marsh & McLennan Companies, Inc., Brunswick Corporation, VF Corporation and Rohm and Haas Company. Sandra S. Wijnberg, a Director during such period, was an executive officer of Marsh &
McLennan Companies, Inc. George W. Buckley, a Director during such period, was an executive officer of Brunswick Corporation. Mackey J. McDonald, a Director during such period, is an executive officer of VF Corporation. Rajiv L. Gupta, a Director, is an executive officer of Rohm and Haas Company. Purchases from Marsh & McLennan Companies, Inc. during 2005 were approximately $23 million. Purchases from other companies noted above during 2005 aggregated less than 1 percent of consolidated net revenue.
During 2004, the Company engaged in commercial transactions in the normal course of business with companies where the Company's Directors were employed and served as officers, including Marsh & McLennan Companies, Inc., Brunswick Corporation and VF Corporation. Sandra S. Wijnberg, a Director during such period, was an executive officer of Marsh & McClennan Companies, Inc. George W. Buckley, a Director during such period, was an executive officer of Brunswick Corporation. Mackey J. McDonald, a Director, is an executive officer of VF Corporation. Purchases from Marsh & McLennan Companies, Inc. during 2004 were approximately $22 million. Purchases from other companies noted above during 2004 aggregated less than 1 percent of consolidated net revenue.
In 2001, Tyco authorized compensation arrangements to L. Dennis Kozlowski and Mark H. Swartz, the Company's Chief Financial Officer and Director until August 2002. In connection with such arrangements, Tyco purchased executive split dollar life insurance policies for Messrs. Kozlowski and Swartz and entered into a shared ownership agreement with each of them whereby the Company agreed to pay premiums for these insurance policies for an 11-year period beginning in 2001. In 2001, amended policies were executed providing for additional Company-paid premiums. The Company is a co-beneficiary of the policies, less amounts owed to Messrs. Kozlowski and Swartz. Messrs. Kozlowski and Swartz are the beneficiaries of the cash surrender values of the policies plus the amount of any unpaid premiums. The Company's obligations under these arrangements were entered into in recognition of services rendered by these officers and were not contingent upon continuing
employment. At that time, the Company deposited $31 million into a rabbi trust to fund premiums on the policies. In the event the investment options within the policies do not earn specified interest amounts, Tyco had guaranteed a supplemental premium payment amount to ensure a 10% annual return on the cash surrender value, and any unpaid premiums. This liability was accreted by a charge to earnings throughout the period of the arrangements to make the specified supplemental premium payments, if any. In conjunction with Mr. Swartz's termination of employment, a lump sum payment of $25 million, which represented the present value of the annual premium amounts at his termination date for the remainder of the contractual period, was made to Mr. Swartz and in return Mr. Swartz waived Tyco's obligation to continue making premium payments. Tyco discontinued making premium payments for Mr. Kozlowski's insurance policy as of October 1, 2002. The Company filed affirmative actions against Mr. Kozlowski, seeking disgorgement of all benefits under this executive life insurance policy. Pending resolution of such action against Mr. Kozlowski, premium obligations since October 2002 have been drawn down from the cash surrender value of such policy to avoid termination of such policy's death benefit. On September 27, 2006, the Company and Mr. Kozlowski entered into a general release agreement that terminated Mr. Kozlowski's shared ownership agreement of the split dollar life insurance policy and the rabbi trust. As such, the Company has no continuing obligation to make any payment or contributions with respect to the split dollar insurance policy or the rabbi trust. The Company recorded a credit of $72 million related to this liability in 2006 within selling, general and administrative expenses on the Consolidated Statements of Income.Operations. The Consolidated Financial Statements include charges of $7 million $7related to Mr. Kozlowski's life insurance policy in each of 2006 and 2005. The $25 million and $6 million for Mr. Kozlowskithat remained in 2006, 2005 and 2004, respectively. The Company had accrued $65 million on the Consolidated Balance Sheetrabbi trust as of September 30, 2005, in connection with this arrangement. As of September 29, 2006 $25 million remains in a rabbi trust.was received by Tyco during the first quarter of 2007.
The Company filed civil complaints against Messrs. Kozlowski and Swartz for breach of fiduciary duty and other wrongful conduct relating to alleged abuses of our Key Employee Loan Program and relocation program, unauthorized bonuses, unauthorized payments, self-dealing transactions and other improper conduct.
In June 2002, the Company filed a civil complaint against Frank E. Walsh, Jr., a former director, for breach of fiduciary duty, inducing breaches of fiduciary duty and related wrongful conduct involving
a $20 million payment by Tyco, $10 million of which was paid to Mr. Walsh with the balance paid to a charity of which Mr. Walsh is trustee. The payment was purportedly made for Mr. Walsh's assistance in arranging our acquisition of The CIT Group, Inc. On December 17, 2002, Mr. Walsh pleaded guilty to a felony violation of New York law in the Supreme Court of the State of New York, (New York County) and settled a civil action for violation of federal securities laws brought by the SEC in United States District Court for the Southern District of New York. Both the felony charge and the civil action were brought against Mr. Walsh based on such payment. The felony charge accused Mr. Walsh of intentionally concealing information concerning the payment from Tyco's directors and shareholders while engaged in the sale of Tyco securities in the State of New York. The SEC action alleged that Mr. Walsh knew that the registration statement covering the sale of Tyco securities as part of the CIT Group acquisition contained a material misrepresentation concerning fees payable in connection with the acquisition. Pursuant to the plea and settlement, Mr. Walsh paid $20 million in restitution to Tyco on December 17, 2002. Our claims against Mr. Walsh are still pending.
15.13. Debt
Debt at September 29, 200628, 2007 and September 30, 200529, 2006 is as follows ($ in millions):
| | 2006 | 2005 | 2007 | 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 6.375% public notes due 2006(2) | $ | — | $ | 1,000 | ||||||||
| 5.8% public notes due 2006(2) | — | 700 | ||||||||||
| 6.125% Euro denominated public notes due 2007(1) | 762 | 721 | ||||||||||
| 6.125% Euro denominated public notes due 2007(2) | $ | — | $ | 762 | ||||||||
| Revolving bank credit facility due 2007 | 700 | — | — | 700 | ||||||||
| 6.5% notes due 2007 | 100 | 100 | ||||||||||
| 2.75% convertible senior debentures due 2018 | — | 1,242 | ||||||||||
| 364-day senior bridge loan facility due 2008(1) | 367 | — | ||||||||||
| 6.125% public notes due 2008 | 399 | 399 | 300 | 399 | ||||||||
| 7.2% notes due 2008 | 86 | 85 | ||||||||||
| 5.5% Euro denominated notes due 2008 | 869 | 823 | — | 869 | ||||||||
| 6.125% public notes due 2009 | 399 | 399 | 215 | 399 | ||||||||
| 6.75% public notes due 2011 | 999 | 999 | 516 | 999 | ||||||||
| 6.375% public notes due 2011 | 1,500 | 1,500 | 849 | 1,500 | ||||||||
| 6.5% British pound denominated public notes due 2011 | 373 | 353 | — | 373 | ||||||||
| Revolving senior credit facility due 2012 | 308 | — | ||||||||||
| 6.0% notes due 2013 | 997 | 996 | 654 | 997 | ||||||||
| 7.0% debentures due 2013 | 86 | 86 | ||||||||||
| 3.125% convertible senior debentures due 2023 | 750 | 750 | 21 | 750 | ||||||||
| 7.0% public notes due 2028 | 497 | 497 | 437 | 497 | ||||||||
| 6.875% public notes due 2029 | 790 | 790 | 723 | 790 | ||||||||
| 6.5% British pound denominated public notes due 2031 | 536 | 502 | — | 536 | ||||||||
| Other(1)(2) | 330 | 587 | 66 | 53 | ||||||||
| Total debt | 10,173 | 12,529 | 4,456 | 9,624 | ||||||||
| Less current portion | 808 | 1,930 | 380 | 771 | ||||||||
| Long-term debt | $ | 9,365 | $ | 10,599 | $ | 4,076 | $ | 8,853 | ||||
Debt Tenders
On April 27, 2007, Tyco announced that, in connection with the Separation, Tyco and certain of its subsidiaries that are issuers of its corporate debt had commenced tender offers to purchase for cash substantially all of its outstanding U.S. dollar denominated public debt, aggregating approximately $6.6 billion. Of this amount, approximately $5.9 billion was non-convertible U.S. debt and $750 million was convertible U.S. debt, with maturities from 2007 to 2029. In conjunction with the tender offers, the relevant issuer solicited consents for certain clarifying amendments to the indentures pursuant to which the debt was issued. Tyco received acceptance notices for approximately $2.1 billion, or 36% of theits outstanding non-convertible U.S. debt and approximately $726 million or 97% of its outstanding convertible U.S. debt. Debt which was not tendered in an amount shown as other, comprise the current portion of long-term debt as of September 29, 2005.
Additionally, Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA"), holdscommenced on April 30, 2007 tender offers to purchase for cash all of its outstanding Euro and Pound Sterling denominated public debt, aggregating the equivalent of approximately $1.9 billion, with maturities from 2008 to 2031, issued under its Euro Medium Term Note Programme (the "EMTN Notes") and a consent solicitation for certain clarifying amendments to the fiscal agency agreement pursuant to which the EMTN Notes were issued. Tyco received acceptance notices for approximately $1.5 billion, or 80% of its EMTN Notes. The remaining EMTN Notes were repurchased pursuant to an optional redemption.
In connection with the debt tender offers, Tyco incurred a pre-tax charge for the early extinguishment of debt of approximately $647 million, for which no tax benefit is available (see Note 5).
TIGSA's remaining debt was contributed to Tyco International Finance S.A. ("TIFSA"), a wholly owned subsidiary of the Company and successor company to TIGSA.
Bank and Revolving Credit Facilities
On April 25, 2007, Tyco, certain of its subsidiaries and a syndicate of banks entered into three 364-day unsecured bridge loan facilities with an aggregate commitment amount of $10 billion. At the end of May 2007, the aggregate commitment amount under these facilities was increased to $12.5 billion. Tyco borrowed approximately $8.9 billion under the unsecured bridge loan facilities to fund its debt tender offers, repay its existing bank credit facilities and to finance the class action settlement. Of this amount, approximately $4.3 billion and $3.6 billion was assigned to Covidien and Tyco Electronics, respectively. Tyco initially guaranteed the new unsecured bridge loan facilities and Covidien and Tyco Electronics each assumed Tyco's obligations with respect to their unsecured bridge loan facilities upon the Separation. We no longer guarantee those assumed amounts. This facility has a variable interest rate based on LIBOR. The margin over LIBOR payable by TIFSA can vary based on changes in its credit rating. As of September 28, 2007, Tyco's aggregate commitment under its unsecured bridge loan facility was $4.0 billion and $367 million remained outstanding with a weighted-average interest rate of 5.5%.
On October 1, 2007, the commitments with respect to the unused portion of the Company's unsecured bridge loan facility expired. The Company's unsecured revolving credit facility and its letter of credit facility described below provide the lenders under those facilities with the right to demand repayment of outstanding amounts, and to terminate commitments to extend additional credit, if
(i) certain of the Company's outstanding public debt is declared due and payable and (ii) the Company does not have sufficient liquidity available under its unsecured bridge loan facility to refinance such debt. As a result, on November 27, 2007, the Company secured additional firm commitments from certain of its lenders under the bridge loan facility. These additional commitments provide the Company with sufficient liquidity to repay the outstanding public debt with borrowings of up to $4.0 billion. The additional commitments expire on, and any borrowings under the facility would mature on, November 25, 2008. The facility may only be used to repay, settle or otherwise extinguish the public debt described above, which is the subject of ongoing litigation between the Company and The Bank of New York. For more information regarding such litigation, see "Indenture Trustee Litigation" in Note 16.
Additionally, on April 25, 2007, Tyco, certain of its subsidiaries and a syndicate of banks entered into three unsecured revolving credit facilities with an initial aggregate commitment amount of $2.5 billion that increased to $4.25 billion at the time of the Separation. Of the aggregate commitment amount of $4.25 billion, a $1.25 billion commitment is available to Tyco, and a $1.5 billion commitment was available to each of Covidien and Tyco Electronics. Tyco will use its revolving credit facilities for working capital, capital expenditures and other corporate purposes. Tyco initially guaranteed the new revolving credit facilities and Covidien and Tyco Electronics each assumed Tyco's obligations with respect to their revolving credit facilities upon the Separation. We no longer guarantee those assumed amounts. At September 28, 2007, Tyco has borrowed $308 million under its unsecured revolving credit facility. This facility has a variable interest rate based on LIBOR. The margin over LIBOR payable by TIFSA can vary based on changes in its credit rating.
The unsecured revolving credit facilities replaced TIGSA's existing $1.0 billion 5-year revolving credit facility, expiring on December 16, 2009. TIGSA also holds a $1.5 billion 3-year revolving bank credit facility which was amended on June 28, 2006 to extend the maturity date from December 22, 2006 to December 21, 2007. Additionally, TIGSA holds aand $500 million 3-year unsecured letter of credit facility, expiring onwhich were all terminated by June 1, 2007 prior to their scheduled expiration dates of December 16, 2009, December 21, 2007 and June 15, 2007. At September 29, 2006,2007, respectively. On the date of termination, no amounts were borrowed under the $1.0 billion facility and the $1.5 billion facility, and letters of credit of $475$494 million were issued under the $500 million facility.
On June 21, 2007, Tyco and TIFSA entered into a new $500 million letter of credit facility, with Citibank N.A. as administrative agent, expiring on December 15, 2007. The facility provides for the issuance of letters of credit, supported by a related line of credit facility. TIFSA may only borrow under the line of credit agreement to reimburse the bank for obligations with respect to letters of credit issued under this facility. The covenants under this facility are substantially similar to the covenants under the bridge loan and revolving credit facilities. TIFSA would pay interest on any outstanding borrowings at a variable interest rate, based on the bank's base rate or the Eurodollar rate, as defined. As of September 28, 2007, letters of credit of $494 million have been issued under the $500 million credit facility and $25$6 million remains available for issuance. At September 29, 2006, $700 million has been borrowed under the $1.5 billion 3-year revolving bank credit facility. There were no amounts borrowed under the otherthis credit facilitiesfacility at September 29, 200628, 2007. On October 19, 2007, the facility was amended. The amendment extended the maturity date to June 15, 2008 and no amounts borrowedadjusted the interest rate spreads and fees applicable to extensions of credit thereunder. Loans under anythe amended letter of these credit facilities at September 30, 2005.agreement will continue to bear interest based on LIBOR plus the applicable margin.
During 2006,TIFSA's bank credit agreements contain customary terms and conditions, and financial covenants that limit the Company utilized $1.0 billion in cashratio of the Company's debt to its earnings before interest, taxes, depreciation, and the above mentioned $700 million in credit facility borrowings for scheduled repayments ofamortization and that limit its 6.375% and 5.8% public notes due 2006, respectively.ability to incur subsidiary debt or grant liens on its property. The Company's indentures contain customary covenants including limits on negative pledges, subsidiary debt
On January 26, 2006,and sale/leaseback transactions. None of these covenants are considered restrictive to the Company's business. The Company repaid and terminated onebelieves it is in compliance with all of its synthetic lease facilities used to finance capital expenditures for manufacturing machinerydebt covenants. The Bank of New York, as indenture trustee under indentures dated as of June 9, 1998 and equipment for a total cash payment of $203 million, reducing principal debt and minority interest by $191 million and $10 million, respectively.November 12, 2003, is contesting whether the Separation transactions were permitted under such indentures. See Note 16.
On February 21, 2006, TIGSA delivered a notice of redemption to the holders of its Series A 2.75% convertible senior debentures due 2018 with a 2008 put option (the "2.75% convertible senior debentures"), exercising its right to redeem all such debentures at 101.1 percent of the principal amount outstanding plus accrued interest. The 2.75% convertible senior debentures were convertible into 43.892 Tyco common shares per $1,000 principal amount. Prior to March 8, 2006, the redemption date, $1.2 billion of the 2.75% convertible senior debentures were converted into 54.4 million Tyco common shares and on March 8, 2006, TIGSA redeemed the remaining $1 million principal amount outstanding with cash.Convertible Debentures
As of September 29, 2006, TIGSA28, 2007, TIFSA had $750$21 million outstanding of its 3.125% convertible senior debentures due 2023 with a 2015 put option ("the 3.125% convertible senior debentures"). These debentures are fully and unconditionally guaranteed by Tyco. These debentures were originally convertible into Tyco shares. As a result of the Separation and atthe distribution of Covidien and Tyco Electronics shares to Tyco's shareholders, these debentures are now convertible into Tyco, Covidien and Tyco Electronics shares. At any time subsequent to the Separation, holders may convert each $1,000 principal amount of the debentures into 45.982111.496 Tyco common shares, 11.496 Covidien common shares and 11.496 Tyco Electronics common shares prior to the stated maturity at a rate of $21.7476 per share.maturity. Additionally, holders of the 3.125% convertible senior debentures may require TIGSATIFSA to purchase all or a portion of their debentures on January 15, 2015. If the option is exercised, TIGSATIFSA must repurchase the debentures at par plus accrued interest, and may elect to repurchase the securities for cash, Tyco common shares, or some combination thereof. TIGSATIFSA may redeem for cash some or all of the 3.125% convertible senior debentures at any time on or after January 20, 2008, for an amount equal to the redemption price.
The Company's bank credit agreements contain a number of financial covenants, such as a limit on the ratio of debt to earnings before interest, income taxes, depreciation, and amortization and minimum levels of net worth, and limits on the incurrence of liens. At September 29, 2006, the Company had one remaining synthetic lease facility, with other covenants, including interest coverage and leverage ratios (see Note 28—Subsequent EventsOther Debt Information). The Company's outstanding indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants are presently considered restrictive to the Company's operations. The Company is currently in compliance with all of its debt covenants.
The fair value of debt was approximately $10.9$4.5 billion (book value of $10.2$4.5 billion) and $13.5$10.4 billion (book value of $12.5$9.6 billion) at September 29, 200628, 2007 and September 30, 2005,29, 2006, respectively, based on discounted cash flow analyses using current market interest rates.
The aggregate amounts of totalprincipal debt, including capital leases, maturing during the next five years and thereafter are as follows (in millions): $808 in 2007, $847$380 in 2008, $2,577$524 in 2009, $23$7 in 2010, $1,009$521 in 2011, $1,160 in 2012 and $4,909$1,885 thereafter.
The weighted-average interest rate of interest on total debt was 5.9%6.3% and 5.6% for the years ended6.0% at September 28, 2007 and September 29, 2006, and September 30, 2005, respectively, excluding the impact of interest rate swaps. The weighted-average interest rate of interest on all variableshort-term debt was 6.3% and 7.2%5.5% at September 29, 2006 and September 30, 2005, respectively.28, 2007. The impact of the Company's interest rate swap agreements on reported interest expense was a net increase of $10 million for 2006 and a net reductiondecrease of $40 million and $66 million for 2005, respectively. Of these amounts, $6 million of the increase in 2006 and 2004, respectively.$24 million of the decrease in 2005 for interest expense was allocated and included in discontinued operations.
Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 20072008 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance and the potential exposure for nonperformance under the guarantees would not have a material effect on the Company's financial position, results of operations or cash flows.
There are certain guarantees or indemnifications extended among Tyco, Covidien and Tyco Electronics in accordance with the terms of the Separation and Distribution Agreement and the Tax Sharing Agreement. At the time of the Separation, Tyco recorded a liability necessary to recognize the fair value of such guarantees and indemnifications in accordance with FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Fair values were determined with the assistance of a third party valuation firm. The liability necessary to reflect the fair value of these guarantees and indemnifications is $543 million, which is included in other liabilities on our Consolidated Balance Sheets. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. See Note 16 for further discussion of the Tax Sharing Agreement.
In addition, Tyco historically provided support in the form of financial and/or performance guarantees to various Covidien and Tyco Electronics operating entities. In connection with the Separation, the Company worked with the guarantee counterparties to cancel or assign these guarantees to Covidien or Tyco Electronics. To the extent these guarantees were not assigned prior to the Separation date, Tyco assumed primary liability on any remaining support. The estimated fair values of those obligations are $7 million, which are included in other liabilities with an offset to shareholders' equity on our Consolidated Balance Sheets, and were recorded in accordance with FIN No. 45.
In disposing of assets or businesses, the Company often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 1816 for a discussion of these liabilities.
The Company has guaranteed the fair value of certain vessels not to exceed $235 million, and as of September 29, 2006 expects the obligation to be $54 million, which is recorded in the accompanying Consolidated Balance Sheets, based on its estimate of the fair value of the vessels (see Notes 18 and 28).
In the normal course of business, the Company is liable for contract completion and product performance. In the opinion of management, such obligations will not significantly affect the Company's financial position, results of operations or cash flows.
The Company records estimated product warranty costs at the time of sale. For further information on estimated product warranty, see Note 1.
Following is a roll forward of the Company's warranty accrual for 20062007 ($ in millions):
| Balance at September 30, 2005 | $ | 193 | ||||||
| Balance at September 29, 2006 | $ | 186 | ||||||
| Warranties issued during the year | 51 | 27 | ||||||
| Changes in estimates | 85 | 17 | ||||||
| Settlements | (86 | ) | (69 | ) | ||||
| Currency translation | 2 | 3 | ||||||
| Balance at September 29, 2006 | $ | 245 | ||||||
| Balance at September 28, 2007 | 164 | |||||||
In 2001, Engineereda division of Safety Products and Services initiated a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain Model GB fire
O-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco's acquisition. Under this program, the sprinkler heads are being replaced over a 5-7 year period free of charge to property owners. In the third quarter of 2006, the Company completed a comprehensive review of reported claims, recent claim rates and cost trends and further assessed the future of the program. The Company determined that an additional liability was necessary in order to satisfy the Company's obligation under the VRP. As a result, the Company recorded a $100 million charge which
was reflected in cost of sales. On May 1, 2007, the Consumer Products Safety Commission and the Company announced an August 31, 2007 deadline for filing claims to participate in the VRP. The Company will fulfill all valid claims for replacement of qualifying sprinklers received up to August 31, 2007. During the fourth quarter of 2007, the Company further assessed the expected cost to complete the program in light of the most current claims data and determined that an additional accrual of $10 million was necessary to satisfy the estimated remaining obligation. The ultimate cost to complete the program will be impacted by a number of factors such as changes in material and labor costs, and the actual number of sprinkler heads replaced. Actual results could differ from this estimate. Settlements during 20062007 include cash expenditures of $37$38 million related to the VRP.
17.15. Financial Instruments
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, debt and derivative financial instruments. The fair value of cash and cash equivalents, accounts receivable, investments and accounts payable and derivative financial instruments approximated book value at September 29, 200628, 2007 and September 30, 2005.29, 2006. See Note 1513 for the fair value estimates of debt.
All derivative financial instruments are reported on the Consolidated Balance Sheets at fair value, and changes in a derivative's fair value are recognized currently in earnings unless specific hedge criteria are met. Fair value estimates are based on relevant market information, including current market rates and prices, assuming adequate market liquidity. Fair value estimates for interest rate and cross-currency swaps arewere calculated by the Company or are provided towith the Company byassistance of high-quality, third-party financial institutions known to be high volume participants in this market.
The Company uses derivative financial instruments to manage exposures to foreign currency and interest rate risks. The Company's objective for utilizing derivatives is to manage these risks using the most effective methods to eliminate or reduce the impacts of these exposures. For those transactions that are designated as hedges, the Company documents relationships between hedging instruments and hedged items, and links derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the Consolidated Balance Sheets or to specific firm commitments or forecasted transactions. For transactions designated as hedges, the Company also assesses and documents, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows associated with the hedged items.
As part of managing the exposure to changes in market interest rates, the Company entershas historically entered into various interest rate swap transactions with financial institutions acting as principal counterparties. To ensure both appropriate use as a hedge and hedge accounting treatment, all derivatives entered into arewere designated according to a hedge objective against specified forecasted interest payments on specifically underwritten debt issuances. The Company's primary hedge objectives include the conversion of fixed-rate liabilities to variable rates. The derivative financial instruments associated with these objectives are designated and accounted for as fair value hedges.
As part of managing the exposure to changes in foreign currency exchange rates, the Company utilizes forward and option contracts with financial institutions acting as principal counterparties. The objective of these hedgingderivative contracts is to minimize impacts to cash flows due to changes in foreign currency exchange rates onassociated with intercompany loans, notes receivable and accounts payable, and forecasted transactions. The Company has designated certain forward contracts and certaintransactions due to changes in foreign currency denominated debt issuances to hedge its net investments in foreign operations. The remaining hedges are marked to market with changes in the derivatives' fair value recognized in the income statement.exchange rates.
The Company's derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as Tyco deals with a variety of major banks worldwide with long-term Standard & Poor's and Moody's credit ratings of A/A2 or higher. In addition, only conventional derivative financial instruments are utilized, thereby affording optimum clarity as to the market risk. None of the Company's derivative financial instruments outstanding at year end would
result in a significant loss to the Company if a counterparty failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or other security to be furnished by the counterparties to its derivative financial instruments.
In assessing the current and potential future risk attributable to interest rate movements, during the fourth quarter of 2006, the Company terminated interest rate swaps and cross currency agreements with an aggregate notional value of $2.5 billion. The fair value of the swaps at the time of termination was a net gain of $10 million. As the interest rate swaps were designated as hedging instruments of outstanding debt, the net deferred loss of $26 million will be recognized in earnings over the remaining term of the related debt instrument. The remaining agreements were terminated subsequent toduring the endfirst quarter of 2006.2007.
Interest Rate Exposures
The Company enters intohistorically utilized interest rate swap agreements to manage its exposure to interest rate risk. Under these agreements,During the first quarter of 2007, the Company receives a fixedterminated the interest rate of interest of 6.4% and pays a floating rate of interest based on six month LIBOR. At September 29, 2006,swaps. Since the Company had interest rate swaps in a net loss position of $6 millionwere designated as fair value hedges with expiration dates in 2011. Thehedging instruments of outstanding debt, the related loss will be amortized over the remaining life of the related debt instruments. Prior to termination, the mark-to-market effects of both the interest rate swap agreements and the underlying debt obligations were recorded in interest expense and are directly offsetting to the extent the hedges are effective.
In addition, the Company enters intohistorically utilized interest rate and foreign currency swap agreements ("cross currency swaps") to manage its exposure to interest rate risk and foreign currency exposure on loans denominated in foreign currency. Under these agreements,During the first quarter of 2007, the Company receivesterminated these agreements. The settlement of the swaps terminated during the first quarter of 2007 along with $17 million of swaps in a fixed rategain position that were terminated in the fourth quarter of interest of 6.5% and pays floating rates of interest based on six month LIBOR. At September 29, 2006 the Company had interest rate and foreign currency swap agreementsresulted in a net gain positioncash inflow of $52$63 million designatedin the first quarter of 2007. In connection with the debt tender offer, $9 million of unamortized loss on interest rate swaps was accelerated and recorded as a fair value hedge with an expiration dateloss on retirement of debt and included in 2011. Theother expense, net (see Note 13). At September 28, 2007 there were no cross-currency or interest rate swaps outstanding. Prior to termination, the mark-to-market effects on the interest rate and foreign currency swaps were recorded in interest expense and selling, general and administrative expense,expenses, respectively, and directly offset the corresponding changes in the fair value of the hedged items to the extent the hedges were effective. The ineffective portion of the hedge was not material.
Foreign Currency Exposures
The Company hedges its net investment in certain foreign operations. The aggregate notional value of these hedges was $7.1 billion at September 29, 2006. Included in the cumulative translation adjustment component of other comprehensive income was a net loss of $91 million and a net gain of $31 million at September 29, 2006 and September 30, 2005, respectively. Changes in the fair value of forward contracts qualifying as net investment hedges are reported in the cumulative translation adjustment component of accumulated other comprehensive income to the extent the hedges are effective. Amounts excluded from the measure of effectiveness of the net investment hedges totaled $6 million and were recognized in selling, general and administrative expenses.
The Company uses forward agreements to hedge its exposure to foreign currency exchange rates on raw material purchases. These forward agreements are designated as cash flow hedges. Gains and losses resulting from these hedges, the amounts of which are not material in any period presented, are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income
to earnings and recorded as an adjustment to cost of sales when the underlying transaction impacts earnings.
Tyco uses various options, swaps, and forwards not designated as hedging instruments, to manage foreign currency exposures on accounts and notes receivable, accounts payable, intercompany loans and forecasted transactions denominated in certain foreign currencies. For derivatives not designated as hedging instruments, the Company records changes in fair value through earningsin selling, general and administrative expenses in the income statement in the period of change. The fair value of these instruments totaled $23$95 million at September 28, 2007.
In December 2006, due to required changes to the legal entity structure to facilitate the Separation, the Company determined that it would no longer consider certain intercompany foreign currency transactions to be long-term investments. As a result, the related foreign currency transaction gains and losses on such investments were recorded in the income statement subsequent to this determination rather than to the currency translation component of shareholders' equity. Forward contracts that were previously designated as hedges of these net investments, continued to be used to manage this exposure but were no longer designated as net investment hedges. The remaining forward and option contracts are marked to market with changes in the derivatives' fair value recognized in the income statement.
Previously, the Company hedged its net investment in certain foreign operations. Changes in the fair value of forward contracts qualifying as net investment hedges are reported in the cumulative translation adjustment component of accumulated other comprehensive income to the extent the hedges are effective. The cumulative translation adjustment component of other comprehensive income includes a net loss of $299 million and $91 million during 2007 and 2006, respectively, for hedges of the foreign currency exposure of the Company's net investment in certain foreign operations. In connection with the Separation and the debt tender, the Company de-designated its 6.125% Euro denominated public notes due 2007 on March 29, 2006.2007, its 5.5% Euro denominated public notes due 2008 and its 6.5% British Pound denominated public notes due 2031 on May 21, 2007, that had previously been considered as hedges of net investments in certain foreign operations. At September 28, 2007, the Company did not hedge its net investments in foreign operations, and all of its outstanding borrowings were denominated in U.S. dollars.
18.Convertible Debentures
Given the potential requirement to convert the Company's 3.125% convertible senior debentures into shares of Covidien and Tyco Electronics, the Separation and Distribution Agreement provides for Covidien and Tyco Electronics to deliver such shares as needed. Tyco recorded an asset for the fair value of the Covidien and Tyco Electronics shares required to satisfy the obligation to the debenture holders. Tyco also recorded the related conversion option as a liability at fair value. These amounts were established with an offset to shareholders' equity in connection with the Separation. During the fourth quarter of 2007, Tyco recorded a $3 million credit to other expense, net for the changes in fair
value of the asset and the conversion option. At September 28, 2007, the fair value of the asset and the conversion option liability were $19 million and $15 million, respectively.
16. Commitments and Contingencies
The Company has facility, vehicle and equipment leases that expire at various dates through the year 2052.2027. Rental expense under these leases was $717$410 million, $764$390 million, and $764$405 million for 2007, 2006 2005 and 2004,2005, respectively. The Company also has facility and equipment commitments under capital leases.
Following is a schedule of minimum lease payments for non-cancelable leases as of September 29, 2006 (in28, 2007 ($ in millions):
| | | Operating Leases | Capital Leases(1) | | Operating Leases | Capital Leases | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | $ | 516 | $ | 26 | ||||||||||
| 2008 | 2008 | 405 | 27 | 2008 | $ | 291 | $ | 14 | ||||||
| 2009 | 2009 | 302 | 22 | 2009 | 226 | 12 | ||||||||
| 2010 | 2010 | 214 | 9 | 2010 | 171 | 10 | ||||||||
| 2011 | 2011 | 158 | 7 | 2011 | 123 | 8 | ||||||||
| 2012 | 2012 | 72 | 6 | |||||||||||
| Thereafter | Thereafter | 499 | 76 | Thereafter | 157 | 55 | ||||||||
| Total minimum lease payments | $ | 2,094 | $ | 167 | $ | 1,040 | 105 | |||||||
Less: amount representing interest | Less: amount representing interest | 41 | ||||||||||||
| Total minimum lease payments | $ | 64 | ||||||||||||
The Company also has purchase obligations related to commitments to purchase certain goods and services. At September 29, 2006,28, 2007, such obligations were as follows: $222 million in 2007, $24$114 million in 2008, $10$7 million in 2009, $10$3 million in 2010 $7and $0 million in 2011, and an aggregate of $24 million in 2012 and thereafter.
At September 29, 2006, the Company had an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon expiration of this lease in October 2006, a subsidiary of the Company has the option to buy these vessels for approximately $280 million, or return the vessels to the lessor and, under a residual guarantee, pay any shortfall in sales proceeds to the lessor from a third party in an amount not to exceed $235 million. As of September 29, 2006, the Company expected this obligation to be $54 million, which is recorded in the accompanying Consolidated Balance Sheets, based on an estimate of the fair value of the vessels performed by management with the assistance of a third-party valuation. During 2006, 2005 and 2004, the Company incurred expenses of $14 million in each year related to this expected obligation. See Note 28—Subsequent Events.
At September 29, 2006, the Company had a contingent purchase price liability of $80 million related to the 2001 acquisition of Com-Net by Electronics. This represents the maximum amount payable to the former shareholders of Com-Net only after the construction and installation of a
communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. A liability for this contingency has not been recorded in Tyco's Consolidated Financial Statements as the outcome of this contingency cannot be reasonably determined.
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, results of operations or cash flows.
In connection with the Separation, the Company entered into a liability sharing agreement regarding certain class actions that were pending against Tyco prior to the Separation. Subject to the terms and conditions of the Separation and Distribution Agreement, the Company will manage and control all the legal matters related to assumed contingent liabilities as described in the Separation and Distribution Agreement, including the defense or settlement thereof, subject to certain limitations.
Tyco has assumed 27%, Covidien has assumed 42% and Tyco Electronics has assumed 31% of certain Tyco pre-Separation contingent and other corporate liabilities, which include securities class action litigation, ERISA class action litigation, certain legacy tax contingencies and any actions with respect to the spin-offs or the distributions made or brought by any third party except for litigation related to our public debt. Any amounts relating to these contingent and other corporate liabilities paid by Tyco after the spin-offs that are subject to the allocation provisions of the Separation and Distribution Agreement will be shared among Tyco, Covidien and Tyco Electronics pursuant to the same allocation ratio. As described in the Separation and Distribution Agreement, Tyco, Tyco Electronics and Covidien are jointly and severally liable for all amounts relating to the previously
disclosed securities class action settlement. All costs and expenses that Tyco incurs in connection with the defense of such litigation, other than the amount of any judgment or settlement, which will be allocated in the manner described above, will be borne equally by Covidien, Tyco Electronics and Tyco.
Class Actions and Class Action Settlement
As a result of actions taken by certain of the Company's former senior corporate management, Tyco, some members of the Company's former senior corporate management, including former members of ourits Board of Directors and the Company's current Chief Executive Officer andformer General Counsel and former Chief Financial Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws. In addition, Tyco, certain of the Company'sits current and former employees, some members of the Company's former senior corporate management and some former members of the Company's Board of Directors also are named as defendants in several Employee Retirement Income Security Act ("ERISA") class actions. In addition, some members of the Company's former senior corporate management are subject to a SEC inquiry. The findings and outcomes of the SEC inquiry may affect the course of the purported securities class actions and ERISA class actions pending against Tyco. The Company is generally obligated to indemnify its directors and officers and its former directors and officers who are named as defendants in some or all of these matters to the extent required by Bermuda law. In addition, the Company's insurance carriers may decline coverage, or the Company's coverage may be insufficient to cover its expenses and liability, in some or all of these matters. While the Company may from time to time seek to engage plaintiff's
On May 14, 2007, Tyco entered into a Memorandum of Understanding with plaintiffs' counsel in connection with the settlement discussions,of 32 purported securities class action lawsuits. The Memorandum of Understanding does not resolve all securities cases, and several remain outstanding. In addition, the Companyproposed settlement does not release claims arising under ERISA and the lawsuits arising thereunder.
Under the terms of the Memorandum of Understanding, the plaintiffs agreed to release all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco to the certified class. The parties to the Memorandum of Understanding have applied to the court for approval of the settlement agreement. On July 13, 2007, the U. S. District Court in Concord, New Hampshire granted preliminary approval of the settlement. On November 2, 2007, the final fairness hearing for the class settlement was held. The Court indicated it would approve the settlement and stated a formal ruling would be issued in a few weeks. If the settlement agreement does not receive final court approval, the Memorandum of Understanding will be null and void. By December 28, 2007, class participants must file their proofs of claim demonstrating their right to recovery under the class settlement.
The deadline for deciding not to participate in the class settlement was September 28, 2007. As of such date, Tyco had received opt-out notices from individuals and entities totaling approximately 4% of the shares owned by class members. These individuals and entities may pursue their claims separately against Tyco and any judgments resulting from such claims would not reduce the settlement amount. One entity, Franklin Mutual Advisers, LLC, has filed a complaint against Tyco on September 24, 2007 in an action styledFranklin Mutual Advisers, LLC v. Tyco International Ltd. in the United States District Court for the District of New Jersey alleging violations of Section 11 of the Securities Act of 1933, 15 U.S.C. Sec. 77(b), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(b), and Rule 10b-5 promulgated thereunder and Section 18 of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(k) in connection with the plaintiffs' purchases and sales of Tyco securities between June 4, 2001 and April 30, 2002. The plaintiffs seek unspecified compensatory damages and reasonable attorneys' fees and costs. Tyco has requested that this action be transferred to the United States District Court for the District of New Hampshire. Tyco intends to vigorously defend the litigation. It is unablenot possible at this time to predict the
final outcome or to estimate whatthe amount of loss or range of possible loss, if any, that might result from an adverse resolution of theFranklin matter or other unasserted claims from individuals that have opted-out.
Under the terms of the Separation and Distribution Agreement entered into in connection with the Separation, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full amount of the class action settlement and any judgments resulting from opt-out claims. Additionally, under the Separation and Distribution Agreement, the companies share in the liability and related escrow accounts, with Tyco assuming 27%, Covidien 42% and Tyco Electronics 31% of the settlement amount.
Tyco incurred a charge to expense, for which no tax benefit is available, and a current liability of $2.975 billion in 2007. The Company has also recovered or expects to recover certain of these costs from insurers. As such, the Company recorded $113 million of recoveries in connection with the class action settlement in its ultimateConsolidated Statements of Operations. Tyco borrowed under its unsecured bridge and credit facilities to fund the liability and placed the proceeds in these matters mayescrow for the benefit of the class. In connection with the Separation, Covidien and Tyco Electronics assumed their portion of the related borrowing. The escrow accounts will earn interest that is payable to the class. Interest is also accrued on the class action settlement liability. Based on the Separation and Distribution Agreement, at September 28, 2007 Tyco had a receivable from Covidien and Tyco Electronics for their portion of the liability of $1,257 million and $927 million, respectively, and a payable to Covidien and Tyco Electronics for their interest in the escrow accounts. Receivables and payables that pertain to the class action settlement and related escrow accounts with the same counterparty are presented net in the consolidated balance sheet. Tyco's portion of the liability is $808 million. Additionally, Tyco has paid $73 million and recorded payables of $9 million at September 28, 2007, with an offset to shareholders' equity for amounts due to Covidien and Tyco Electronics for their portion of the insurance recovery.
If the proposed settlement were not consummated on the agreed terms or if the unresolved proceedings were to be anddetermined adversely to Tyco, it is possible that the Company will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on its financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.
Investigations
The Company and others have received various subpoenas and requests from the SEC's Division of Enforcement, the United States Department of Labor, state departments of labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into the Company's governance, management, operations, accounting and related controls. The Department of Labor is investigating Tyco and the administrators of certain of its benefit plans. The Company cannot predict when these investigations will be completed, nor can the Company predict what the results of these investigations may be. It is possible that the Company will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government entities or instrumentalities (which in turn could negatively impact the Company's business with non-governmental customers) or suffer other penalties or adverse impacts, each of which could have a material adverse effect on the Company's business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters.
Environmental Matters Tyco 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. As of September Tyco has recorded asset retirement obligations Asbestos Matters Tyco and some of its subsidiaries and certain subsidiaries of Covidien are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. Pursuant to the Separation and Distribution Agreement, Covidien has assumed all liabilities for pending cases filed against Covidien's subsidiaries. Consistent with the national trend of increased asbestos-related litigation, the Company has observed an increase in the number of these lawsuits in the past several years. Tyco's involvement in asbestos cases has been limited because its subsidiaries did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims were never substantiated and have been dismissed by the courts. The Company will continue to vigorously defend The Company estimates its pending asbestos claims and claims that were incurred but not reported, as well as related insurance and indemnification recoveries. The Company's estimate of the liability for pending and future claims is based on claim experience over the past five years and covers claims expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all known and anticipated future claims, after taking into account its substantial indemnification rights and insurance coverage, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Income Taxes In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a Tax Sharing Agreement that generally governs Covidien's, Tyco Electronics' and Tyco's respective rights, responsibilities, and obligations after the distribution with respect to taxes, including ordinary course of business taxes and taxes, if any, incurred as a result of any failure of the distribution of all of the shares of Covidien or Tyco Electronics to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Code or certain internal transactions undertaken in anticipation of the spin-offs to qualify for tax-favored treatment under the Code. Under the Tax Sharing Agreement, with certain exceptions, Tyco generally is responsible for the payment of 27% of any additional U.S. income taxes that are required to be paid to a U.S. tax authority as a result of a U.S. tax audit of Covidien's, Tyco Electronics' or Tyco's subsidiaries' income tax returns for all periods prior to the spin-offs. Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco's, Covidien's and Tyco Electronics' income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42% and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and Tyco Electronics' U.S. income tax returns. All costs and expenses associated with the management of these shared tax liabilities are shared equally among the parties. At September 28, 2007, Tyco has recorded a receivable from Covidien and Tyco Electronics of $103 million reflected in other assets as our estimate of their portion of the Tax Sharing obligations with an offset to shareholders' equity. Other liabilities include $543 million for the fair value of Tyco's obligations under the Tax Sharing Agreement, determined in accordance with FIN 45 recognized with an offset to shareholders' equity. Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected to occur as the IRS audit process is completed for the impacted years. Given the nature of the shared liabilities, the maximum amount of potential future payments is not determinable. In the event the Separation is determined to be taxable and such determination was the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result thereof. If such determination is not the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, then Tyco, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%, respectively, of any taxes imposed on Tyco, Covidien or Tyco Electronics as a result of such determination. Such tax amounts could be significant. The Company is responsible for all of its own taxes that are not shared pursuant to the Tax Sharing Agreement's sharing formula. In addition, Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula. If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of its agreed-upon share of Tyco's, Covidien's and Tyco Electronics' tax liabilities. The Company and its subsidiaries' income tax returns periodically are In 2004, in connection with the The Company has yet to complete proposed amendments to its U.S. federal income tax returns for periods subsequent to 2002, which will primarily reflect the roll forward through 2006 of the amendments for the periods 1997 to 2002. When the Company's tax return positions are updated additional adjustments may be identified and recorded in the Consolidated Financial Statements. While the final adjustments cannot be determined until the income tax return amendment process is completed, the Company believes that any resulting adjustments will not have a material impact on its financial condition, results of operations or cash flows. During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco's U.S. federal income tax returns for the years 1997 through 2000 and issued anticipated Revenue Agents' Reports ("RARs") which reflect the IRS' determination of proposed tax adjustments for the periods under audit. The RARs propose tax audit adjustments to certain of the Company's previously filed tax return positions, all of which the Company expected and previously assessed at each balance sheet date. Accordingly, the Company has made no additional provision during the year ended September 28, 2007 as a result of the proposed audit adjustments in the RARs. The Company has agreed with the IRS on adjustments totaling $498 million, with an estimated cash impact to the Company of $458 million, and during the third quarter of 2007, the Company paid $458 million, of which $163 million relates to the Company's discontinued operations. The Company appealed other proposed tax audit adjustments totaling approximately $1 billion, and, as Audit Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend its prior filed tax return positions. The Company continues to believe that the amounts recorded in its financial statements relating to these tax adjustments are sufficient. However, the ultimate resolution of these matters is uncertain and could result in a material impact to the Company's financial position, results of operations or cash flows. In addition, ultimate resolution of these matters could result in the Company filing amended U.S. federal income tax returns for years subsequent to the current 1997 to 2000 audit period and could have a material impact on the Company's effective tax rate in future reporting periods. Additionally, the IRS proposed civil fraud penalties against a prior subsidiary that was distributed to Tyco Electronics arising from alleged actions of former executives in connection with certain intercompany transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory guidelines, we estimate the proposed penalties could range between $30 million and $50 million. The Company as Audit Managing Party will vigorously oppose the assertion of such penalties against Tyco Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company's former Chief Tax Officer on a charge of willful filing of a false tax return. Compliance Matters Tyco has received and responded to various allegations and other information that certain improper payments were made by Tyco subsidiaries in recent years. reports to these agencies, and that it would present its factual findings upon conclusion of the baseline review. The Company has and will continue to Any judgment required to be paid or settlement or other cost incurred by Tyco in connection with these matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of Tyco to Covidien or Tyco Electronics, respectively, and provides that Tyco will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among Tyco, Covidien and Tyco Electronics. The German Federal Cartel Office ("FCO") charged that certain German subsidiaries in Tyco's Flow Control business have engaged in anti-competitive practices, in particular with regard to its hydrant, valve, street box and fittings business. Tyco investigated this matter and determined that the conduct may have violated German anti-trust-law. Tyco is cooperating with the FCO in its investigation of this violation. Tyco cannot estimate the range of potential loss that may result from this violation. It is possible that the Company may be subject to civil or criminal proceedings and may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on its financial position, results of operations or cash flows. Indenture Trustee Litigation On June 4, 2007, The Bank of New York ("BONY"), as indenture trustee under the indentures dated as of June 9, 1998 and November 12, 2003, of Tyco International Group S.A. ("TIGSA"), a wholly-owned subsidiary of Tyco, commenced an action against TIGSA and Tyco in the United States District Court for the Southern District of New York. BONY served an amended complaint on October 18, 2007, which added Tyco International Finance S.A. ("TIFSA") as an additional defendant. As amended, the complaint alleges that the Separation breached the indentures and seeks damages on behalf of noteholders in excess of $4.1 billion, consisting of principal plus accrued interest on the notes issued under the indentures, plus a "make-whole" amount payable under the indentures in the event of early redemption of the notes. The amended complaint also seeks a judgment declaring that BONY was not required to sign supplemental indentures proposed by TIGSA, TIFSA and Tyco in connection with the Separation. BONY also seeks a declaratory judgment that TIGSA is obligated to pay BONY reasonable compensation and to reimburse BONY for all reasonable expenses, including attorneys' fees incurred in connection with the Separation and in resolving the proper interpretation of the indentures. On November 15, 2007, Tyco and TIFSA filed counterclaims against BONY, alleging that its refusal to sign the supplemental indentures in connection with the Separation and the filing of the amended complaint constituted a breach of the indentures and a breach of the duty of good faith and fair dealing implied in the indentures. They seek unspecified damages on these claims. Tyco and TIFSA also seek a declaratory judgment that no default has occurred and that BONY is required to sign the supplemental indentures. On November 8, 2007, BONY delivered to the Company a Notice of Events of Default, claiming that the actions taken by the Company in connection with the Separation constitute events of default under the indentures. The claims made in the Notice of Events of Default are the same as those alleged by BONY in the litigation, and the Company continues to believe that no default or event of default has occurred. The indentures provide for a 90-day cure period following delivery of the notice of default, after which BONY could declare any outstanding amounts under the indentures immediately due and payable. We would contest such an acceleration. TIGSA, TIFSA and Tyco continue to believe that the Separation and the proposed supplemental indentures are permitted under the indentures and that no "make-whole" amount is payable. The Company intends to vigorously defend the claims of default and believes it will prevail in legal proceedings. If we did not have liquidity available to repay the outstanding debt under the 1998 and 2003 indentures under our 364-day bridge facility, such an acceleration of the outstanding notes would have permitted a majority of the lenders under each of our bank and letter of credit facilities to demand repayment of amounts outstanding under those facilities, and to terminate their commitments to extend additional credit thereunder. As a result, on November 27, 2007, the Company secured additional firm commitments from certain of its lenders under the bridge facility, providing the Company with additional borrowings of up to $4.0 billion to repay such notes. The additional commitments expire on, and any borrowings under the facility would mature on, November 25, 2008. The facility may only be used to repay, settle or otherwise extinguish the amounts required to be paid in connection with the litigation with BONY. ERISA Partial Withdrawal Liability Assessment and Demand On June 8, 2007, SimplexGrinnell received a notice alleging that it had partially withdrawn from the National Automatic Sprinkler Industry Pension Fund (the "Fund"). Under Title IV of ERISA, if the fund can prove that an employer completely or partially withdraws from a multi-employer pension plan such as the Fund, the employer is liable for withdrawal liability equal to its proportionate share of the plan's unfunded vested benefits. The alleged withdrawal results from a 1994 labor dispute between Grinnell Fire Protection Systems, SimplexGrinnell's predecessor, and Road Sprinkler Fitters Local Union No. 669. ERISA requires that payment of withdrawal liability be made in full or in quarterly installments commencing upon receipt of a liability assessment from the plan. A plan's assessment of withdrawal liability generally may be challenged only in arbitration, and ERISA requires that quarterly payments must continue to be made during the pendency of the arbitration. If the employer prevails in arbitration (and any subsequent court appeals), its quarterly withdrawal liability payments are refunded with interest. The Fund's total withdrawal liability assessment against SimplexGrinnell is approximately $25 million, and the quarterly withdrawal liability payments are $1.1 million commencing on August 1, 2007. SimplexGrinnell believes that it has strong arguments that no withdrawal liability is owed to the Fund, and it plans to vigorously defend against the Fund's withdrawal liability assessment by timely filing for arbitration. Accordingly, the Company has made no provision for this contingency in its Consolidated Financial Statements. Other Matters Earth Tech v. City of Phoenix is a contract dispute arising from Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. On December 21, 2005, Earth Tech filed a lawsuit against the City of Phoenix in the Maricopa County Superior Court alleging $3 million in damages plus interest for the City's failure to pay dewatering and computer systems costs related to the 91st Avenue project. After the City rejected Earth Tech's administrative claim against the City, Earth Tech filed and served a First Amended Complaint upon the City of Phoenix. In its First Amended Complaint, Earth Tech alleged eighteen causes of action and requested the following: (i) a recovery of at least $73 million for the value of the services performed by Earth Tech in connection with the contract; (ii) a rescission of the contract; (iii) an equitable adjustment of the Contract price for additional dewatering services and the Computer Control System; and (iv) costs for demobilization and termination of the contract. The City of Phoenix filed a Motion to Dismiss rather than filing an answer to the First Amended Complaint on May 18, 2006. The Court granted the City's Motion to Dismiss without prejudice on September 19, 2006 allowing Earth Tech 30 days to file a Second Amended Complaint. Earth Tech filed its Second Amended Compliant against the City of Phoenix on September 25, 2006. On April 17, 2006, the Company reached a settlement that closes the SEC Enforcement Division's investigation of the Company regarding certain accounting practices and other actions by former Tyco officers. On April 25, 2006, the United States District Court for the Southern District of New York entered a final judgment in which the Company was ordered to pay $1 in disgorgement and a fine of $50 million. During the third quarter of 2006, the Company satisfied the judgment which was accrued in 2005.Intellectual Property and Antitrust Litigation As previously discussed in our periodic filings, the Company is a party to a number of patent infringement and antitrust actions that may require the Company to pay damage awards. Tyco has assessed the status of these matters and has recorded liabilities related to certain of these matters where appropriate.Mallinckrodt, Inc. ("Mallinckrodt") and Nellcor Puritan Bennett, Inc. ("Nellcor"), plaintiffs/counter-defendants v. Masimo Corporation ("Masimo") et al., defendants/counter-claimants, is a consolidated patent infringement action filed on June 19, 2000 in the United States District Court for the Central District of California. Nellcor is a subsidiary of Tyco. Nellcor alleges that Masimo infringed one Nellcor patent related to pulse oximeters, which are medical devices used to measure blood oxygen levels in patients, and Masimo alleges that Nellcor infringed four Masimo patents related to pulse oximeters. Trial in the action commenced on February 18, 2004. On March 16, 2004, the jury returned a liability finding that Nellcor willfully infringed the four Masimo patents and that Masimo did not infringe the one Nellcor patent. On March 26, 2004, the jury awarded Masimo $135 million in damages for Nellcor's alleged infringement through December 31, 2003. After hearing post-trial motions, the district court issued an order on July 14, 2004 which (i) denied Masimo's request to impose an injunction on the sale of pulse oximeters; (ii) reversed the jury finding of patent infringement for one of the four patents at issue; (iii) ruled that a second patent was unenforceable due to Masimo's inequitable conduct in seeking the patent; and (iv) overturned the jury finding that the infringement was "willful." On August 6, 2004, the district court entered final judgment that included additional damages of $30 million for Nellcor's alleged infringement from January 1, 2004 through May 31, 2004. Nellcor asserts that Masimo infringes a second Nellcor patent (U.S. Patent No. 4,934,372—the "372 patent"). On April 8, 2005, the United States Court of Appeals for the Federal Circuit issued a decision in Nellcor's favor that reversed the district court's summary judgment finding of no infringement regarding the 372 patent claim against Masimo. The Court of Appeals remanded Nellcor's 372 patent claim to the district court for further proceedings. The district court has not yet scheduled trial in the 372 case. Nellcor appealed the jury's infringement finding on the remaining two Masimo patents to the United States Court of Appeals for the Federal Circuit. On September 7, 2005, the Court of Appeals issued a decision on the appeal that was adverse to Nellcor. In particular, the Court of Appeals: (1) affirmed the infringement finding against Nellcor on two patents; (2) reversed the district court's ruling of non-infringement of a third patent; and (3) reversed the district court's ruling not to enter an injunction and directed the district court to issue an injunction. The Court of Appeals also: (1) affirmed the district court's ruling that Nellcor's infringement was not willful, which precluded Masimo from seeking up to treble damages; and (2) affirmed the district court's ruling that one of Masimo's patents was unenforceable due to Masimo's inequitable conduct in seeking the patent. The Company has assessed the amount of potential additional damages and interest accruing from the dateof entry of final judgment to the present. Accordingly, during the fiscal quarter ending September 30, 2005, Tyco recorded a pre-tax charge of $277 million related to this matter. On January 17, 2006, Tyco International Ltd., and its subsidiaries Tyco International (US) Inc., Tyco Healthcare Group LP, Mallinckrodt, Inc., and Nellcor Puritan Bennett, Inc. (collectively "Nellcor") entered into a Settlement Agreement and Release of Claims with Masimo Corporation and Masimo Laboratories, Inc. (the "Settlement") related to the consolidated patent infringement action. Under the terms of the Settlement, Tyco on behalf of Nellcor, paid Masimo a total of $330 million on January 19, 2006, which represents $265 million in damages in the patent case for sales through January 31, 2006 (after which the infringing products will no longer be sold) and $65 million as an advance royalty for oximetry sales including Nellcor's new 06 technology products from February 1, 2006 through December 31, 2006. In 2005, Tyco recorded a liability of $277 million related to this matter. The Settlement does not resolve the Masimo antitrust lawsuit or the related consumer antitrust class lawsuits described below. Under the terms of the Settlement, Nellcor received from Masimo a covenant not to sue on the Nellcor 06 products as well as a termination of all pending patent litigation with Masimo. In March 2011, Nellcor has the option to terminate Masimo's covenant not to sue and the obligation to pay future royalties on Nellcor's current products as well as any next-generation products. In addition, Nellcor will discontinue making, offering to sell, selling or shipping any products that the court found infringed on the patents held by Masimo, but will continue to provide service and sensors for the previously sold products.Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit filed on May 22, 2002 also pending in the United States District Court for the Central District of California. Tyco Healthcare and Mallinckrodt are subsidiaries of Tyco. In this lawsuit, Masimo alleges violations of antitrust laws against Tyco Healthcare and Mallinckrodt in the markets for pulse oximeter products. Masimo alleges that Tyco Healthcare and Mallinckrodt used their market position to prevent hospitals from purchasing Masimo's pulse oximetry products. Masimo seeks injunctive relief and monetary damages, including treble damages. Trial in this case began on February 22, 2005. The jury returned its verdict on March 21, 2005, and awarded Masimo $140 million in damages. The damages are automatically trebled under the antitrust statute to an award of $420 million. If ultimately successful, Masimo's attorneys are entitled to an award of reasonable fees and costs in addition to the verdict amount. The district court held a hearing on June 28, 2005 regarding post-trial motions. On March 22, 2006, the district court issued its Memorandum of Decision regarding the post-trial motions. In the Memorandum, the district court (i) vacated the jury's liability findings on two business practices; (ii) affirmed the jury's liability finding on two other business practices; (iii) vacated the jury's damage award in its entirety; and (iv) ordered a new trial on damages. The district court held the new trial on the damages on October 18 and 19, 2006. After post-trial briefing, the district court will issue its decision regarding the amount of damages to be awarded. Tyco has assessed the status of this matter and has concluded that it is more likely than not that the remainder of the jury's decision will be overturned, and, further, Tyco intends to vigorously pursue all available means to achieve such reversal. Accordingly, no provision has been made in the Consolidated Financial Statements with respect to this damage award. Beginning on August 29, 2005 withNatchitoches Parish Hospital Service District v. Tyco International, Ltd., twelve consumer class actions have been filed againstNellcor in the United StatesDistrict Court for the Central District of California. The remaining eleven actions areAllied Orthopedic Appliances, Inc. v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on August 29, 2005,Scott Valley Respiratory Home Care v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on October 27, 2005,Brooks Memorial Hospital et al v. Tyco Healthcare Group LP filed on October 18, 2005,All Star Oxygen Services, Inc. et al v. Tyco Healthcare Group, et al filed on October 25, 2005,Niagara Falls Memorial Medical Center, et al v. Tyco Healthcare Group LP filed on October 28, 2005,Nicholas H. Noyes Memorial Hospital v. Tyco Healthcare and Mallinckrodt filed on November 4, 2005,North Bay Hospital, Inc. v. Tyco Healthcare Group, et al filed on November 15, 2005,Stephen Skoronski v. Tyco International, Ltd., et al filed on November 21, 2005,Abington Memorial Hospital v. Tyco Int'l Ltd.; Tyco Int'l (US) Inc.; Mallinckrodt In.; Tyco Healthcare Group LP filed on November 22, 2005,South Jersey Hospital, Inc. v. Tyco International, Ltd., et al filed on January 24, 2006 andDeborah Heart and Lung Center v. Tyco International, Ltd., et al filed on January 27, 2006. In all twelve complaints the putative class representatives, on behalf of themselves and others, seek to recover overcharges they allege they paid for pulse oximetry products as a result of anticompetitive conduct by Nellcor in violation of the federal antitrust laws. The Company will respond to these complaints and intends to vigorously defend the actions. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters. As previously reported in the Company's periodic filings,Applied Medical Resources Corp. ("Applied Medical") v. United States Surgical ("U.S. Surgical") is a patent infringement action that was filed in the United States District Court for the Central District of California in April 1999 in which U.S. Surgical, a subsidiary of Tyco, is the defendant. In February 2002, the district court held that U.S. Surgical's VERSASEAL universal seal system, contained in certain surgical trocar and access devices manufactured by U.S. Surgical, infringed certain of the plaintiff's patents. The district court entered a permanent injunction against U.S. Surgical based upon infringement of one of the three patents involved in the suit. The United States Court of Appeals for the Federal Circuit affirmed the district court's permanent injunction ruling in September 2003 for the VERSASEAL product, which is no longer on the market. In October 2003, the district court ruled in U.S. Surgical's favor, holding that two other patents involved in the case were invalid. A trial on damages for the earlier infringement ruling in the district court concluded on July 27, 2004. The jury awarded Applied Medical $44 million in damages and returned a finding that the earlier infringement was willful, giving the district court discretion to enhance those damages to up to treble the damages awarded to Applied Medical by the jury. On October 1, 2004, the district court issued post-trial rulings that denied U.S. Surgical's motion to set aside the jury's finding on willfulness and granted Applied Medical's motion for enhanced damages, enhancing the jury's damages award by 25%, or $11 million. On January 27, 2005, the district court awarded Applied Medical $10 million in costs, prejudgment interest and attorneys' fees. Thus, Applied Medical's total award was $65 million. U.S. Surgical appealed the damages award and the willfulness finding to the Court of Appeals for the Federal Circuit. On January 24, 2006, the Court of Appeals issued a decision affirming the award to Applied Medical. On February 17, 2006, Tyco, on behalf of U.S. Surgical, paid Applied Medical $66 million which includes post-judgment interest accrued during the appeal. Tyco previously recorded a liability of $66 million related to this matter. On July 31, 2003, Applied Medical filed another patent infringement suit against U.S. Surgical in the United States District Court for the Central District of California. The complaint alleges that U.S. Surgical's VERSASEAL Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,553. Applied Medical seeks injunctive relief and unspecified monetary damages, including enhanced damages for alleged willful infringement. Applied Medical filed a motion for a preliminary injunction,which the district court denied on December 23, 2003. On February 7, 2005, the district court granted U.S. Surgical's motion for summary judgment. Applied Medical appealed the summary judgment ruling. On May 15, 2006, the United States Court of Appeals for the Federal Circuit issued a decision on the appeal vacating the district court's grant of summary judgment and remanding the case for further proceedings. The district court has scheduled trial in this case for July 10, 2007. It is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of this matter.29, 2006,28, 2007, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $124$36 million to $406$63 million. As of September 29, 2006,28, 2007, Tyco concluded that the best estimate within this range is approximately $184$40 million, of which $34$11 million is included in accrued and other current liabilities and $150$29 million is included in other liabilities on ourTyco's Consolidated Balance Sheets. In view of the Company's financial position and reserves for environmental matters, of $184 million, the Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows.(AROs)("AROs") according to the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations," and FIN No. 147 for the estimated future costs associated with legal obligations to decommission two nuclear facilities. With the clarification outlined by FIN No. 47 for valuation of conditional AROs, Tyco reassessed its overall ARO and recorded an additional $32 million.retire certain assets. As of September 29, 200628, 2007 and September 30, 2005,29, 2006, the Company's AROs were $111$13 million and $69 million, respectively. The increase in the reserve during 2006 is primarily due to the adoption of FIN No. 47. In addition, the Company recorded an insignificant amount of accretion, new cost estimates and foreign currency translation related to AROs during 2006.both periods. The Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows. See further discussions on the implementation of FIN No. 47 in Note 1.7. The majority of these cases have been filed against subsidiaries in Healthcare and Engineered Products and Services. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. A majority of the cases involve product liability claims, based principally on allegations of past distribution of heat-resistant industrial products incorporating asbestos or the past distribution of industrial valves that incorporated asbestos-containingasbestos- containing gaskets or packing. Each case typically names between dozens to hundreds of corporate defendants.thesethe lawsuits that have been filed against it and its subsidiaries. To date, the Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims. When appropriate, the Company settles claims; however, the total amount paid in any year to settle and defend all asbestos claims has been immaterial. As of September 29, 2006,28, 2007, there were approximately 15,5005,600 asbestos liability cases pending against the Company and its subsidiaries. periodically examined by various tax authorities. In connection with suchthese examinations, tax authorities, including the United States Internal Revenue Service ("IRS"), have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies and related interest that management has assessed as probable and estimable have been recorded. Whiletiming and ultimate resolutionIRS audit of these matters is uncertain, the Company anticipates that certain of these matters could be resolved during 2007. The IRS continues to audit the1997 through 2000 years, 1997 to 2000. In 2004 the Company submitted to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously reported.filed. During 2006, the IRS accepted substantially all of the proposed adjustments. These adjustments did not have a material impact on the financial condition, results of operations or cash flows of the Company. DuringAlso during 2006, the Company has developed proposed amendments to U.S. federal income tax returns for additional periods.periods through 2002. On the basis of previously accepted amendments, the Company has determined that acceptance of these adjustments is probable and accordingly has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows.During 2005,As previously reported, we have been informed that two subsidiaries in our Flow Control business in Italy have been named in a request for criminal charges filed by the Milan public prosecutor's office. Tyco has reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("FCPA"), that it would continue to make periodic progresshave communicationscommunicate with the DOJ and SEC to provide updates on the baseline review being conducted by outside counsel, including, as appropriate, briefings concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities. Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the Company in its response to these allegations. To date, the baseline review has revealed that some business practices may not comply with Tyco and FCPA requirements. At this time, Tyco cannot predict the outcome of these matters and other allegations reported to regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of any or all of these matters. However, it is possible that the Company may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on its financial position, results of operations or cash flows.
On December 29, 2005, the City of Phoenix filed a lawsuit against Earth Tech, Inc., its surety, Federal Insurance Company and other unnamed parties in the Maricopa County Superior Court,The City of Phoenix v. Earth Tech, Inc., Federal Insurance Company and John Does 1-50. The lawsuit is in connection with the City of Phoenix's termination on August 12, 2005 of Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. The City alleges the following causes of action: (i) Earth Tech breached its Pre-Construction Services and Construction Management at Risk Contracts; (ii) Earth Tech did not properly, reasonably or timely manage, supervise or inspect the work under the Contracts; (iii) Federal Insurance breached the terms and conditions of the performance bond; and (iv) Federal Insurance failed to investigate the City's Bond Claims. The City requested unspecified general, consequential, incidental, special and liquidated damages plus interest as its relief. On February 8, 2006, Earth Tech filed a Motion to Dismiss the City's Complaint in which Federal Insurance Company joined. The Court denied Earth Tech's Motion to Dismiss on September 25, 2006. The City of Phoenix filed an Amended Complaint against Earth Tech and Federal Insurance on September 25, 2006. In the Amended Complaint, the City of Phoenix alleged damages of $128 million.
The Presiding Judge of Maricopa County Superior Court on July 11, 2006 consolidated all of the pending lawsuits related to this dispute on the Court's complex litigation docket. At this time,On June 6, 2007, the Court granted Earth Tech's motion for partial summary judgment, ordering that application of Arizona's Prompt Payment Act was appropriate and that any material inconsistencies in the contract be resolved in favor of the Act's requirements. On October 19, 2007, Earth Tech filed a second motion related to the Prompt Payment Act, arguing that the City of Phoenix breached its contract with Earth Tech by failing to make payment on a Payment Application that was deemed certified and approved under the Prompt Payment Act. The Court is likely to rule on the motion sometime in the spring of 2008. Tyco cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of this matter.
Fitzpatrick Contractors Limited v. Tyco Fire and Integrated Solutions (UK) Ltd. On July 18, 2007, Fitzpatrick Contractors Limited ("FCL") commenced an action against Tyco Fire and Integrated Solutions (UK) Ltd. in the High Court of Justice, Queen Bench Division, Technology and Construction Court, United Kingdom, alleging that Tyco entered into a binding contract in 2002 for the design, manufacture and installation of mechanical and electrical works for the refurbishment of a portion of London Transport's Blackwell Tunnel. FCL seeks a declaratory judgment that a contract was formed between the parties and seeks damages for breach of contract in the amount of approximately $38 million. Tyco believes it has valid counterclaims for unpaid amounts owed to it by FCL for design work, purchased equipment and subcontracted construction work associated with the project, but denies that it entered a binding contract with FCL for the project and intends to defend this action vigorously. While it is not possible at this time to predict the final outcome of this dispute, Tyco does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows.
Sensormatic Security Corp. v. Sensormatic Electronics Corp., ADT Security Services, Inc. and Wallace Computer Services, Inc. In April 2002, litigation was commenced in the United States District Court for the District of Maryland by a Sensormatic franchisee, Sensormatic Security Corp. ("SSC"), alleging breach of contract against Sensormatic and tortuous interference with contract against ADT and Wallace Computer Services, Inc., a party unrelated to Tyco. The litigation was based on allegedly unpaid commissions under a franchise agreement. The lawsuit also alleges that Sensormatic improperly authorized third parties (including ADT and Wallace) to sell in SSC's exclusive territory of Maryland, Virginia and the District of Columbia. Sensormatic has agreed to indemnify Wallace. SSC seeks an accounting, monetary damages (including punitive damages against ADT and Wallace), and injunctive relief. Sensormatic and ADT have denied SSC's allegations and asserted affirmative defenses. Sensormatic also filed a counterclaim seeking recovery of overpayments made to SSC. On September 7, 2006, the trial court denied in part and granted in part the parties' cross motions for summary judgment. Among other things, the Court ruled that SSC has the right to commissions on all Sensormatic CCTV products (not just SensorVision systems) if sold for automatic theft detection in the franchise territory and SSC has the right to commissions on CCTV indirect sales if sold for automatic theft detection in the franchise territory. Sensormatic and ADT intend to appeal those rulings. Sensormatic and ADT will continue to vigorously defend the litigation. While it is not possible at this time to predict the final outcome of this dispute, Tyco does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows.
The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.
19.17. Retirement Plans
Measurement Date—In 2005,September 2006, the FASB issued SFAS No. 158. SFAS No. 158 requires the recognition of the funded status of defined benefit pension and other postretirement benefit plans on the Company's Consolidated Balance Sheets. SFAS No. 158 requires recognition of the actuarial gains or losses and prior service costs that have not yet been included in net periodic benefit cost as a component of accumulated other comprehensive income, net of tax. The Company changedadopted the recognition and disclosure provisions of SFAS No. 158 on September 28, 2007. The Company uses a measurement date for its pension and post retirement benefit plans from September 30th toof August 31st, effective October 1, 2004..
The Company believes thattable below presents the one-month changeincremental effect of measurement date is a preferable change as it allows management adequate time to evaluate and report the actuarial informationapplying SFAS No. 158 on individual line items in the Company's Consolidated Financial Statements under the accelerated reporting deadlines. Accordingly, all amounts presented as of and for the years endedBalance Sheet at September 29, 2006 and September 30, 2005 reflect an August 31 measurement date, while prior years reflect a September 30 measurement date. The Company has accounted for the change28, 2007 ($ in measurement date as a change in accounting principle. The cumulative effect of the accounting principle change as of the beginning of 2005 was a $21 million after-tax gain ($28 million pretax). The effects of this change in measurement date did not have a material effect on net periodic benefit costs.millions):
| | Before Application of SFAS No. 158 | Adjustments | After Application of SFAS No. 158 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Prepaid expenses and other current assets | $ | 1,350 | $ | (172 | ) | $ | 1,178 | ||
| Intangible assets, net | 2,707 | (10 | ) | 2,697 | |||||
| Other assets | 2,428 | 98 | 2,526 | ||||||
| Accrued and other current liabilities | 2,898 | 23 | 2,921 | ||||||
| Other liabilities | 3,943 | 4 | 3,947 | ||||||
| Accumulated other comprehensive income | 454 | 111 | 565 | ||||||
Defined Benefit Pension Plans—The Company has a number of noncontributory and contributory defined benefit retirement plans covering certain of its U.S. and non-U.S. employees, designed in accordance with conditions and practices in the countries concerned. Net periodic pension benefit cost is based on periodic actuarial valuations which use the projected unit credit method of calculation and is charged to the Consolidated Statements of IncomeOperations on a systematic basis over the expected average remaining service lives of current participants. Contribution amounts are determined based on the advice of professionally qualified actuaries in the countries concerned. The benefits under the defined benefit plans are based on various factors, such as years of service and compensation. The following tables exclude amounts related to discontinued operations for all periods presented.
In connection with the Separation, the Company legally separated certain pension plans that included participants of Tyco Healthcare, Tyco Electronics and other subsidiaries. As a result, the Company remeasured the assets and projected benefit obligation of the separated pension plans. The impact of the remeasurement on continuing operations was immaterial. Also, during 2007, the Company completed the merger of certain pension plans in the United Kingdom, which resulted in an increase to the minimum pension liability with a corresponding decrease to accumulated other comprehensive income of $10 million, net of income taxes.
The net periodic benefit cost for all U.S. and non-U.S. defined benefit pension plans for 2007, 2006 2005 and 20042005 is as follows ($ in millions):
| | | U.S. Plans | Non-U.S. Plans | | U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||
| Service cost | Service cost | $ | 25 | $ | 21 | $ | 25 | $ | 117 | $ | 106 | $ | 102 | Service cost | $ | 9 | $ | 11 | $ | 8 | $ | 48 | $ | 39 | $ | 37 | ||||||||||||||
| Interest cost | Interest cost | 127 | 128 | 129 | 137 | 136 | 123 | Interest cost | 47 | 43 | 42 | 74 | 61 | 60 | ||||||||||||||||||||||||||
| Expected return on plan assets | Expected return on plan assets | (164 | ) | (151 | ) | (114 | ) | (126 | ) | (107 | ) | (86 | ) | Expected return on plan assets | (56 | ) | (55 | ) | (51 | ) | (74 | ) | (61 | ) | (50 | ) | ||||||||||||||
| Amortization of initial net asset obligation | Amortization of initial net asset obligation | — | — | (1 | ) | — | — | — | Amortization of initial net asset obligation | — | — | — | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||
| Amortization of prior service cost (benefit) | 3 | 3 | 3 | (4 | ) | (1 | ) | 1 | ||||||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | Amortization of prior service cost (credit) | 1 | 1 | 1 | (3 | ) | (2 | ) | (1 | ) | ||||||||||||||||||||||||||||||
| Amortization of net actuarial loss | Amortization of net actuarial loss | 52 | 43 | 46 | 54 | 47 | 52 | Amortization of net actuarial loss | 12 | 18 | 14 | 30 | 25 | 23 | ||||||||||||||||||||||||||
| Plan settlements, curtailments and special termination benefits | Plan settlements, curtailments and special termination benefits | (1 | ) | 1 | 3 | 1 | (4 | ) | 5 | Plan settlements, curtailments and special termination benefits | — | — | — | 2 | 1 | — | ||||||||||||||||||||||||
| Net periodic benefit cost | $ | 42 | $ | 45 | $ | 91 | $ | 179 | $ | 177 | $ | 197 | Net periodic benefit cost | $ | 13 | $ | 18 | $ | 14 | $ | 76 | $ | 62 | $ | 68 | |||||||||||||||
Weighted-average assumptions used to determine net pension cost during the period: | Weighted-average assumptions used to determine net pension cost during the period: | Weighted-average assumptions used to determine net pension cost during the period: | ||||||||||||||||||||||||||||||||||||||
| Discount rate | Discount rate | 5.3 | % | 6.0 | % | 6.0 | % | 4.3 | % | 4.9 | % | 4.9 | % | Discount rate | 6.0 | % | 5.3 | % | 6.0 | % | 4.9 | % | 4.8 | % | 5.3 | % | ||||||||||||||
| Expected return on plan assets | Expected return on plan assets | 8.0 | % | 8.0 | % | 8.0 | % | 6.3 | % | 6.5 | % | 6.3 | % | Expected return on plan assets | 8.0 | % | 8.0 | % | 8.0 | % | 7.0 | % | 7.1 | % | 7.0 | % | ||||||||||||||
| Rate of compensation increase | Rate of compensation increase | 4.0 | % | 4.3 | % | 4.3 | % | 3.4 | % | 3.6 | % | 3.4 | % | Rate of compensation increase | 4.0 | % | 4.0 | % | 4.3 | % | 4.1 | % | 3.9 | % | 3.9 | % | ||||||||||||||
The estimated net loss and prior service cost for U.S. pension benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are expected to be $6 million and $1 million, respectively.
The estimated net loss and prior service credit for non-U.S. pension benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are expected to be $20 million and $3 million, respectively.
The change in benefit obligations, plan assets and the amounts recognized on the Consolidated Balance Sheets for all U.S. and non-U.S. defined benefit plans at September 29, 200628, 2007 and September 30, 200529, 2006 is as follows ($ in millions):
| | | U.S. Plans | Non-U.S. Plans | | U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2006 | 2005 | | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
| Change in benefit obligations: | Change in benefit obligations: | Change in benefit obligations: | ||||||||||||||||||||||||||
| Benefit obligations at end of prior year | $ | 2,478 | $ | 2,222 | $ | 3,235 | $ | 2,770 | ||||||||||||||||||||
| Effect of change in measurement date | — | 11 | — | (8 | ) | |||||||||||||||||||||||
| Benefit obligations at beginning of period | 2,478 | 2,233 | 3,235 | 2,762 | ||||||||||||||||||||||||
| Benefit obligations at beginning of year | Benefit obligations at beginning of year | $ | 803 | $ | 816 | $ | 1,495 | $ | 1,276 | |||||||||||||||||||
| Service cost | Service cost | 25 | 21 | 117 | 106 | Service cost | 9 | 11 | 48 | 39 | ||||||||||||||||||
| Interest cost | Interest cost | 127 | 128 | 137 | 136 | Interest cost | 47 | 43 | 74 | 61 | ||||||||||||||||||
| Employee contributions | Employee contributions | — | — | 13 | 10 | Employee contributions | — | — | 6 | 6 | ||||||||||||||||||
| Plan amendments | Plan amendments | 2 | 4 | (16 | ) | (43 | ) | Plan amendments | 2 | — | (8 | ) | — | |||||||||||||||
| Actuarial (gain) loss | Actuarial (gain) loss | (107 | ) | 233 | 29 | 354 | Actuarial (gain) loss | (42 | ) | (26 | ) | (115 | ) | 76 | ||||||||||||||
| Transfer | Transfer | 7 | — | — | — | |||||||||||||||||||||||
| Benefits and administrative expenses paid | Benefits and administrative expenses paid | (144 | ) | (140 | ) | (107 | ) | (104 | ) | Benefits and administrative expenses paid | (43 | ) | (41 | ) | (58 | ) | (49 | ) | ||||||||||
| New plans | — | — | — | 100 | ||||||||||||||||||||||||
| Plan settlements, curtailments and special termination benefits | Plan settlements, curtailments and special termination benefits | (3 | ) | (1 | ) | (1 | ) | (5 | ) | Plan settlements, curtailments and special termination benefits | — | — | (8 | ) | (2 | ) | ||||||||||||
| Currency translation | Currency translation | — | — | 167 | (81 | ) | Currency translation | — | — | 102 | 88 | |||||||||||||||||
| Benefit obligations at end of period | $ | 2,378 | $ | 2,478 | $ | 3,574 | $ | 3,235 | Benefit obligations at end of period | $ | 783 | $ | 803 | $ | 1,536 | $ | 1,495 | |||||||||||
| Change in plan assets: | Change in plan assets: | Change in plan assets: | ||||||||||||||||||||||||||
| Fair value of plan assets at end of prior year | $ | 2,126 | $ | 1,993 | $ | 1,952 | $ | 1,591 | ||||||||||||||||||||
| Effect of change in measurement date | — | (338 | ) | — | (33 | ) | ||||||||||||||||||||||
| Fair value of plan assets at beginning of period | 2,126 | 1,655 | 1,952 | 1,558 | ||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | Fair value of plan assets at beginning of year | $ | 720 | $ | 700 | $ | 993 | $ | 848 | |||||||||||||||||||
| Actual return on plan assets | Actual return on plan assets | 168 | 246 | 188 | 260 | Actual return on plan assets | 76 | 57 | 80 | 86 | ||||||||||||||||||
| Employer contributions | Employer contributions | 10 | 366 | 117 | 205 | Employer contributions | 5 | 4 | 111 | 44 | ||||||||||||||||||
| Employee contributions | Employee contributions | — | — | 13 | 11 | Employee contributions | — | — | 6 | 6 | ||||||||||||||||||
| New plans | — | — | — | 82 | ||||||||||||||||||||||||
| Transfer | Transfer | 7 | — | — | — | |||||||||||||||||||||||
| Plan settlements, curtailments and special termination benefits | Plan settlements, curtailments and special termination benefits | (3 | ) | (1 | ) | (3 | ) | (8 | ) | Plan settlements, curtailments and special termination benefits | — | — | (9 | ) | (2 | ) | ||||||||||||
| Benefits and administrative expenses paid | Benefits and administrative expenses paid | (144 | ) | (140 | ) | (107 | ) | (104 | ) | Benefits and administrative expenses paid | (43 | ) | (41 | ) | (58 | ) | (49 | ) | ||||||||||
| Currency translation | Currency translation | — | — | 112 | (52 | ) | Currency translation | — | — | 70 | 60 | |||||||||||||||||
| Fair value of plan assets at end of period | $ | 2,157 | $ | 2,126 | $ | 2,272 | $ | 1,952 | Fair value of plan assets at end of period | $ | 765 | $ | 720 | $ | 1,193 | $ | 993 | |||||||||||
| Funded status | Funded status | $ | (221 | ) | $ | (352 | ) | $ | (1,302 | ) | $ | (1,283 | ) | Funded status | $ | (18 | ) | $ | (83 | ) | $ | (343 | ) | $ | (502 | ) | ||
| Unrecognized net actuarial loss | Unrecognized net actuarial loss | 625 | 787 | 976 | 1,014 | Unrecognized net actuarial loss | — | 217 | — | 499 | ||||||||||||||||||
| Unrecognized prior service cost (benefit) | 25 | 26 | (51 | ) | (36 | ) | ||||||||||||||||||||||
| Unrecognized prior service cost (credit) | Unrecognized prior service cost (credit) | — | 8 | — | (31 | ) | ||||||||||||||||||||||
| Unrecognized transition asset | Unrecognized transition asset | — | — | (6 | ) | (6 | ) | Unrecognized transition asset | — | — | — | (6 | ) | |||||||||||||||
| Contributions after the measurement date | Contributions after the measurement date | 3 | 1 | 18 | 10 | Contributions after the measurement date | — | — | 5 | 3 | ||||||||||||||||||
| Net amount recognized | $ | 432 | $ | 462 | $ | (365 | ) | $ | (301 | ) | Net amount recognized | $ | (18 | ) | $ | 142 | $ | (338 | ) | $ | (37 | ) | ||||||
Amounts recognized on the Consolidated Balance Sheets: | ||||||||||||||||||||||||||||
| Prepaid benefit cost | $ | 2 | $ | — | $ | 31 | $ | 27 | ||||||||||||||||||||
| Accrued benefit liability | (209 | ) | (344 | ) | (997 | ) | (974 | ) | ||||||||||||||||||||
| Intangible asset | 18 | 22 | 6 | 5 | ||||||||||||||||||||||||
| Accumulated other comprehensive income | 621 | 784 | 595 | 641 | ||||||||||||||||||||||||
| Net amount recognized | $ | 432 | $ | 462 | $ | (365 | ) | $ | (301 | ) | ||||||||||||||||||
Weighted-average assumptions used to determine pension benefit obligations at year end: | ||||||||||||||||||||||||||||
| Discount rate | 6.0 | % | 5.3 | % | 4.5 | % | 4.3 | % | ||||||||||||||||||||
| Rate of compensation increase | 4.0 | % | 4.0 | % | 3.6 | % | 3.4 | % | ||||||||||||||||||||
| | U.S. Plans | Non-U.S. Plans | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2007 | 2006 | ||||||||||
| Amounts recognized on the Consolidated Balance Sheets: | ||||||||||||||
For the years before the adoption of the funded status provisions of SFAS No. 158: | ||||||||||||||
| Prepaid benefit credit | $ | — | $ | 1 | ||||||||||
| Accrued benefit cost | (74 | ) | (437 | ) | ||||||||||
| Intangible asset | 8 | 2 | ||||||||||||
| Accumulated other comprehensive income | 208 | 397 | ||||||||||||
| Net amount recognized | $ | 142 | $ | (37 | ) | |||||||||
For the years after the adoption of the funded status provisions of SFAS No. 158: | ||||||||||||||
| Non-current assets | $ | 26 | $ | 2 | ||||||||||
| Current liabilities | (4 | ) | (13 | ) | ||||||||||
| Non-current liabilities | (40 | ) | (327 | ) | ||||||||||
| Net amount recognized | $ | (18 | ) | $ | (338 | ) | ||||||||
| Amounts recognized in accumulated other comprehensive income (before taxes) consist of: | ||||||||||||||
| Transition obligation | $ | — | $ | (6 | ) | |||||||||
| Prior service cost (credit) | 9 | (38 | ) | |||||||||||
| Net actuarial loss | 143 | 377 | ||||||||||||
| Total amount recognized | $ | 152 | $ | 333 | ||||||||||
Weighted-average assumptions used to determine pension benefit obligations at year end: | ||||||||||||||
| Discount rate | 6.3 | % | 6.0 | % | 5.6 | % | 4.9 | % | ||||||
| Rate of compensation increase | 4.0 | % | 4.0 | % | 4.4 | % | 4.1 | % | ||||||
The accumulated benefit obligation for all U.S. plans as of September 28, 2007 and September 29, 2006 and September 30, 2005 was $2,363$776 million and $2,465$795 million, respectively. The accumulated benefit obligation for all
non-U.S. plans as of September 28, 2007 and September 29, 2006 and September 30, 2005 was $3,192$1,468 million and $2,870$1,413 million, respectively.
The accumulated benefit obligation and fair value of plan assets for U.S. pension plans with accumulated benefit obligations in excess of plan assets were $2,355$111 million and $2,149$67 million, respectively, at September 28, 2007 and $794 million and $719 million, respectively, at September 29, 2006 and $2,465 million and $2,126 million, respectively, at September 30, 2005.2006.
The accumulated benefit obligation and fair value of plan assets for non-U.S. pension plans with accumulated benefit obligations in excess of plan assets were $3,051$1,278 million and $2,097$988 million, respectively, at September 28, 2007 and $1,402 million and $980 million, respectively, at September 29, 20062006.
The aggregate benefit obligation and $2,738fair value of plan assets for U.S. pension plans with benefit obligations in excess of plan assets were $111 million and $1,796$67 million, respectively, at September 30, 2005.28, 2007, and $802 million and $719 million, respectively, at September 29, 2006.
The aggregate benefit obligation and fair value of plan assets for non-U.S. pension plans with benefit obligations in excess of plan assets were $1,519 million and $1,175 million, respectively, at September 28, 2007, and $1,492 million and $989 million, respectively, at September 29, 2006.
In determining the expected return on plan assets, the Company considers the relative weighting of plan assets by class and individual asset class performance expectations as provided by its external advisors.
The Company's investment strategy for its pension plans is to manage the plans on a going-concern basis. Current investment policy is to achieve a superior return on assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for participants. For U.S. pension plans, this policy targets a 60% allocation to equity securities and a 40% allocation to debt securities. Various asset allocation strategies are in place for non-U.S. pension plans, with a weighted-average target allocation of 54%52% to equity securities, 40%43% to debt securities and 6%5% to other asset classes, including real estate and cash equivalents.
Pension plans have the following weighted-average asset allocations at September 29, 2006 and September 30, 2005:allocations:
| | | U.S. Plans | Non-U.S. Plans | | U.S. Plans | Non-U.S. Plans | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2006 | 2005 | 2006 | 2005 | | 2007 | 2006 | 2007 | 2006 | ||||||||||
| Asset Category: | Asset Category: | Asset Category: | ||||||||||||||||||
| Equity securities | Equity securities | 60 | % | 59 | % | 54 | % | 54 | % | Equity securities | 60 | % | 60 | % | 50 | % | 57 | % | ||
| Debt securities | Debt securities | 40 | % | 38 | % | 38 | % | 31 | % | Debt securities | 40 | % | 40 | % | 44 | % | 36 | % | ||
| Real estate | Real estate | — | — | 3 | % | 3 | % | Real estate | — | — | 3 | % | 3 | % | ||||||
| Cash and cash equivalents | Cash and cash equivalents | — | 3 | % | 5 | % | 12 | % | Cash and cash equivalents | — | — | 3 | % | 4 | % | |||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | Total | 100 | % | 100 | % | 100 | % | 100 | % | |||
Although the Company does not buy or sell any of its own stock as a direct investment for its pension funds, due to external investment management of the funds, the plans may indirectly hold Tyco stock. The aggregate amount of the shares would not be considered material relative to the total fund assets.
The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which it operates as well as to make discretionary voluntary contributions from time-to-time. The Company anticipates that at a minimum it will makecontribute at least the minimum required contributions to its pension plans in 20072008 of $10$5 million for the U.S. plans and $141$64 million for non-U.S. plans.
Benefit payments, including those amounts to be paid out of corporate assets and reflecting future expected service as appropriate, are expected to be paid as follows ($ in millions):
| | U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | $ | 138 | $ | 99 | ||||||||
| 2008 | 144 | 106 | $ | 41 | $ | 52 | ||||||
| 2009 | 146 | 115 | 42 | 54 | ||||||||
| 2010 | 162 | 122 | 44 | 59 | ||||||||
| 2011 | 155 | 133 | 46 | 64 | ||||||||
| 2012–2016 | 857 | 806 | ||||||||||
| 2012 | 49 | 70 | ||||||||||
| 2013-2017 | 269 | 425 | ||||||||||
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 $6$3 million, $15$3 million and $13$12 million in 2007, 2006 2005 and 2004,2005, respectively.
Executive Retirement Arrangements—Messrs. Kozlowski and Swartz participated in individual Executive Retirement Arrangements maintained by Tyco (the "ERA"). Under the ERA, Messrs. Kozlowski and Swartz would have fixed lifetime benefits commencing at their normal retirement age of 65. The Company's accrued benefit obligations for Messrs. Kozlowski and Swartz as of September 29, 200628, 2007 were $66$71 million and $34$36 million, respectively. The Company's accrued benefit obligations for Messrs. Kozlowski and Swartz as of September 30, 200529, 2006 were $62$66 million and $32$34 million, respectively. Retirement benefits are available at earlier ages and alternative forms of benefits can be elected. Any such variations would be actuarially equivalent to the fixed lifetime benefit starting at age 65. Amounts owed to Messrs. Kozlowski and Swartz under the ERA are in dispute by the Company.
Defined Contribution Retirement Plans—The Company maintains several defined contribution retirement plans, which include 401(k) matching programs, as well as qualified and nonqualified profit sharing and share bonus retirement plans. Expense for the defined contribution plans is computed as a percentage of participants' compensation and was $204$78 million, $190$73 million and $175$67 million for 2007, 2006 2005 and 2004,2005, respectively. The Company also maintains an unfunded Supplemental Executive Retirement Plan ("SERP"). This plan is nonqualified and restores the employer match that certain employees lose due to IRS limits on eligible compensation under the defined contribution plans. Expense related to the SERP was $3 million in 2006, $62007, $2 million in 20052006 and $3 million in 2004.2005.
Deferred Compensation Plans—The Company has nonqualified deferred compensation plans, which permit eligible employees to defer a portion of their compensation. A record keeping account is set up for each participant and the participant chooses from a variety of measurement funds for the deemed investment of their accounts. The measurement funds correspond to a number of funds in the Company's 401(k) plans and the account balance fluctuates with the investment returns on those funds. Deferred compensation expense was $10$13 million, $14$6 million and $15$7 million in 2007, 2006 2005 and 2004,2005, respectively. Total deferred compensation liabilities were $179$100 million and $171$91 million at September 28, 2007 and September 29, 2006, and September 30, 2005, respectively.
Rabbi Trusts—Trusts—The Company has rabbi trusts, the assets of which may be used to pay non-qualified plan benefits. The trusts primarily hold corporate-owned life insurance policies, cash and cash equivalents, and debt and equity securities. During 2007, the Company, as permitted under the trust agreement, sold substantially all of the assets from one of the trusts and received $271 million of proceeds. At September 28, 2007 and September 29, 2006, and September 30, 2005, trust assets
totaled $399$2 million and $388$265 million, respectively. The cash surrender value of the life insurance policies, net of outstanding loans, included in the rabbi trust was $228 million and $218$224 million at September 29, 2006 and September 30, 2005, respectively.2006. The rabbi trust assets, which are consolidated, are subject to the claims of the Company's creditors in the event of the Company's insolvency. Plan participants are general creditors of the Company with respect to these benefits.
Postretirement Benefit Plans—The Company generally does not provide postretirement benefits other than pensions for its employees. However, certain acquired operations provide these benefits to employees who were eligible at the date of acquisition, and a small number of U.S. and Canadian operations provide on going eligibility for such benefits.
Net periodic postretirement benefit cost for 2007, 2006 2005 and 20042005 is as follows ($ in millions):
| | | 2006 | 2005 | 2004 | | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | Service cost | $ | 4 | $ | 3 | $ | 2 | Service cost | $ | 1 | $ | 1 | $ | 1 | ||||||||
| Interest cost | Interest cost | 15 | 18 | 21 | Interest cost | 4 | 3 | 4 | ||||||||||||||
| Amortization of prior service benefit | (5 | ) | (6 | ) | (5 | ) | ||||||||||||||||
| Amortization of net actuarial (gain) loss | (1 | ) | 1 | 8 | ||||||||||||||||||
| Curtailment/Settlement gain | — | — | (3 | ) | ||||||||||||||||||
| Amortization of prior service credit | Amortization of prior service credit | (1 | ) | — | (1 | ) | ||||||||||||||||
| Amortization of net actuarial gain | Amortization of net actuarial gain | (2 | ) | (3 | ) | (4 | ) | |||||||||||||||
| Net periodic postretirement benefit cost | $ | 13 | $ | 16 | $ | 23 | Net periodic postretirement benefit cost | $ | 2 | $ | 1 | $ | — | |||||||||
Weighted-average assumptions used to determine net postretirement benefit cost during the period: | Weighted-average assumptions used to determine net postretirement benefit cost during the period: | Weighted-average assumptions used to determine net postretirement benefit cost during the period: | ||||||||||||||||||||
| Discount rate | Discount rate | 4.8 | % | 5.5 | % | 5.5 | % | Discount rate | 5.7 | % | 4.8 | % | 5.5 | % | ||||||||
| Rate of compensation increase | 4.0 | % | 4.3 | % | 4.3 | % | ||||||||||||||||
The components of the accrued postretirement benefit obligations, substantially all of which are unfunded at September 29, 200628, 2007 and September 30, 2005,29, 2006, are as follows ($ in millions):
| | | 2006 | 2005 | | 2007 | 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in benefit obligations: | Change in benefit obligations: | Change in benefit obligations: | ||||||||||||||
| Benefit obligations at beginning of period | $ | 337 | $ | 389 | ||||||||||||
| Benefit obligations at beginning of year | Benefit obligations at beginning of year | $ | 67 | $ | 73 | |||||||||||
| Service cost | Service cost | 4 | 3 | Service cost | 1 | 1 | ||||||||||
| Interest cost | Interest cost | 15 | 18 | Interest cost | 3 | 3 | ||||||||||
| Plan amendments | (7 | ) | (15 | ) | ||||||||||||
| Actuarial gain | (13 | ) | (37 | ) | ||||||||||||
| Actuarial loss (gain) | Actuarial loss (gain) | 6 | (2 | ) | ||||||||||||
| Benefits paid | Benefits paid | (29 | ) | (22 | ) | Benefits paid | (7 | ) | (9 | ) | ||||||
| Currency translation | Currency translation | 1 | 1 | Currency translation | 1 | 1 | ||||||||||
| Benefit obligations at end of period | $ | 308 | $ | 337 | Benefit obligations at end of year | $ | 71 | $ | 67 | |||||||
| Change in plan assets: | Change in plan assets: | |||||||||||||||
| Fair value of plan assets at beginning of year | Fair value of plan assets at beginning of year | $ | — | $ | — | |||||||||||
| Employer contributions | Employer contributions | 7 | 9 | |||||||||||||
| Benefits paid | Benefits paid | (7 | ) | (9 | ) | |||||||||||
| Fair value of plan assets at end of year | $ | — | $ | — | ||||||||||||
| Funded status | Funded status | $ | (71 | ) | $ | (67 | ) | |||||||||
| Unrecognized net actuarial loss | Unrecognized net actuarial loss | — | (16 | ) | ||||||||||||
| Unrecognized prior service credit | Unrecognized prior service credit | — | (4 | ) | ||||||||||||
| Net amount recognized | $ | (71 | ) | $ | (87 | ) | ||||||||||
| | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of period | $ | 4 | $ | 5 | ||||
| Employer contributions | 29 | 21 | ||||||
| Benefits paid | (29 | ) | (22 | ) | ||||
| Fair value of plan assets at end of period | $ | 4 | $ | 4 | ||||
| Funded status | $ | (304 | ) | $ | (333 | ) | ||
| Unrecognized net loss | 44 | 65 | ||||||
| Unrecognized prior service benefit | (42 | ) | (41 | ) | ||||
| Contributions after the measurement date | 2 | 2 | ||||||
| Accrued postretirement benefit cost | $ | (300 | ) | $ | (307 | ) | ||
Weighted-average assumptions used to determine postretirement benefit obligations at year end: | ||||||||
| Discount rate | 5.7 | % | 4.8 | % | ||||
| Rate of compensation increase | 4.0 | % | 4.0 | % | ||||
| | 2007 | 2006 | ||||||
|---|---|---|---|---|---|---|---|---|
| Amounts recognized on the Consolidated Balance Sheets: | ||||||||
For the years before the adoption of the funded status provisions of SFAS No. 158: | ||||||||
| Accrued benefit cost | $ | (87 | ) | |||||
| Net amount recognized | $ | (87 | ) | |||||
| For the years after the adoption of the funded status provisions of SFAS No. 158: | ||||||||
| Current liabilities | $ | (7 | ) | |||||
| Non-current liabilities | (64 | ) | ||||||
| Net amount recognized | $ | (71 | ) | |||||
| Amounts recognized in accumulated other comprehensive income (before taxes) consist of: | ||||||||
| Prior service credit | $ | (3 | ) | |||||
| Net actuarial gain | (8 | ) | ||||||
| Total amount recognized | $ | (11 | ) | |||||
Weighted-average assumptions used to determine postretirement benefit obligations at year end: | ||||||||
| Discount rate | 6.0 | % | 5.7 | % | ||||
The Company expects to make contributions to its postretirement benefit plans of $26$7 million in 2007.2008.
Benefit payments, including those amounts to be paid out of corporate assets and reflecting future expected service as appropriate, are expected to be paid as follows ($ in millions):
| 2007 | $ | 26 | ||||
| 2008 | 25 | $ | 7 | |||
| 2009 | 24 | 7 | ||||
| 2010 | 23 | 7 | ||||
| 2011 | 23 | 7 | ||||
| 2012–2016 | 112 | |||||
| 2012 | 6 | |||||
| 2013-2017 | 29 | |||||
For measurement purposes, a 10.1%10.0% and 11.5%11.4% composite annual rate of increase in the per capita cost of covered health care benefits was assumed at September 29, 200628, 2007 and September 30, 2005,29, 2006, respectively. At September 29, 200628, 2007 and September 30, 2005,29, 2006, the composite annual rate of increase in health care benefit costs was assumed to decrease gradually to 5.0% by the year 2013 and remain at that level thereafter. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects ($ in millions):
| | 1-Percentage-Point Increase | 1-Percentage-Point Decrease | 1-Percentage-Point Increase | 1-Percentage-Point Decrease | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Effect on total of service and interest cost | $ | 3 | $ | (2 | ) | $ | — | $ | — | |||||
| Effect on postretirement benefit obligation | 31 | (25 | ) | 4 | (4 | ) | ||||||||
In December 2003, the US enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Certain of the Company's
retiree medical programs already provided prescription drug coverage for retirees over age 65 that were at least as generous as the benefits provided under Medicare. This Act reduces the Company's obligation in these instances. The Company included the effects of the Act in the Consolidated Financial Statements by reducing net periodic benefit cost by $12$5 million for 2005, and reflecting an actuarial gain which reduced its accumulated post retirementpostretirement benefit obligation by approximately $64$30 million at September 30, 2005.
20. Shareholder's18. Shareholders' Equity
Preference Shares—Tyco has authorized 125,000,00031,250,000 preference shares, par value of $1$4 per share, none of which were issued and outstanding at September 29, 200628, 2007 and September 30, 2005.29, 2006. Rights as to dividends, return of capital, redemption, conversion, voting and otherwise with respect to the preference shares may be determined by Tyco's Board of Directors on or before the time of issuance. In the event of the liquidation of the Company, the holders of any preference shares then outstanding would be entitled to payment to them of the amount for which the preference shares were subscribed and any unpaid dividends prior to any payment to the common shareholders.
Dividends—On December 9, 2004, theSeptember 13, 2007 Tyco's Board of Directors approved an increase in thea quarterly dividend on the Company's common shares from $0.0125of $0.15 per share payable on November 1, 2007 to $0.10 per share.shareholders of record of Tyco International Ltd. post Separation on October 1, 2007. Tyco paid a quarterly cash dividend of $0.0125$0.05 in the first quarter of 2005 and $0.10$0.40 thereafter. Prior to that, Tyco paid a quarterly cash dividend of $0.0125 per common share.
Shares Owned by Subsidiaries—Shares owned by subsidiaries are treated as treasury shares and are recorded at cost. In connection with the Separation, all such shares were effectively retired during the third quarter of 2007 and repurchases commenced in the fourth quarter of 2007.
Share Repurchase Program—In September 2007, Tyco's Board of Directors approved a $1.0 billion share repurchase program. In July 2005 and May 2006, Tyco's Board of Directors approved share repurchase programs of $1.5 billion and $2.0 billion, respectively. During the fourth quarter of 2007, the Company repurchased 1.3 million common shares for $56 million under the $1.0 billion share repurchase program. During the first quarter of 2007, the Company repurchased 5 million common shares for $659 million completing the $2.0 billion share repurchase program. During 2006, the Company repurchased 4511 million of common shares for $1.2 billion completing the $1.5 billion share repurchase program and 5013 million of common shares for $1.3 billion under the $2.0 billion share repurchase program. During 2005, the Company repurchased 103 million of common shares for $300 million.
21.19. Share Plans
In connection with the Separation, share options were modified through the issuance of Covidien and Tyco Electronics share options. As previously mentioned,a result of the Companyone for four share split, share option exercise
prices for the Tyco awards were adjusted. Generally, employee share options converted into share options of the employer with the exception of corporate employees whose awards converted into share options of all three companies. The revisions made to the share options as a result of the Separation constituted a modification under the provisions of SFAS No. 123R which requires a comparison of fair values of the share options immediately before the Separation and the fair values immediately after the Separation. In certain instances, the fair value immediately after the separation was higher. As a result, the modification will result in incremental compensation cost of $18 million. Of this amount, $13 million was recorded compensation amounts for prior periods related to errors in the Company'sthird quarter of 2007 for vested share options ($11 million in discontinued operations) and $2 million will be recorded in continuing operations over the remaining vesting period of the share options. The continuing operations impact was included in separation costs. Except for the changes described, the principal terms of the share options remain unchanged from the original grant.
Also in connection with the Separation, Tyco employee restricted share awards and restricted stock option accountingunits (collectively, "restricted share awards") were modified through the issuance of Covidien and Tyco Electronics restricted shares or the conversion to shares of the employer. Restricted shares and restricted share units held by employees in the recognitioncompany in which they are not employed are subject to accelerated vesting provisions and vest 50% on the first day of trading after the Separation and 50% six months thereafter. This accelerated vesting will result in $14 million of accelerated compensation expense for Tyco's continuing operations. Tyco recorded $12 million as selling, general and administrative expenses in the fourth quarter of 2007 and will record the remaining expense in the first quarter of 2008. Equity awards under the Company's employeeSave-As-You-Earn Plan (the "SAYE Plan") were not modified in connection with the Separation thereby resulting in additional compensation expense of $14 million, $5 million of which was recorded in 2007 ($2 million in discontinued operations), with the balance to be recorded over the remaining vesting period. Except for the changes described, the principal terms and conditions of restricted shares, restricted units and deferred stock purchase program inunits of the United Kingdom. As such,employees remain unchanged from the reported resultsoriginal grant.
The Company amended the terms of performance based awards granted on November 22, 2005 to provide for prior periods have been restatedvesting of the remaining awards without regard to the original performance measures. The original performance awards, which were previously adjusted to reflect the impactattainment of such additional stock-based compensation expense.performance metrics through fiscal year 2006, were converted to time based restricted stock units of the employer, with the exception of corporate employees whose outstanding awards were converted to time based restricted stock units of the three separate companies.
Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123R using the modified prospective transition method. Under this transition method, the compensation cost recognized beginning October 1, 2005 includes compensation cost for (i) all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based payments granted subsequent to September 30, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is generally recognized ratably over the requisite service period or period to retirement eligibility, if shorter. Prior period amounts have not been restated for the adoption of SFAS No. 123R.
As a result of the adoption of SFAS No. 123R, the Company's resultsselling, general and administrative expenses for the yearyears ended September 28, 2007 and September 29, 2006 include incremental share-based compensation expense of $161 million. The total$66 million and $82 million, respectively. Total share-based compensation cost recognized during 2006, 2005 (restated) and 2004 (restated) of $2822007 was $297 million, $105which includes $155 million and $126 million, respectively, has been included in the Consolidated Statements of Income within selling, general and administrative expenses.expenses, $13 million in restructuring and asset impairment charges, net, $6 million in separation costs and $123 million in discontinued operations. Total share-based compensation cost recognized during 2006 was $288 million, which includes $155 million in selling, general and administrative expenses and $133 million in discontinued operations. Total share-based compensation cost recognized during 2005 was $108 million, which includes $59 million in selling, general and administrative expenses and $49 million in discontinued operations. The Company has recognized a related tax benefit associated with its share-based compensation arrangements during 2007, 2006 and 2005 (restated) and 2004 (restated) of $78 million, $85 million and $36 million, respectively, of which $31 million, $41 million and $37$14 million is included in discontinued operations, respectively.
Prior to October 1, 2005, the Company accounted for stock-based compensation plans in accordance with the provisions of APB Opinion No. 25, as permitted by SFAS No. 123, and accordingly did not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price of the stock at the date of grant. Had the fair value based method as prescribed by SFAS No. 123 been applied by Tyco, the effect on net income and earnings per share for 2005, adjusted for the impact of the Separation and 2004the one for four reverse stock split, would have been as follows ($ in millions, except per share data):
| | | 2005 (Restated) | 2004 (Restated) | | 2005 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income, as reported | Net income, as reported | $ | 3,019 | $ | 2,820 | Net income, as reported | $ | 3,094 | |||||
| Add: Employee compensation expense for share options included in reported net income, net of income taxes | Add: Employee compensation expense for share options included in reported net income, net of income taxes | 23 | 66 | Add: Employee compensation expense for share options included in reported net income, net of income taxes | 23 | ||||||||
| Less: Total employee compensation expense for share options determined under fair value method, net of income taxes | Less: Total employee compensation expense for share options determined under fair value method, net of income taxes | (169 | ) | (264 | ) | Less: Total employee compensation expense for share options determined under fair value method, net of income taxes | (169 | ) | |||||
| Net income, pro forma | Net income, pro forma | $ | 2,873 | $ | 2,622 | Net income, pro forma | $ | 2,948 | |||||
| Earnings per share: | Earnings per share: | �� | Earnings per share: | ||||||||||
| Basic—as reported | $ | 1.50 | $ | 1.41 | Basic—as reported | $ | 6.15 | ||||||
| Basic—pro forma | 1.43 | 1.31 | Basic—pro forma | 5.86 | |||||||||
| Diluted—as reported | 1.43 | 1.32 | Diluted—as reported | 5.85 | |||||||||
| Diluted—pro forma | 1.37 | 1.24 | Diluted—pro forma | 5.60 | |||||||||
During 2004, the Tyco International Ltd. 2004 Stock and Incentive Plan (the "2004 Plan") effectively replaced the Tyco International Ltd. Long Term Incentive Plan, as amended as of May 12, 1999 (the "LTIP I Plan"), the Tyco International Ltd. Long Term Incentive Plan II (the "LTIP II Plan"), as well as the Tyco International Ltd. 1994 Restricted Stock Ownership Plan for Key Employees (the "1994 Plan") for all awards effective on and after March 25, 2004. The 2004 Plan provides for the award of stock options, stock appreciation rights, annual performance bonuses, long term performance awards, restricted units, restricted stock, deferred stock units, promissory stock and other stock-based awards (collectively, "Awards").
The 2004 Plan provides for a maximum of 16036 million common shares to be issued as Awards, subject to adjustment as provided under the terms of the 2004 Plan. In addition, any common shares that have been approved by the Company's shareholders for issuance under the LTIP Plans but which have not been awarded thereunder as of January 1, 2004, reduced by the number of common shares related to Awards made under the LTIP Plans between January 1, 2004 and March 25, 2004, the date the 2004 Plan was approved by shareholders, (or which have been awarded but will not be issued, owing to expiration, forfeiture, cancellation, return to the Company or settlement in cash in lieu of common shares on or after January 1, 2004) and which are no longer available for any reason (including the termination of the LTIP Plans) will also be available for issuance under the 2004 Plan.
When common shares are issued pursuant to a grant of restricted stock and restricted units (collectively, "restricted share awards"),awards, deferred stock units, promissory stock, and performance units or as payment of an annual performance bonus or other stock-based award, the total number of common shares remaining available for grant will be decreased by a margin of at least 1.8 per common share issued. At September 29, 2006,28, 2007, there were approximately 16231 million shares available for future grant under the 2004 Plan (including shares available under both the LTIP I and LTIP II Plans that are now assumable under the 2004 Plan).
The 1994 Plan provided for the issuance of restricted stock grants to officers and non-officer employees. The 1994 Plan expired in November 2004; thus no additional grants of restricted stock have been made under this plan since November 2004 and no shares are available for future grant. At September 29, 2006, 3028, 2007, 14 million shares had been granted, of which 1410 million were granted under the 2004 Plan and 164 million were granted under the 1994 Plan.
The LTIP I Plan reserved common shares for issuance to Tyco's directors, executives and managers as share options. This plan is administered by the Compensation and Human Resources Committee of the Board of Directors of the Company, which consists exclusively of independent directors of the Company. Tyco had reserved 140 million common shares for issuance under the LTIP I Plan. At September 29, 2006,28, 2007, there were approximately 290.5 million shares originally reserved for issuance under this plan but now available for future grant under the 2004 Plan.
The LTIP II Plan was a broad-based option plan for non-officer employees. Tyco had reserved 100 million common shares for issuance under the LTIP II Plan. The terms and conditions of this plan are similar to the LTIP I Plan. At September 29, 2006,28, 2007, there were approximately 350.1 million shares originally reserved for issuance under this plan that are now available for future grant under the 2004 Plan.
Share Options—Options are granted to purchase common shares at prices which are equal to or greater than the market price of the common shares on the date the option is granted. Conditions of vesting are determined at the time of grant under the 2004 Plan. Options are generally exercisable in equal annual installments over a period of three or four years and will generally expire 10 years after the date of grant. Options assumed as part of business combination transactions are administered under Tyco's plan but do not reduce the available shares and retain all the rights, terms and conditions of the respective plans under which they were originally issued.
At September 29, 2006,28, 2007, approximately 401250 million share options had been granted of which 230138 million, 12476 million and 4736 million were granted under the LTIP I, LTIP II and 2004 Plans, respectively.
The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make
certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the Company's stock and implied volatility derived from exchange traded options. Post Separation, expected volatility was calculated based on an analysis of historic and implied volatility measures for a set of peer companies. The average expected life was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The compensation expense recognized is net of estimated forfeitures. Forfeitures are
estimated based on voluntary termination behavior, as well as an analysis of actual option forfeitures. The weighted-average assumptions used in the Black-Scholes option pricing model for 2007, 2006 2005 and 20042005 are as follows:
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expected stock price volatility | 34 | % | 35 | % | 47 | % | 30 | % | 34 | % | 35 | % | ||||||||
| Risk free interest rate | 4.28 | % | 3.88 | % | 2.56 | % | 4.52 | % | 4.28 | % | 3.88 | % | ||||||||
| Expected annual dividend per share | $ | 0.40 | $ | 0.40 | $ | 0.05 | $ | 0.58 | $ | 0.64 | $ | 0.64 | ||||||||
| Expected life of options (years) | 4.2 | 4.1 | 3.9 | 4.7 | 4.2 | 4.1 | ||||||||||||||
The weighted-average grant-date fair values of options granted during 2007, 2006 and 2005 was $15.35, $14.33, and 2004 was $8.98, $11.04, and $10.79,$17.44, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 and 2004 was $163 million, $108 million $142 million and $89$142 million, respectively. The related excess cash tax benefit classified as a financing cash inflow for 2007 and 2006 was not significant.
A summary of option activity as of September 29, 200628, 2007 and changes during the year then ended is presented below:below and has been adjusted for the conversion of Tyco share options to share options of Covidien and Tyco Electronics as well as the Separation:
| | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at October 1, 2005 | 140,502,534 | $ | 32.80 | |||||||||||||||||
| Outstanding at September 29, 2006 | 64,109,138 | $ | 52.24 | |||||||||||||||||
| Granted | 10,981,808 | 28.99 | 10,260,271 | 49.78 | ||||||||||||||||
| Exercised | (11,993,526 | ) | 18.61 | (11,141,505 | ) | 35.35 | ||||||||||||||
| Distributed at Separation | (30,064,450 | ) | 57.04 | |||||||||||||||||
| Expired | (13,873,678 | ) | 43.23 | (3,954,891 | ) | 71.82 | ||||||||||||||
| Forfeited | (4,342,262 | ) | 31.91 | (1,364,231 | ) | 50.43 | ||||||||||||||
| Outstanding at September 29, 2006 | 121,274,876 | 32.66 | 5.7 | $ | 398 | |||||||||||||||
| Vested and unvested expected to vest at September 29, 2006 | 119,678,337 | 32.68 | 5.7 | 398 | ||||||||||||||||
| Exercisable at September 29, 2006 | 95,643,612 | 33.10 | 5.0 | 382 | ||||||||||||||||
| Outstanding at September 28, 2007 | 27,844,332 | 50.21 | 6.1 | $ | 115 | |||||||||||||||
| Vested and unvested expected to vest at September 28, 2007 | 26,729,393 | 50.19 | 6.0 | 115 | ||||||||||||||||
| Exercisable at September 28, 2007 | 19,009,857 | 49.96 | 4.8 | 115 | ||||||||||||||||
As of September 29, 2006,28, 2007, there was $161$93 million of total unrecognized compensation cost related to non-vested options granted. The cost is expected to be recognized over a weighted-average period of 1.42.7 fiscal years.
Employee Stock Purchase Plans—Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in an employee share purchase plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. The Company matches a portion of the employee contribution by contributing an additional 15% of the employee's payroll deduction. All shares purchased under the plan are purchased on the open market by a designated broker.
The Company also maintains two other employee stock purchase plans for the benefit of employees of certain qualified non-U.S. subsidiaries. The terms of these plans provide for the Company to grant to its employees the right to purchase shares of the Company's stock at a stated price and receive certain tax benefits.
Under one plan, operated in Ireland, eligible employees are offered the opportunity to acquire shares using a portion of their bonus or, alternatively, receive a cash bonus subject to normal taxation.
Such employees also have the opportunity to forego a portion of their basic salary to purchase additional shares. As of September 29, 2006, there were 1 million shares available for future issuance under this plan.
Under the second plan, the Save-As-You-Earn ("SAYE")SAYE Plan, eligible employees in the United Kingdom are granted options to purchase shares at the end of three years of service at 85% of the market price at the time of grant. Options under the SAYE Plan are generally exercisable after a period of three years and expire six months after the date of vesting. The SAYE Plan provides for a maximum of 10 million common shares to be issued; as of September 29, 2006,28, 2007, there were 7 million shares available for future issuance. All of the shares purchased under both the SAYE Plan and the Irish Bonus Plan are purchased on the open market.
A summary of option activity under the SAYE Plan as of September 29, 200628, 2007 and changes during the year then ended is presented below:
| | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at October 1, 2005 | 2,486,634 | $ | 16.56 | |||||||||||||||||
| Granted | 733,347 | 21.46 | ||||||||||||||||||
| Outstanding at September 29, 2006 | 1,361,740 | $ | 22.99 | |||||||||||||||||
| Exercised | (1,669,530 | ) | 12.79 | (402,276 | ) | 23.15 | ||||||||||||||
| Expired | (104,412 | ) | 23.82 | (98,909 | ) | 20.03 | ||||||||||||||
| Forfeited | (84,299 | ) | 20.96 | (125,695 | ) | 23.04 | ||||||||||||||
| Outstanding at September 29, 2006 | 1,361,740 | 22.99 | 2.2 | $ | 7 | |||||||||||||||
| Vested and unvested expected to vest at September 29, 2006 | 1,166,517 | 22.92 | 2.2 | 6 | ||||||||||||||||
| Exercisable at September 29, 2006 | 60,252 | 12.75 | 0.1 | 1 | ||||||||||||||||
| Outstanding at September 28, 2007 | 734,860 | 23.30 | 1.6 | $ | 15 | |||||||||||||||
| Vested and unvested expected to vest at September 28, 2007 | 699,167 | 23.36 | 1.6 | 15 | ||||||||||||||||
| Exercisable at September 28, 2007 | 33,072 | 23.88 | — | 1 | ||||||||||||||||
The grant-date-fair value of each option grant is estimated using the Black-Scholes option pricing model. Assumptions for expected volatility, the average expected life, and the risk-free rate were made using the same methodology as previously described underShare Options.
The weighted-average grant-date fair values of options granted under the SAYE Plan during 2006 2005 and 20042005 was $8.80, $12.65, and $12.09,$12.65, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 and 2004 was $5 million, $24 million and $3 million, and $0, respectively. The related excess cash tax benefit classified as a financing cash inflow for 2007 and 2006 was not significant.
As of September 29, 2006,28, 2007, there was $7$2 million in total unrecognized compensation cost related to non-vested options granted under the SAYE Plan. The cost is expected to be recognized over a period of 2.01.3 fiscal years.
Restricted Share Awards—Restricted share awards are granted subject to certain restrictions. Conditions of vesting are determined at the time of grant under the 2004 Plan. All restrictions on the award will lapse upon normal retirement, death or disability of the employee.
For grants which vest based on certain specified performance criteria, the fair market value of the shares or units is expensed over the period of performance, once achievement of criteria is deemed probable. For grants that vest through passage of time, the fair market value of the award at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted share
awards is determined based on the market value of the Company's shares on the grant date. Restricted share awards generally vest after a period of three or four years, as determined by the Compensation Committee, upon attainment of various levels of performance that equal or exceed targeted levels, if applicable. The compensation expense recognized for restricted share awards is net of estimated forfeitures.
Recipients of restricted shares have the right to vote such shares and receive dividends, whereas recipients of restricted units have no voting rights and receive dividend equivalents.
A summary of the status of the Company's restricted share awards and performance shares as of September 29, 200628, 2007 and changes during the year then ended is presented in the tables below:below and has been adjusted for the conversion of Tyco restricted share awards and performance shares to restricted share awards and performance shares of Covidien and Tyco Electronics, the Separation and the one for four reverse stock split:
| Non-vested Restricted Share Awards | Shares | Weighted-Average Grant-Date Fair Value | Shares | Weighted-Average Grant-Date Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Non-vested at October 1, 2005 | 7,348,292 | $ | 28.54 | |||||||
| Non-vested at September 29, 2006 | 2,645,475 | $ | 47.07 | |||||||
| Granted | 5,580,636 | 28.77 | 5,148,791 | 49.49 | ||||||
| Vested | (1,316,777 | ) | 19.45 | (1,279,410 | ) | 45.69 | ||||
| Distributed at Separation | (1,830,771 | ) | 47.67 | |||||||
| Conversion of performance share awards to restricted awards | 279,378 | 44.26 | ||||||||
| Forfeited | (1,344,971 | ) | 28.46 | (448,309 | ) | 48.13 | ||||
| Non-vested at September 29, 2006 | 10,267,180 | 29.82 | ||||||||
| Non-vested at September 28, 2007 | 4,515,154 | 49.83 | ||||||||
The weighted-average grant-date fair value of restricted share awards granted during 2007, 2006 and 2005 was $49.49, $45.37 and 2004 was $28.77, $35.25 and $27.38,$55.87, respectively. The total fair value of restricted share awards vested during 2007, 2006 and 2005 and 2004 was $58 million, $26 million and $3 million, and $5 million, respectively.
| Non-vested Performance Shares | Shares | Weighted-Average Grant-Date Fair Value | |||
|---|---|---|---|---|---|
| Non-vested at October 1, 2005 | — | — | |||
| Granted | 1,028,500 | $ | 28.95 | ||
| Vested | (15,300 | ) | 29.00 | ||
| Forfeited | (68,000 | ) | 28.91 | ||
| Non-vested at September 29, 2006 | 945,200 | 28.94 | |||
| Non-vested Performance Shares | Shares | Weighted-Average Grant-Date Fair Value | |||
|---|---|---|---|---|---|
| Non-vested at September 29, 2006 | 463,180 | $ | 44.51 | ||
| Granted | 625,913 | 59.49 | |||
| Vested | (28,130 | ) | 44.37 | ||
| Distributed at Separation | (226,834 | ) | 44.84 | ||
| Conversion of performance share awards to restricted awards | (279,378 | ) | 44.26 | ||
| Forfeited | (23,441 | ) | 50.20 | ||
| Non-vested at September 28, 2007 | 531,310 | 53.36 | |||
The total fair value of performance shares vested during 2007 was $1 million while 2006 2005 and 20042005 was insignificant.
As of September 29, 2006,28, 2007, there was $174$144 million of total unrecognized compensation cost related to both non-vested restricted share awards and performance shares. That cost is expected to be recognized over a weighted-average period of 1.93.1 fiscal years.
Deferred Stock Units—Deferred Stock Units ("DSUs") are notional units that are tied to the value of Tyco common shares with distribution deferred until termination of employment. Distribution, when made, will be in the form of actual shares. Similar to restricted share grants that vest through the passage of time, the fair value of DSUs is determined based on the market value of the Company's shares on the grant date and is amortized to expense over the vesting period. Recipients of DSUs do not have the right to vote such shares and do not have the right to receive cash dividends. However, they have the right to receive dividend equivalents. Conditions of vesting are determined at the time of grant. Under the 2004 Plan, the majority of Tyco's DSU grants vest in equal annual installments over
three years. The Company has granted 21 million DSUs, all of which all but 0.1 million were outstanding at September 29, 2006.28, 2007.
A summary of the status of the Company's DSUs as of September 29, 200628, 2007 and changes during the year then ended is presented below:below and has been adjusted for the Separation and the one for four reverse stock split:
| Non-vested Deferred Stock Units | Shares | Weighted-Average Grant-Date Fair Value | Shares | Weighted-Average Grant-Date Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Non-vested at October 1, 2005 | 400,000 | $ | 8.47 | |||||||
| Non-vested at September 29, 2006 | 125,894 | $ | 13.45 | |||||||
| Granted | 46,651 | 28.30 | 27,138 | 42.29 | ||||||
| Dividend reinvestment | 27,690 | 26.11 | 13,777 | 50.67 | ||||||
| Vested | (274,341 | ) | 13.62 | (166,809 | ) | 48.12 | ||||
| Non-vested at September 29, 2006 | 200,000 | 8.47 | ||||||||
| Non-vested at September 28, 2007 | — | — | ||||||||
The weighted-average grant-date fair value of DSUs granted during 2007, 2006 and 2005 was $42.29, $44.95 and 2004 was $28.30, $31.08 and $20.44,$49.38, respectively. The total fair value of DSUs vested during 2007, 2006 and 2005 and 2004 was $4$8 million, $6$4 million and $6 million, respectively. As of September 29, 2006, there was $1.7 million of total unrecognized compensation cost related to non-vested DSUs. That cost is expected to be recognized over a weighted-average period of 0.8 fiscal years.28, 2007, all DSUs are vested.
22.20. Comprehensive Income
The components of accumulated other comprehensive (loss) income are as follows ($ in millions):
| | Currency Translation(1) | Unrealized (Loss) Gain on Securities(2) | Unrealized (Loss) Gain on Derivative Financial Instruments | Minimum Pension Liability | Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at October 1, 2003 | $ | 548 | $ | (3 | ) | $ | 2 | $ | (820 | ) | $ | (273 | ) | |||||||||||||||||||||
| Pretax current period change | 704 | 4 | (5 | ) | 104 | 807 | ||||||||||||||||||||||||||||
| Income tax (expense) benefit | — | (1 | ) | 1 | (18 | ) | (18 | ) | ||||||||||||||||||||||||||
| | Currency Translation(1) | Unrealized (Loss) Gain on Securities(2) | Unrealized (Loss) Gain on Derivative Financial Instruments | Minimum Pension Liability(3) | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||
| Balance at September 30, 2004 | Balance at September 30, 2004 | 1,252 | — | (2 | ) | (734 | ) | 516 | Balance at September 30, 2004 | $ | 1,255 | $ | — | $ | (2 | ) | $ | (734 | ) | $ | 519 | |||||||||||||
| Pretax current period change | (48 | ) | (4 | ) | 1 | (279 | ) | (330 | ) | Pretax current period change | (56 | ) | (4 | ) | 1 | (279 | ) | (338 | ) | |||||||||||||||
| Income tax benefit (expense) | — | 1 | (1 | ) | 79 | 79 | Income tax benefit (expense) | — | 1 | (1 | ) | 79 | 79 | |||||||||||||||||||||
| Balance at September 30, 2005 | Balance at September 30, 2005 | 1,204 | $ | (3 | ) | (2 | ) | (934 | ) | 265 | Balance at September 30, 2005 | 1,199 | (3 | ) | (2 | ) | (934 | ) | 260 | |||||||||||||||
| Pretax current period change | 619 | 1 | 1 | 211 | 832 | Pretax current period change | 606 | 1 | 1 | 211 | 819 | |||||||||||||||||||||||
| Income tax expense | — | — | — | (62 | ) | (62 | ) | Income tax expense | — | — | — | (62 | ) | (62 | ) | |||||||||||||||||||
| Balance at September 29, 2006 | Balance at September 29, 2006 | $ | 1,823 | $ | (2 | ) | $ | (1 | ) | $ | (785 | ) | $ | 1,035 | Balance at September 29, 2006 | 1,805 | (2 | ) | (1 | ) | (785 | ) | 1,017 | |||||||||||
| Pretax current period change | 883 | 3 | 1 | 215 | 1,102 | |||||||||||||||||||||||||||||
| Income tax expense | — | (1 | ) | — | (77 | ) | (78 | ) | ||||||||||||||||||||||||||
| Distribution of Covidien and Tyco Electronics | (1,797 | ) | — | — | 321 | (1,476 | ) | |||||||||||||||||||||||||||
| Balance at September 28, 2007 | Balance at September 28, 2007 | $ | 891 | $ | — | $ | — | $ | (326 | ) | $ | 565 | ||||||||||||||||||||||
23.21. Consolidated Segment and Geographic Data
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. In connection with the Separation, the Company has realigned its management and segment reporting structure effective March 31, 2007. The Company's segments are strategic business units that operate in different industries and are managed separately. Certain corporate expenses were allocated to each segment's operating income, based generally on net revenues.
segment data presented reflects this new segment structure. The Company operatesreports financial and operating information in the following businessfive segments:
The segmentTyco also provides general corporate services to its segments and geographic data presented have been reclassified to exclude the results of discontinued operations. Also, the operating results of the TGN business were presented withinthese costs are reported as Corporate until its sale in the third quarter of 2005.and Other.
Selected information by businessin the new segment structure is presented in the following tables for 2007, 2006 and 2005 and 2004, as restated ($ in millions):
| | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net revenue(2): | |||||||||
| Electronics | $ | 12,724 | $ | 11,774 | $ | 11,371 | |||
| Fire and Security | 11,653 | 11,503 | 11,447 | ||||||
| Healthcare | 9,641 | 9,543 | 9,110 | ||||||
| Engineered Products and Services | 6,942 | 6,456 | 6,007 | ||||||
| Corporate(1) | — | 29 | 25 | ||||||
| $ | 40,960 | $ | 39,305 | $ | 37,960 | ||||
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net revenue(1): | |||||||||
| ADT Worldwide | $ | 7,648 | $ | 7,205 | $ | 7,104 | |||
| Fire Protection Services | 3,506 | 3,281 | 3,182 | ||||||
| Flow Control | 3,766 | 3,135 | 2,806 | ||||||
| Safety Products | 1,767 | 1,675 | 1,682 | ||||||
| Electrical and Metal Products | 1,974 | 1,949 | 1,798 | ||||||
| Corporate and Other(2) | 120 | 91 | 93 | ||||||
| $ | 18,781 | $ | 17,336 | $ | 16,665 | ||||
| | 2006 | 2005 (Restated) | 2004 (Restated) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Operating income: | ||||||||||
| Electronics | $ | 1,808 | $ | 1,849 | $ | 1,744 | ||||
| Fire and Security | 1,190 | 1,216 | 899 | |||||||
| Healthcare | 2,200 | 2,286 | 2,365 | |||||||
| Engineered Products and Services | 676 | 672 | 620 | |||||||
| Corporate(1)(2) | (400 | ) | (255 | ) | (482 | ) | ||||
| $ | 5,474 | $ | 5,768 | $ | 5,146 | |||||
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Operating (loss) income: | ||||||||||
| ADT Worldwide | $ | 842 | $ | 907 | $ | 952 | ||||
| Fire Protection Services | 253 | 239 | 202 | |||||||
| Flow Control | 457 | 356 | 336 | |||||||
| Safety Products | 286 | 202 | 278 | |||||||
| Electrical and Metal Products | 159 | 319 | 295 | |||||||
| Corporate and Other(1)(2) | (3,712 | ) | (653 | ) | (872 | ) | ||||
| $ | (1,715 | ) | $ | 1,370 | $ | 1,191 | ||||
Net revenue by groups of products within Tyco's segments for 2006, 2005 and 2004 is as follows ($ in millions):
| | 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue by groups of products: | ||||||||||
| Electronic Components | $ | 11,041 | $ | 10,203 | $ | 9,485 | ||||
| Wireless | 871 | 870 | 835 | |||||||
| Electrical Contracting Services | — | — | 353 | |||||||
| Power Systems | 513 | 447 | 492 | |||||||
| Submarine Telecommunications | 299 | 254 | 206 | |||||||
| Electronics | 12,724 | 11,774 | 11,371 | |||||||
Electronic Security Services | 6,956 | 6,838 | 6,770 | |||||||
| Fire Protection Contracting and Services | 4,697 | 4,665 | 4,677 | |||||||
| Fire and Security | 11,653 | 11,503 | 11,447 | |||||||
Medical Devices & Supplies | 7,573 | 7,549 | 7,124 | |||||||
| Retail | 855 | 830 | 912 | |||||||
| Pharmaceuticals | 1,213 | 1,164 | 1,074 | |||||||
| Healthcare | 9,641 | 9,543 | 9,110 | |||||||
Flow Control and Fire & Building Products | 3,815 | 3,418 | 3,037 | |||||||
| Electrical & Metal Products | 1,867 | 1,745 | 1,545 | |||||||
| Infrastructure Services | 1,260 | 1,293 | 1,425 | |||||||
| Engineered Products and Services | 6,942 | 6,456 | 6,007 | |||||||
Corporate(1) | — | 29 | 25 | |||||||
| $ | 40,960 | $ | 39,305 | $ | 37,960 | |||||
Total assets by segment at September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 are as follows ($ in millions):
| | 2006 | 2005 (Restated) | 2004 (Restated) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total assets: | ||||||||||
| Electronics | $ | 19,196 | $ | 17,892 | $ | 18,205 | ||||
| Fire and Security | 18,400 | 18,389 | 18,203 | |||||||
| Healthcare | 13,992 | 13,616 | 13,239 | |||||||
| Engineered Products and Services | 7,594 | 7,164 | 7,124 | |||||||
| Corporate(1) | 4,295 | 4,057 | 4,594 | |||||||
| Assets held for sale | 245 | 1,568 | 2,372 | |||||||
| $ | 63,722 | $ | 62,686 | $ | 63,737 | |||||
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Total assets: | |||||||||
| ADT Worldwide | $ | 12,287 | $ | 11,297 | $ | 11,557 | |||
| Fire Protection Services | 2,801 | 3,218 | 3,185 | ||||||
| Flow Control | 4,422 | 3,818 | 3,575 | ||||||
| Safety Products | �� | 3,482 | 3,611 | 3,554 | |||||
| Electrical and Metal Products | 1,979 | 1,959 | 1,841 | ||||||
| Corporate and Other(1) | 6,875 | 4,883 | 4,891 | ||||||
| Assets of discontinued operations | 969 | 34,225 | 33,862 | ||||||
| $ | 32,815 | $ | 63,011 | $ | 62,465 | ||||
Depreciation and amortization and capital expenditures, net by segment for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 are as follows ($ in millions):
| | 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Depreciation and amortization: | ||||||||||
| Electronics | $ | 533 | $ | 543 | $ | 519 | ||||
| Fire and Security | 1,081 | 1,106 | 1,132 | |||||||
| Healthcare | 334 | 319 | 327 | |||||||
| Engineered Products and Services | 106 | 108 | 116 | |||||||
| Corporate | 11 | 8 | 4 | |||||||
| $ | 2,065 | $ | 2,084 | $ | 2,098 | |||||
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Depreciation and amortization: | |||||||||
| ADT Worldwide | $ | 925 | $ | 964 | $ | 992 | |||
| Fire Protection Services | 30 | 28 | 27 | ||||||
| Flow Control | 62 | 55 | 55 | ||||||
| Safety Products | 95 | 93 | 93 | ||||||
| Electrical and Metal Products | 27 | 25 | 25 | ||||||
| Corporate and Other | 12 | 17 | 12 | ||||||
| $ | 1,151 | $ | 1,182 | $ | 1,204 | ||||
| | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Capital expenditures, net: | |||||||||||
| Electronics | $ | 549 | $ | 449 | $ | 370 | |||||
| Fire and Security | 433 | 389 | 335 | ||||||||
| Healthcare | 429 | 326 | 239 | ||||||||
| Engineered Products and Services | 98 | 88 | 45 | ||||||||
| Corporate | 5 | 11 | (2 | ) | |||||||
| $ | 1,514 | $ | 1,263 | $ | 987 | ||||||
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Capital expenditures: | |||||||||
| ADT Worldwide | $ | 459 | $ | 393 | $ | 357 | |||
| Fire Protection Services | 26 | 21 | 22 | ||||||
| Flow Control | 90 | 52 | 35 | ||||||
| Safety Products | 51 | 45 | 38 | ||||||
| Electrical and Metal Products | 29 | 37 | 29 | ||||||
| Corporate and Other | 14 | 10 | 35 | ||||||
| $ | 669 | $ | 558 | $ | 516 | ||||
Net revenue by geographic area for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 is as follows ($ in millions):
| | | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue(1): | Net revenue(1): | ||||||||||||||||||
| United States | United States | $ | 19,985 | $ | 19,298 | $ | 19,254 | $ | 8,884 | $ | 8,613 | $ | 8,161 | ||||||
| Other Americas | Other Americas | 2,494 | 2,202 | 2,103 | 1,445 | 1,358 | 1,255 | ||||||||||||
| Europe | 11,498 | 11,407 | 10,830 | ||||||||||||||||
| Europe, Middle East and Africa | 5,462 | 4,825 | 4,876 | ||||||||||||||||
| Asia—Pacific | Asia—Pacific | 6,983 | 6,398 | 5,773 | 2,990 | 2,540 | 2,373 | ||||||||||||
| $ | 40,960 | $ | 39,305 | $ | 37,960 | $ | 18,781 | $ | 17,336 | $ | 16,665 | ||||||||
Long-lived assets by geographic area at September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 are as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-lived assets(1): | ||||||||||||||||||
| United States | $ | 6,091 | $ | 6,122 | $ | 6,261 | $ | 2,693 | $ | 2,621 | $ | 2,770 | ||||||
| Other Americas | 618 | 569 | 628 | 337 | 408 | 353 | ||||||||||||
| Europe | 2,242 | 2,187 | 2,214 | |||||||||||||||
| Europe, Middle East and Africa | 611 | 620 | 676 | |||||||||||||||
| Asia—Pacific | 1,266 | 1,097 | 944 | 532 | 442 | 384 | ||||||||||||
| Corporate(2) | 321 | 344 | 303 | |||||||||||||||
| Corporate and Other | 65 | 306 | 338 | |||||||||||||||
| $ | 10,538 | $ | 10,319 | $ | 10,350 | $ | 4,238 | $ | 4,397 | $ | 4,521 | |||||||
24.22. Supplementary Income Statement of Operations Information
Selected supplementary income statement of operations information for the years ended September 28, 2007, September 29, 2006 and September 30, 2005 and 2004 is as follows ($ in millions):
| | 2006 | 2005 | 2004 | 2007 | 2006 | 2005 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Research and development | $ | 914 | $ | 833 | $ | 778 | $ | 121 | $ | 112 | $ | 113 | ||||||
| Advertising | $ | 239 | $ | 262 | $ | 234 | $ | 133 | $ | 120 | $ | 135 | ||||||
25.23. Supplementary Balance Sheet and Cash Flow Information
Selected supplementary balance sheet information as of September 29, 200628, 2007 and September 30, 200529, 2006 is as follows ($ in millions):
| | | 2006 | 2005 | | 2007 | 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Purchased materials and manufactured parts | Purchased materials and manufactured parts | $ | 1,154 | $ | 1,020 | Purchased materials and manufactured parts | $ | 631 | $ | 563 | ||||||
| Work in process | Work in process | 1,102 | 937 | Work in process | 269 | 238 | ||||||||||
| Finished goods | Finished goods | 2,538 | 2,187 | Finished goods | 935 | 818 | ||||||||||
| Inventories | $ | 4,794 | $ | 4,144 | Inventories | $ | 1,835 | $ | 1,619 | |||||||
| Land | Land | $ | 536 | $ | 520 | Land | $ | 155 | $ | 145 | ||||||
| Buildings | Buildings | 2,988 | 2,862 | Buildings | 729 | 678 | ||||||||||
| Subscriber systems | Subscriber systems | 4,775 | 4,745 | Subscriber systems | 5,062 | 4,775 | ||||||||||
| Machinery and equipment | Machinery and equipment | 10,397 | 9,698 | Machinery and equipment | 2,231 | 2,049 | ||||||||||
| Property under capital leases(1) | Property under capital leases(1) | 265 | 265 | Property under capital leases(1) | 56 | 57 | ||||||||||
| Construction in progress | Construction in progress | 975 | 814 | Construction in progress | 138 | 110 | ||||||||||
| Accumulated depreciation(2) | Accumulated depreciation(2) | (10,627 | ) | (9,812 | ) | Accumulated depreciation(2) | (4,815 | ) | (4,313 | ) | ||||||
| Property, plant and equipment, net | $ | 9,309 | $ | 9,092 | Property, plant and equipment, net | $ | 3,556 | $ | 3,501 | |||||||
| Deferred tax asset—non-current | Deferred tax asset—non-current | $ | 3,432 | $ | 3,155 | Deferred tax asset—non-current | $ | 1,109 | $ | 1,413 | ||||||
| Other non-current assets | Other non-current assets | 2,210 | 2,135 | Other non-current assets | 1,417 | 1,503 | ||||||||||
| Other assets | 5,642 | 5,290 | Other assets | $ | 2,526 | $ | 2,916 | |||||||||
| Accrued payroll and payroll related costs | Accrued payroll and payroll related costs | $ | 991 | $ | 867 | Accrued payroll and payroll related costs | $ | 591 | $ | 516 | ||||||
| Deferred income tax liability—current | Deferred income tax liability—current | 606 | 393 | Deferred income tax liability—current | 143 | 431 | ||||||||||
| Income taxes payable—current | Income taxes payable—current | 1,076 | 807 | Income taxes payable—current | 286 | 217 | ||||||||||
| Other | Other | 3,161 | 3,702 | Other | 1,901 | 1,848 | ||||||||||
| Accrued and other current liabilities | $ | 5,834 | $ | 5,769 | Accrued and other current liabilities | $ | 2,921 | $ | 3,012 | |||||||
| Long-term pension and postretirement liabilities | Long-term pension and postretirement liabilities | $ | 1,606 | $ | 1,704 | Long-term pension and postretirement liabilities | $ | 538 | $ | 715 | ||||||
| Deferred income tax liability—non-current | Deferred income tax liability—non-current | 1,557 | 1,228 | Deferred income tax liability—non-current | 558 | 585 | ||||||||||
| Income taxes payable—non-current | Income taxes payable—non-current | 2,114 | 2,165 | Income taxes payable—non-current | 161 | 1,570 | ||||||||||
| Other | Other | 2,541 | 2,605 | Other | 1,496 | 834 | ||||||||||
| Other liabilities | $ | 7,818 | $ | 7,702 | Other liabilities | $ | 2,753 | $ | 3,704 | |||||||
Supplementary non-cash financing activities as of September 28, 2007, September 29, 2006, and September 30, 2005 and September 30, 2004 is as follows ($ in millions):
| | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Conversion of debt to common shares | $ | 1,235 | $ | 25 | $ | 6 | |||
| | 2007 | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Conversion of debt to common shares | $ | 3 | $ | 1,235 | $ | 25 | |||
26.24. Summarized Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended September 29, 200628, 2007 and September 30, 2005, as restated,29, 2006 is as follows ($ in millions, except per share data):
| | | 2006 | | 2007 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 1st Qtr.(1) | 2nd Qtr.(2) | 3rd Qtr.(3) | 4th Qtr.(4) | | 1st Qtr.(1) | 2nd Qtr.(2) | 3rd Qtr.(3) | 4th Qtr.(4) | ||||||||||||||||||
| Net revenue | Net revenue | $ | 9,603 | $ | 10,093 | $ | 10,504 | $ | 10,760 | Net revenue | $ | 4,408 | $ | 4,570 | $ | 4,775 | $ | 5,028 | ||||||||||
| Gross profit | Gross profit | 3,228 | 3,410 | 3,447 | 3,592 | Gross profit | 1,502 | 1,523 | 1,616 | 1,699 | ||||||||||||||||||
| Income from continuing operations | 804 | 1,088 | 896 | 1,287 | ||||||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (234 | ) | (66 | ) | (28 | ) | (20 | ) | ||||||||||||||||||||
| Cumulative effect of accounting change, net of income taxes | (14 | ) | — | — | — | |||||||||||||||||||||||
| Net income | 556 | 1,022 | 868 | 1,267 | ||||||||||||||||||||||||
| Income (loss) from continuing operations | Income (loss) from continuing operations | 164 | 156 | (3,049 | ) | 210 | ||||||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | Income (loss) from discontinued operations, net of income taxes | 629 | 679 | (502 | ) | (29 | ) | |||||||||||||||||||||
| Net income (loss) | Net income (loss) | 793 | 835 | (3,551 | ) | 181 | ||||||||||||||||||||||
| Basic earnings per share: | Basic earnings per share: | Basic earnings per share: | ||||||||||||||||||||||||||
| Income from continuing operations | $ | 0.40 | $ | 0.54 | $ | 0.44 | $ | 0.64 | ||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (0.11 | ) | (0.03 | ) | (0.01 | ) | (0.01 | ) | Income (loss) from continuing operations | $ | 0.33 | $ | 0.32 | $ | (6.16 | ) | $ | 0.42 | ||||||||||
| Cumulative effect of accounting change, net of income taxes | (0.01 | ) | — | — | — | Income (loss) from discontinued operations, net of income taxes | 1.27 | 1.37 | (1.02 | ) | (0.06 | ) | ||||||||||||||||
| Net income | 0.28 | 0.51 | 0.43 | 0.63 | Net income (loss) | 1.60 | 1.69 | (7.18 | ) | 0.36 | ||||||||||||||||||
| Diluted earnings per share: | Diluted earnings per share: | Diluted earnings per share: | ||||||||||||||||||||||||||
| Income from continuing operations | 0.39 | 0.52 | 0.43 | 0.63 | Income (loss) from continuing operations | 0.33 | 0.31 | (6.16 | ) | 0.42 | ||||||||||||||||||
| Loss from discontinued operations, net of income taxes | (0.11 | ) | (0.03 | ) | (0.01 | ) | (0.01 | ) | Income (loss) from discontinued operations, net of income taxes | 1.24 | 1.35 | (1.02 | ) | (0.06 | ) | |||||||||||||
| Cumulative effect of accounting change, net of income taxes | (0.01 | ) | — | — | — | Net income (loss) | 1.57 | 1.66 | (7.18 | ) | 0.36 | |||||||||||||||||
| Net income | 0.27 | 0.49 | 0.42 | 0.62 | ||||||||||||||||||||||||
| | 2006 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1st Qtr.(1) | 2nd Qtr.(2) | 3rd Qtr.(3) | 4th Qtr.(4) | |||||||||
| Net revenue | $ | 4,077 | $ | 4,222 | $ | 4,421 | 4,616 | ||||||
| Gross profit | 1,407 | 1,470 | 1,440 | 1,592 | |||||||||
| Income from continuing operations | 149 | 189 | 159 | 326 | |||||||||
| Income from discontinued operations, net of income taxes | 444 | 706 | 709 | 922 | |||||||||
| Cumulative effect of accounting change, net of income taxes | (14 | ) | — | — | — | ||||||||
| Net income | 579 | 895 | 868 | 1,248 | |||||||||
| Basic earnings per share: | |||||||||||||
| Income from continuing operations | $ | 0.30 | $ | 0.37 | $ | 0.31 | $ | 0.65 | |||||
| Income from discontinued operations, net of income taxes | 0.89 | 1.40 | 1.41 | 1.85 | |||||||||
| Cumulative effect of accounting change, net of income taxes | (0.03 | ) | — | — | — | ||||||||
| Net income | 1.16 | 1.77 | 1.72 | 2.50 | |||||||||
| Diluted earnings per share: | |||||||||||||
| Income from continuing operations | 0.29 | 0.37 | 0.31 | 0.64 | |||||||||
| Income from discontinued operations, net of income taxes | 0.86 | 1.35 | 1.37 | 1.81 | |||||||||
| Cumulative effect of accounting change, net of income taxes | (0.03 | ) | — | — | — | ||||||||
| Net income | 1.12 | 1.72 | 1.68 | 2.45 | |||||||||
| | 2005 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1st Qtr.(1) | 2nd Qtr.(2) | 3rd Qtr.(3) | 4th Qtr.(4) | |||||||||||||||||||||
| | Amounts Previously Reported | As Restated | Amounts Previously Reported | As Restated | Amounts Previously Reported | As Restated | Amounts Previously Reported | As Restated | |||||||||||||||||
| Net revenue | $ | 9,497 | $ | 9,497 | $ | 9,876 | $ | 9,876 | $ | 9,997 | $ | 9,997 | $ | 9,935 | $ | 9,935 | |||||||||
| Gross profit | 3,350 | 3,350 | 3,477 | 3,477 | 3,527 | 3,527 | 3,380 | 3,380 | |||||||||||||||||
| Income from continuing operations | 721 | 713 | 393 | 391 | 1,076 | 1,074 | 867 | 866 | |||||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (12 | ) | (12 | ) | (201 | ) | (201 | ) | 117 | 117 | 50 | 50 | |||||||||||||
| Cumulative effect of accounting change, net of income taxes | 21 | 21 | — | — | — | — | — | — | |||||||||||||||||
| Net income | 730 | 722 | 192 | 190 | 1,193 | 1,191 | 917 | 916 | |||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||||
| Income from continuing operations | $ | 0.36 | $ | 0.36 | $ | 0.20 | $ | 0.19 | $ | 0.53 | $ | 0.53 | $ | 0.43 | $ | 0.43 | |||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.01 | ) | (0.01 | ) | (0.10 | ) | (0.10 | ) | 0.06 | 0.06 | 0.02 | 0.02 | |||||||||||||
| Cumulative effect of accounting change, net of income taxes | 0.01 | 0.01 | — | — | — | — | — | — | |||||||||||||||||
| Net income | 0.36 | 0.36 | 0.10 | 0.09 | 0.59 | 0.59 | 0.45 | 0.45 | |||||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||||
| Income from continuing operations | 0.34 | 0.33 | 0.19 | 0.19 | 0.51 | 0.51 | 0.41 | 0.41 | |||||||||||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.01 | ) | — | (0.09 | ) | (0.09 | ) | 0.05 | 0.05 | 0.03 | 0.03 | ||||||||||||||
| Cumulative effect of accounting change, net of income taxes | 0.01 | 0.01 | — | — | — | — | — | — | |||||||||||||||||
| Net income | 0.34 | 0.34 | 0.10 | 0.10 | 0.56 | 0.56 | 0.44 | 0.44 | |||||||||||||||||
27.25. Tyco International GroupFinance S.A.
TIGSA,TIFSA is a wholly owned subsidiary of the Company. TIFSA, which was formed in December 2006, is a holding company established in connection with the Separation as the successor company to TIGSA. During the third quarter of 2007, TIGSA's assets and liabilities were contributed to TIFSA, Covidien and Tyco Electronics. TIGSA was put into liquidation on June 1, 2007. TIFSA directly and indirectly owns substantially all of the operating subsidiaries of the Company, performs treasury operations and has publicassumed the indebtedness of TIGSA. Historically, TIGSA's debt securities outstanding (see Note 15), which areand currently TIFSA's debt is fully and unconditionally guaranteed by Tyco.Tyco (see Note 13).
The following tables present condensed consolidating financial information for Tyco, TIGSATIFSA and all other subsidiaries. Condensed financial information for Tyco and TIGSATIFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.
CONSOLIDATING STATEMENT OF INCOMEOPERATIONS
For the Year Ended September 28, 2007
($ in millions)
| | Tyco International Ltd. | Tyco International Finance S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | $ | — | $ | — | $ | 18,781 | $ | — | $ | 18,781 | |||||||
| Cost of product sales | — | — | 8,723 | — | 8,723 | ||||||||||||
| Cost of services | — | — | 3,718 | — | 3,718 | ||||||||||||
| Selling, general and administrative expenses | 84 | (46 | ) | 4,790 | — | 4,828 | |||||||||||
| Class action settlement, net | 2,862 | — | — | — | 2,862 | ||||||||||||
| Separation costs | 99 | 1 | 5 | — | 105 | ||||||||||||
| Goodwill impairment | — | — | 46 | — | 46 | ||||||||||||
| Restructuring and asset impairment charges, net | — | — | 210 | — | 210 | ||||||||||||
| Losses on divestitures | — | — | 4 | — | 4 | ||||||||||||
| Operating (loss) income | (3,045 | ) | 45 | 1,285 | — | (1,715 | ) | ||||||||||
| Interest income | 42 | 9 | 51 | — | 102 | ||||||||||||
| Interest expense | (41 | ) | (257 | ) | (15 | ) | — | (313 | ) | ||||||||
| Other expense, net | — | (253 | ) | (2 | ) | — | (255 | ) | |||||||||
| Equity in net income of subsidiaries | 1,750 | 685 | — | (2,435 | ) | — | |||||||||||
| Intercompany interest and fees | (1,225 | ) | 414 | 811 | — | — | |||||||||||
| (Loss) income from continuing operations before income taxes and minority interest | (2,519 | ) | 643 | 2,130 | (2,435 | ) | (2,181 | ) | |||||||||
| Income taxes | — | 11 | (345 | ) | — | (334 | ) | ||||||||||
| Minority interest | — | — | (4 | ) | — | (4 | ) | ||||||||||
| (Loss) income from continuing operations | (2,519 | ) | 654 | 1,781 | (2,435 | ) | (2,519 | ) | |||||||||
| Income from discontinued operations, net of income taxes | 777 | 751 | 1,437 | (2,188 | ) | 777 | |||||||||||
| Net (loss) income | $ | (1,742 | ) | $ | 1,405 | $ | 3,218 | $ | (4,623 | ) | $ | (1,742 | ) | ||||
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended September 29, 2006
($ in millions)
| | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | Net revenue | $ | — | $ | — | $ | 40,960 | $ | — | $ | 40,960 | Net revenue | $ | — | $ | — | $ | 17,336 | $ | — | $ | 17,336 | ||||||||||||
| Cost of product sales | Cost of product sales | — | — | 22,503 | — | 22,503 | Cost of product sales | — | — | 7,874 | — | 7,874 | ||||||||||||||||||||||
| Cost of services | Cost of services | — | — | 4,780 | — | 4,780 | Cost of services | — | — | 3,553 | — | 3,553 | ||||||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | (15 | ) | 56 | 7,947 | — | 7,988 | Selling, general and administrative expenses | (15 | ) | 56 | 4,434 | — | 4,475 | ||||||||||||||||||||
| Separation costs | Separation costs | 45 | — | 124 | — | 169 | Separation costs | 17 | — | 32 | — | 49 | ||||||||||||||||||||||
| Gains on divestitures | — | — | (44 | ) | — | (44 | ) | |||||||||||||||||||||||||||
| Restructuring and other charges, net | — | — | 20 | — | 20 | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | 7 | — | 7 | |||||||||||||||||||||||||||||
| In-process research and development | — | — | 63 | — | 63 | |||||||||||||||||||||||||||||
| Restructuring and asset impairment charges, net | Restructuring and asset impairment charges, net | — | — | 13 | — | 13 | ||||||||||||||||||||||||||||
| Losses on divestitures | Losses on divestitures | — | — | 2 | — | 2 | ||||||||||||||||||||||||||||
| Operating (loss) income | (30 | ) | (56 | ) | 5,560 | — | 5,474 | Operating (loss) income | (2 | ) | (56 | ) | 1,428 | — | 1,370 | |||||||||||||||||||
| Interest income | Interest income | 1 | 28 | 105 | — | 134 | Interest income | 1 | 11 | 31 | — | 43 | ||||||||||||||||||||||
| Interest expense | Interest expense | — | (636 | ) | (77 | ) | — | (713 | ) | Interest expense | — | (254 | ) | (25 | ) | — | (279 | ) | ||||||||||||||||
| Other expense, net | — | — | (11 | ) | — | (11 | ) | |||||||||||||||||||||||||||
| Equity in net income of subsidiaries | Equity in net income of subsidiaries | 5,100 | 3,561 | — | (8,661 | ) | — | Equity in net income of subsidiaries | 2,171 | 574 | — | (2,745 | ) | — | ||||||||||||||||||||
| Intercompany interest and fees | Intercompany interest and fees | (1,361 | ) | 592 | 769 | — | — | Intercompany interest and fees | (1,361 | ) | 572 | 789 | — | — | ||||||||||||||||||||
| Income from continuing operations before income taxes and minority interest | 3,710 | 3,489 | 6,346 | (8,661 | ) | 4,884 | Income from continuing operations before income taxes and minority interest | 809 | 847 | 2,223 | (2,745 | ) | 1,134 | |||||||||||||||||||||
| Income taxes | Income taxes | — | (1 | ) | (798 | ) | — | (799 | ) | Income taxes | — | (82 | ) | (228 | ) | — | (310 | ) | ||||||||||||||||
| Minority interest | Minority interest | — | — | (10 | ) | — | (10 | ) | Minority interest | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||
| Income from continuing operations | 3,710 | 3,488 | 5,538 | (8,661 | ) | 4,075 | Income from continuing operations | 809 | 765 | 1,994 | (2,745 | ) | 823 | |||||||||||||||||||||
| Gain (loss) from discontinued operations, net of income taxes | 3 | — | (351 | ) | — | (348 | ) | |||||||||||||||||||||||||||
| Income from discontinued operations, net of income taxes | Income from discontinued operations, net of income taxes | 2,781 | 2,747 | 3,055 | (5,802 | ) | 2,781 | |||||||||||||||||||||||||||
| Income before cumulative effect of accounting change | 3,713 | 3,488 | 5,187 | (8,661 | ) | 3,727 | Income before cumulative effect of accounting change | 3,590 | 3,512 | 5,049 | (8,547 | ) | 3,604 | |||||||||||||||||||||
| Cumulative effect of accounting change, net of income taxes | Cumulative effect of accounting change, net of income taxes | — | — | (14 | ) | — | (14 | ) | Cumulative effect of accounting change, net of income taxes | — | — | (14 | ) | — | (14 | ) | ||||||||||||||||||
| Net income | $ | 3,713 | $ | 3,488 | $ | 5,173 | $ | (8,661 | ) | $ | 3,713 | Net income | $ | 3,590 | $ | 3,512 | $ | 5,035 | $ | (8,547 | ) | $ | 3,590 | |||||||||||
CONSOLIDATING STATEMENT OF INCOME (RESTATED)OPERATIONS
For the Year Ended September 30, 2005
($ in millions)
| | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | $ | — | $ | — | $ | 39,305 | $ | — | $ | 39,305 | |||||||
| Cost of product sales | — | — | 20,804 | — | 20,804 | ||||||||||||
| Cost of services | — | — | 4,767 | — | 4,767 | ||||||||||||
| Selling, general and administrative expenses | 112 | 63 | 8,054 | — | 8,229 | ||||||||||||
| Gains on divestitures | — | — | (274 | ) | — | (274 | ) | ||||||||||
| Restructuring and other charges, net | — | — | 5 | — | 5 | ||||||||||||
| Impairment of long-lived assets | — | — | 6 | — | 6 | ||||||||||||
| Operating (loss) income | (112 | ) | (63 | ) | 5,943 | — | 5,768 | ||||||||||
| Interest income | 1 | 28 | 94 | — | 123 | ||||||||||||
| Interest expense | — | (727 | ) | (88 | ) | — | (815 | ) | |||||||||
| Other (expense) income, net | — | (1,013 | ) | 102 | — | (911 | ) | ||||||||||
| Equity in net income of subsidiaries | 4,539 | 2,882 | — | (7,421 | ) | — | |||||||||||
| Intercompany interest and fees | (1,409 | ) | 1,715 | (306 | ) | — | — | ||||||||||
| Income from continuing operations before income taxes and minority interest | 3,019 | 2,822 | 5,745 | (7,421 | ) | 4,165 | |||||||||||
| Income taxes | — | (1 | ) | (1,111 | ) | — | (1,112 | ) | |||||||||
| Minority interest | — | — | (9 | ) | — | (9 | ) | ||||||||||
| Income from continuing operations | 3,019 | 2,821 | 4,625 | (7,421 | ) | 3,044 | |||||||||||
| Loss from discontinued operations, net of income taxes | — | — | (46 | ) | — | (46 | ) | ||||||||||
| Income before cumulative effect of accounting change | 3,019 | 2,821 | 4,579 | (7,421 | ) | 2,998 | |||||||||||
| Cumulative effect of accounting change, net of income taxes | — | — | 21 | — | 21 | ||||||||||||
| Net income | $ | 3,019 | $ | 2,821 | $ | 4,600 | $ | (7,421 | ) | $ | 3,019 | ||||||
CONSOLIDATING STATEMENT OF INCOME (RESTATED)For the Year Ended September 30, 2004($ in millions)
| | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenue | Net revenue | $ | — | $ | — | $ | 37,960 | $ | — | $ | 37,960 | Net revenue | $ | — | $ | — | $ | 16,665 | $ | — | $ | 16,665 | ||||||||||||
| Cost of product sales | Cost of product sales | — | — | 19,115 | — | 19,115 | Cost of product sales | — | — | 7,232 | — | 7,232 | ||||||||||||||||||||||
| Cost of services | Cost of services | — | — | 5,145 | — | 5,145 | Cost of services | — | — | 3,503 | — | 3,503 | ||||||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 90 | 3 | 8,089 | — | 8,182 | Selling, general and administrative expenses | 112 | 63 | 4,524 | — | 4,699 | ||||||||||||||||||||||
| Restructuring and asset impairment charges, net | Restructuring and asset impairment charges, net | — | — | 17 | — | 17 | ||||||||||||||||||||||||||||
| Losses on divestitures | Losses on divestitures | — | — | 116 | — | 116 | Losses on divestitures | — | — | 23 | — | 23 | ||||||||||||||||||||||
| Restructuring and other charges, net | — | — | 204 | — | 204 | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | 52 | — | 52 | |||||||||||||||||||||||||||||
| Operating (loss) income | (90 | ) | (3 | ) | 5,239 | — | 5,146 | Operating (loss) income | (112 | ) | (63 | ) | 1,366 | — | 1,191 | |||||||||||||||||||
| Interest income | Interest income | — | 28 | 63 | — | 91 | Interest income | 1 | 11 | 27 | — | 39 | ||||||||||||||||||||||
| Interest expense | Interest expense | (5 | ) | (819 | ) | (132 | ) | — | (956 | ) | Interest expense | — | (291 | ) | (31 | ) | — | (322 | ) | |||||||||||||||
| Other expense, net | — | (246 | ) | (40 | ) | — | (286 | ) | ||||||||||||||||||||||||||
| Equity in net income of subsidiaries | 4,161 | 2,277 | — | (6,438 | ) | — | ||||||||||||||||||||||||||||
| Other (expense) income, net | Other (expense) income, net | — | (405 | ) | 109 | — | (296 | ) | ||||||||||||||||||||||||||
| Equity in net income (loss) of subsidiaries | Equity in net income (loss) of subsidiaries | 2,122 | (119 | ) | — | (2,003 | ) | — | ||||||||||||||||||||||||||
| Intercompany interest and fees | Intercompany interest and fees | (1,245 | ) | 1,040 | 205 | — | — | Intercompany interest and fees | (1,409 | ) | 1,706 | (297 | ) | — | — | |||||||||||||||||||
| Income from continuing operations before income taxes and minority interest | 2,821 | 2,277 | 5,335 | (6,438 | ) | 3,995 | Income from continuing operations before income taxes and minority interest | 602 | 839 | 1,174 | (2,003 | ) | 612 | |||||||||||||||||||||
| Income taxes | Income taxes | (1 | ) | — | (1,111 | ) | — | (1,112 | ) | Income taxes | — | (285 | ) | 256 | — | (29 | ) | |||||||||||||||||
| Minority interest | Minority interest | — | — | (14 | ) | — | (14 | ) | Minority interest | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||
| Income from continuing operations | 2,820 | 2,277 | 4,210 | (6,438 | ) | 2,869 | Income from continuing operations | 602 | 554 | 1,428 | (2,003 | ) | 581 | |||||||||||||||||||||
| Loss from discontinued operations, net of income taxes | — | — | (49 | ) | — | (49 | ) | |||||||||||||||||||||||||||
| Income from discontinued operations, net of income taxes | Income from discontinued operations, net of income taxes | 2,492 | 2,452 | 3,208 | (5,660 | ) | 2,492 | |||||||||||||||||||||||||||
| Income before cumulative effect of accounting change | 3,094 | 3,006 | 4,636 | (7,663 | ) | 3,073 | ||||||||||||||||||||||||||||
| Cumulative effect of accounting change, net of income taxes | Cumulative effect of accounting change, net of income taxes | — | — | 21 | — | 21 | ||||||||||||||||||||||||||||
| Net income | $ | 2,820 | $ | 2,277 | $ | 4,161 | $ | (6,438 | ) | $ | 2,820 | Net income | $ | 3,094 | $ | 3,006 | $ | 4,657 | $ | (7,663 | ) | $ | 3,094 | |||||||||||
CONSOLIDATING BALANCE SHEET
As of September 29, 200628, 2007
($ in millions)
| | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | | Tyco International Ltd. | Tyco International Finance S.A | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | Assets | Assets | ||||||||||||||||||||||||||||||||
| Current Assets: | Current Assets: | Current Assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 16 | $ | — | $ | 1,878 | $ | — | $ | 1,894 | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 2 | $ | 1,158 | $ | 1,766 | $ | — | $ | 2,926 | Accounts receivable, net | — | — | 3,010 | — | 3,010 | ||||||||||||||||||
| Accounts receivable, net | — | — | 7,064 | — | 7,064 | Inventories | — | — | 1,835 | — | 1,835 | |||||||||||||||||||||||
| Inventories | — | — | 4,794 | — | 4,794 | Class action settlement escrow | 2,992 | — | — | — | 2,992 | |||||||||||||||||||||||
| Intercompany receivables | 1,468 | 32 | 23,253 | (24,753 | ) | — | Intercompany receivables | 1,445 | 439 | 16,683 | (18,567 | ) | — | |||||||||||||||||||||
| Prepaid expenses and other current assets | 37 | 72 | 2,476 | — | 2,585 | Prepaid expenses and other current assets | 27 | — | 1,151 | — | 1,178 | |||||||||||||||||||||||
| Deferred income taxes | — | — | 1,171 | — | 1,171 | Deferred income taxes | — | — | 467 | — | 467 | |||||||||||||||||||||||
| Assets held for sale | — | — | 245 | — | 245 | Assets of discontinued operations | 460 | 395 | 969 | (855 | ) | 969 | ||||||||||||||||||||||
| Total current assets | 1,507 | 1,262 | 40,769 | (24,753 | ) | 18,785 | Total current assets | 4,940 | 834 | 25,993 | (19,422 | ) | 12,345 | |||||||||||||||||||||
| Property, plant and equipment, net | Property, plant and equipment, net | — | — | 9,309 | — | 9,309 | Property, plant and equipment, net | — | — | 3,556 | — | 3,556 | ||||||||||||||||||||||
| Goodwill | Goodwill | — | — | 24,858 | — | 24,858 | Goodwill | — | — | 11,691 | — | 11,691 | ||||||||||||||||||||||
| Intangible assets, net | Intangible assets, net | — | — | 5,128 | — | 5,128 | Intangible assets, net | — | — | 2,697 | — | 2,697 | ||||||||||||||||||||||
| Investment in subsidiaries | Investment in subsidiaries | 60,952 | 35,238 | — | (96,190 | ) | — | Investment in subsidiaries | 42,944 | 17,332 | — | (60,276 | ) | — | ||||||||||||||||||||
| Intercompany loans receivable | Intercompany loans receivable | — | 23,678 | 19,722 | (43,400 | ) | — | Intercompany loans receivable | — | 11,811 | 18,615 | (30,426 | ) | — | ||||||||||||||||||||
| Other assets | Other assets | — | 96 | 5,546 | — | 5,642 | Other assets | 187 | 36 | 2,303 | — | 2,526 | ||||||||||||||||||||||
| Total Assets | $ | 62,459 | $ | 60,274 | $ | 105,332 | $ | (164,343 | ) | $ | 63,722 | Total Assets | $ | 48,071 | $ | 30,013 | $ | 64,855 | $ | (110,124 | ) | $ | 32,815 | |||||||||||
Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||
| Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||||||||||||||||||||
| Current maturities of long-term debt | $ | — | $ | 762 | $ | 46 | $ | — | $ | 808 | Loans payable and current maturities of long-term debt | $ | — | $ | 367 | $ | 13 | $ | — | $ | 380 | |||||||||||||
| Accounts payable | 2 | — | 3,525 | — | 3,527 | Accounts payable | 3 | — | 1,712 | — | 1,715 | |||||||||||||||||||||||
| Accrued and other current liabilities | 213 | 254 | 5,367 | — | 5,834 | Class action settlement liability | 2,992 | — | — | — | 2,992 | |||||||||||||||||||||||
| Deferred revenue | — | — | 841 | — | 841 | Accrued and other current liabilities | 131 | 77 | 2,713 | — | 2,921 | |||||||||||||||||||||||
| Intercompany payables | 7,101 | 16,152 | 1,500 | (24,753 | ) | — | Deferred revenue | — | — | 584 | — | 584 | ||||||||||||||||||||||
| Liabilities held for sale | — | — | 56 | — | 56 | Intercompany payables | 7,694 | 9,022 | 1,851 | (18,567 | ) | — | ||||||||||||||||||||||
| Liabilities of discontinued operations | — | — | 509 | — | 509 | |||||||||||||||||||||||||||||
| Total current liabilities | 7,316 | 17,168 | 11,335 | (24,753 | ) | 11,066 | ||||||||||||||||||||||||||||
| Total current liabilities | 10,820 | 9,466 | 7,382 | (18,567 | ) | 9,101 | ||||||||||||||||||||||||||||
| Long-term debt | Long-term debt | — | 8,790 | 575 | — | 9,365 | Long-term debt | — | 4,015 | 61 | — | 4,076 | ||||||||||||||||||||||
| Intercompany loans payable | Intercompany loans payable | 19,722 | — | 23,678 | (43,400 | ) | — | Intercompany loans payable | 21,077 | — | 9,349 | (30,426 | ) | — | ||||||||||||||||||||
| Deferred revenue | Deferred revenue | — | — | 1,194 | — | 1,194 | ||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | 2 | 6 | 7,810 | — | 7,818 | Other liabilities | 550 | 16 | 2,187 | — | 2,753 | ||||||||||||||||||||||
| Total Liabilities | 27,040 | 25,964 | 43,398 | (68,153 | ) | 28,249 | Total Liabilities | 32,447 | 13,497 | 20,173 | (48,993 | ) | 17,124 | |||||||||||||||||||||
| Minority interest | Minority interest | — | — | 54 | — | 54 | Minority interest | — | — | 67 | — | 67 | ||||||||||||||||||||||
| Shareholders' Equity: | Shareholders' Equity: | Shareholders' Equity: | ||||||||||||||||||||||||||||||||
| Preference shares | — | — | 13,070 | (13,070 | ) | — | Preference shares | — | — | 2,500 | (2,500 | ) | — | |||||||||||||||||||||
| Common shares | 419 | 1 | (21 | ) | (1 | ) | 398 | Common shares | 398 | — | (1 | ) | — | 397 | ||||||||||||||||||||
| Other shareholders' equity | 35,000 | 34,309 | 48,831 | (83,119 | ) | 35,021 | Other shareholders' equity | 15,226 | 16,516 | 42,116 | (58,631 | ) | 15,227 | |||||||||||||||||||||
| Total Shareholders' Equity | 35,419 | 34,310 | 61,880 | (96,190 | ) | 35,419 | Total Shareholders' Equity | 15,624 | 16,516 | 44,615 | (61,131 | ) | 15,624 | |||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 62,459 | $ | 60,274 | $ | 105,332 | $ | (164,343 | ) | $ | 63,722 | Total Liabilities and Shareholders' Equity | $ | 48,071 | $ | 30,013 | $ | 64,855 | $ | (110,124 | ) | $ | 32,815 | |||||||||||
CONSOLIDATING BALANCE SHEET (RESTATED)
As of September 30, 200529, 2006
($ in millions)
| | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | Assets | Assets | ||||||||||||||||||||||||||||||||
| Current Assets: | Current Assets: | Current Assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3 | $ | 1,204 | $ | 2,005 | $ | — | $ | 3,212 | Cash and cash equivalents | $ | 2 | $ | 1,158 | $ | 1,033 | $ | — | $ | 2,193 | |||||||||||||
| Accounts receivable, net | — | — | 6,657 | — | 6,657 | Accounts receivable, net | — | — | 2,748 | — | 2,748 | |||||||||||||||||||||||
| Inventories | — | — | 4,144 | — | 4,144 | Inventories | — | — | 1,619 | — | 1,619 | |||||||||||||||||||||||
| Intercompany receivables | 1,847 | 37 | 11,382 | (13,266 | ) | — | Intercompany receivables | 1,467 | 650 | 22,957 | (25,074 | ) | — | |||||||||||||||||||||
| Prepaid expenses and other current assets | 21 | 103 | 1,737 | — | 1,861 | Prepaid expenses and other current assets | 37 | 72 | 1,049 | — | 1,158 | |||||||||||||||||||||||
| Deferred income taxes | — | — | 1,220 | — | 1,220 | Deferred income taxes | — | — | 629 | — | 629 | |||||||||||||||||||||||
| Assets held for sale | — | — | 1,568 | — | 1,568 | Assets of discontinued operations | 26,228 | 26,738 | 34,520 | (53,262 | ) | 34,224 | ||||||||||||||||||||||
| Total current assets | 1,871 | 1,344 | 28,713 | (13,266 | ) | 18,662 | Total current assets | 27,734 | 28,618 | 64,555 | (78,336 | ) | 42,571 | |||||||||||||||||||||
| Property, plant and equipment, net | Property, plant and equipment, net | — | — | 9,092 | — | 9,092 | Property, plant and equipment, net | — | — | 3,501 | — | 3,501 | ||||||||||||||||||||||
| Goodwill | Goodwill | — | — | 24,557 | — | 24,557 | Goodwill | — | — | 11,293 | — | 11,293 | ||||||||||||||||||||||
| Intangible assets, net | Intangible assets, net | — | — | 5,085 | — | 5,085 | Intangible assets, net | — | — | 2,730 | — | 2,730 | ||||||||||||||||||||||
| Investment in subsidiaries | Investment in subsidiaries | 57,863 | 30,396 | — | (88,259 | ) | — | Investment in subsidiaries | 34,693 | 7,663 | — | (42,356 | ) | — | ||||||||||||||||||||
| Intercompany loans receivable | Intercompany loans receivable | — | 21,577 | 27,254 | (48,831 | ) | — | Intercompany loans receivable | — | 22,457 | 18,615 | (41,072 | ) | — | ||||||||||||||||||||
| Other assets | Other assets | 24 | 165 | 5,101 | — | 5,290 | Other assets | — | 96 | 2,820 | — | 2,916 | ||||||||||||||||||||||
| Total Assets | $ | 59,758 | $ | 53,482 | $ | 99,802 | $ | (150,356 | ) | $ | 62,686 | Total Assets | $ | 62,427 | $ | 58,834 | $ | 103,514 | $ | (161,764 | ) | $ | 63,011 | |||||||||||
Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||
| Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||||||||||||||||||||
| Current maturities of long-term debt | $ | 2 | $ | 1,700 | $ | 228 | $ | — | $ | 1,930 | Loans payable and current maturities of long-term debt | $ | — | $ | 762 | $ | 9 | $ | — | $ | 771 | |||||||||||||
| Accounts payable | 9 | — | 3,010 | — | 3,019 | Accounts payable | 2 | — | 1,555 | — | 1,557 | |||||||||||||||||||||||
| Accrued and other current liabilities | 279 | 367 | 5,123 | — | 5,769 | Accrued and other current liabilities | 213 | 254 | 2,545 | — | 3,012 | |||||||||||||||||||||||
| Deferred revenue | — | — | 771 | — | 771 | Deferred revenue | — | — | 476 | — | 476 | |||||||||||||||||||||||
| Intercompany payables | 8,271 | 3,111 | 1,884 | (13,266 | ) | — | Intercompany payables | 6,805 | 16,152 | 2,117 | (25,074 | ) | — | |||||||||||||||||||||
| Liabilities held for sale | — | — | 320 | — | 320 | Liabilities of discontinued operations | 296 | — | 8,601 | (900 | ) | 7,997 | ||||||||||||||||||||||
| Total current liabilities | 8,561 | 5,178 | 11,336 | (13,266 | ) | 11,809 | Total current liabilities | 7,316 | 17,168 | 15,303 | (25,974 | ) | 13,813 | |||||||||||||||||||||
| Long-term debt | Long-term debt | — | 10,008 | 591 | — | 10,599 | Long-term debt | — | 8,790 | 63 | — | 8,853 | ||||||||||||||||||||||
| Intercompany loans payable | Intercompany loans payable | 18,615 | 8,639 | 21,577 | (48,831 | ) | — | Intercompany loans payable | 19,722 | — | 21,350 | (41,072 | ) | — | ||||||||||||||||||||
| Deferred revenue | Deferred revenue | — | — | 1,200 | — | 1,200 | ||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | 67 | 8 | 7,627 | — | 7,702 | Other liabilities | 2 | 6 | 3,696 | — | 3,704 | ||||||||||||||||||||||
| Total Liabilities | 27,243 | 23,833 | 41,131 | (62,097 | ) | 30,110 | Total Liabilities | 27,040 | 25,964 | 41,612 | (67,046 | ) | 27,570 | |||||||||||||||||||||
| Minority interest | Minority interest | — | — | 61 | — | 61 | Minority interest | — | — | 54 | — | 54 | ||||||||||||||||||||||
| Shareholders' Equity: | Shareholders' Equity: | Shareholders' Equity: | ||||||||||||||||||||||||||||||||
| Preference shares | — | — | 13,070 | (13,070 | ) | — | Preference shares | — | — | 2,500 | (2,500 | ) | — | |||||||||||||||||||||
| Common shares | 405 | 1 | (2 | ) | (1 | ) | 403 | Common shares | 419 | 1 | (21 | ) | (1 | ) | 398 | |||||||||||||||||||
| Other shareholders' equity | 32,110 | 29,648 | 45,542 | (75,188 | ) | 32,112 | Other shareholders' equity | 34,968 | 32,869 | 59,369 | (92,217 | ) | 34,989 | |||||||||||||||||||||
| Total Shareholders' Equity | 32,515 | 29,649 | 58,610 | (88,259 | ) | 32,515 | Total Shareholders' Equity | 35,387 | 32,870 | 61,848 | (94,718 | ) | 35,387 | |||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 59,758 | $ | 53,482 | $ | 99,802 | $ | (150,356 | ) | $ | 62,686 | Total Liabilities and Shareholders' Equity | $ | 62,427 | $ | 58,834 | $ | 103,514 | $ | (161,764 | ) | $ | 63,011 | |||||||||||
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended September 28, 2007
($ in millions)
| | Tyco International Ltd. | Tyco International Finance S.A | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (930 | ) | $ | 6,560 | $ | (3,794 | ) | $ | — | $ | 1,836 | |||||
| Net cash provided by discontinued operating activities | — | 78 | 2,397 | — | 2,475 | ||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Capital expenditures | — | — | (669 | ) | — | (669 | ) | ||||||||||
| Proceeds from disposal of assets | — | — | 23 | — | 23 | ||||||||||||
| Acquisition of customer accounts (ADT dealer program) | — | — | (409 | ) | — | (409 | ) | ||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (31 | ) | — | (31 | ) | ||||||||||
| Divestiture of businesses, net of cash retained | — | — | 8 | — | 8 | ||||||||||||
| Class action settlement escrow | (2,960 | ) | — | — | — | (2,960 | ) | ||||||||||
| Liquidation of rabbi trust investments | — | — | 271 | — | 271 | ||||||||||||
| Decrease in investments | — | — | 4 | — | 4 | ||||||||||||
| Decrease (increase) in investment in subsidiaries | 2,971 | (4,507 | ) | 132 | 1,404 | — | |||||||||||
| Increase in intercompany loans | — | (2,135 | ) | — | 2,135 | — | |||||||||||
| Decrease in restricted cash | — | — | 5 | — | 5 | ||||||||||||
| Other | — | — | 14 | — | 14 | ||||||||||||
| Net cash provided by (used in) investing activities | 11 | (6,642 | ) | (652 | ) | 3,539 | (3,744 | ) | |||||||||
| Net cash used in discontinued investing activities | — | (78 | ) | (805 | ) | 78 | (805 | ) | |||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Net repayments of debt | — | (5,924 | ) | (4 | ) | — | (5,928 | ) | |||||||||
| Proceeds from exercise of share options | 369 | — | 37 | — | 406 | ||||||||||||
| Dividends paid | (791 | ) | — | — | — | (791 | ) | ||||||||||
| Repurchase of common shares by subsidiary | — | — | (727 | ) | — | (727 | ) | ||||||||||
| (Decrease) increase in equity from parent | — | (2,977 | ) | 4,381 | (1,404 | ) | — | ||||||||||
| Net intercompany loan borrowings | 1,355 | — | 780 | (2,135 | ) | — | |||||||||||
| Transfer from discontinued operations | — | 7,825 | 742 | — | 8,567 | ||||||||||||
| Other | — | — | 12 | — | 12 | ||||||||||||
| Net cash provided by (used in) financing activities | 933 | (1,076 | ) | 5,221 | (3,539 | ) | 1,539 | ||||||||||
| Net cash used in discontinued financing activities | — | — | (854 | ) | (78 | ) | (932 | ) | |||||||||
| Effect of currency translation on cash | — | — | 70 | — | 70 | ||||||||||||
| Effect of currency translation on cash related to discontinued operations | — | — | 33 | — | 33 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 14 | (1,158 | ) | 1,616 | — | 472 | |||||||||||
| Less: net increase in cash related to discontinued operations | — | — | (771 | ) | — | (771 | ) | ||||||||||
| Cash and cash equivalents at beginning of year | 2 | 1,158 | 1,033 | — | 2,193 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 16 | $ | — | $ | 1,878 | $ | — | $ | 1,894 | |||||||
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended September 29, 2006
($ in millions)
| | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | ||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | (513 | ) | $ | (886 | ) | $ | 6,993 | $ | — | $ | 5,594 | Net cash (used in) provided by operating activities | $ | (513 | ) | $ | (2,544 | ) | $ | 5,050 | $ | — | $ | 1,993 | |||||||||
| Net cash used in discontinued operating activities | — | — | (28 | ) | — | (28 | ) | Net cash provided by discontinued operating activities | — | 1,330 | 2,244 | — | 3,574 | |||||||||||||||||||||
| Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | ||||||||||||||||||||||||||||||||
| Capital expenditures | Capital expenditures | — | — | (1,569 | ) | — | (1,569 | ) | Capital expenditures | — | — | (558 | ) | — | (558 | ) | ||||||||||||||||||
| Proceeds from disposal of assets | Proceeds from disposal of assets | — | — | 55 | — | 55 | Proceeds from disposal of assets | — | — | 39 | — | 39 | ||||||||||||||||||||||
| Acquisition of customer accounts (ADT dealer program) | Acquisition of customer accounts (ADT dealer program) | — | — | (373 | ) | — | (373 | ) | Acquisition of customer accounts (ADT dealer program) | — | — | (373 | ) | — | (373 | ) | ||||||||||||||||||
| Acquisition of businesses, net of cash acquired | Acquisition of businesses, net of cash acquired | — | — | (413 | ) | — | (413 | ) | Acquisition of businesses, net of cash acquired | — | — | (5 | ) | — | (5 | ) | ||||||||||||||||||
| Purchase accounting and holdback liabilities | — | — | (19 | ) | — | (19 | ) | |||||||||||||||||||||||||||
| Divestiture of businesses, net of cash retained | Divestiture of businesses, net of cash retained | — | — | 934 | — | 934 | Divestiture of businesses, net of cash retained | — | — | 11 | — | 11 | ||||||||||||||||||||||
| Decrease (increase) in investments | Decrease (increase) in investments | — | 99 | (41 | ) | — | 58 | Decrease (increase) in investments | — | 99 | (41 | ) | — | 58 | ||||||||||||||||||||
| Decrease in intercompany loans | Decrease in intercompany loans | — | 1,749 | — | (1,749 | ) | — | Decrease in intercompany loans | — | 3,407 | — | (3,407 | ) | — | ||||||||||||||||||||
| Decrease in restricted cash | Decrease in restricted cash | — | — | 12 | — | 12 | Decrease in restricted cash | — | — | 20 | — | 20 | ||||||||||||||||||||||
| Other | Other | — | — | (11 | ) | — | (11 | ) | Other | — | — | (20 | ) | — | (20 | ) | ||||||||||||||||||
| Net cash provided by (used in) investing activities | — | 1,848 | (1,425 | ) | (1,749 | ) | (1,326 | ) | Net cash provided by (used in) investing activities | — | 3,506 | (927 | ) | (3,407 | ) | (828 | ) | |||||||||||||||||
| Net cash used in discontinued investing activities | — | — | (100 | ) | — | (100 | ) | Net cash used in discontinued investing activities | — | (1,330 | ) | (599 | ) | 1,330 | (599 | ) | ||||||||||||||||||
| Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | ||||||||||||||||||||||||||||||||
| Net repayments of debt | Net repayments of debt | (2 | ) | (1,008 | ) | (223 | ) | — | (1,233 | ) | Net repayments of debt | (2 | ) | (1,008 | ) | (80 | ) | — | (1,090 | ) | ||||||||||||||
| Proceeds from exercise of share options | Proceeds from exercise of share options | 213 | — | 37 | — | 250 | Proceeds from exercise of share options | 213 | — | 36 | — | 249 | ||||||||||||||||||||||
| Dividends paid | Dividends paid | (806 | ) | — | — | — | (806 | ) | Dividends paid | (806 | ) | — | — | — | (806 | ) | ||||||||||||||||||
| Repurchase of common shares by subsidiary | Repurchase of common shares by subsidiary | — | — | (2,544 | ) | — | (2,544 | ) | Repurchase of common shares by subsidiary | — | — | (2,544 | ) | — | (2,544 | ) | ||||||||||||||||||
| Loan borrowings from (repayments to) affiliates | 1,107 | — | (2,856 | ) | 1,749 | — | ||||||||||||||||||||||||||||
| Transfer to discontinued operations | — | — | (241 | ) | — | (241 | ) | |||||||||||||||||||||||||||
| Net intercompany loan borrowings (repayments) | Net intercompany loan borrowings (repayments) | 1,107 | — | (4,514 | ) | 3,407 | — | |||||||||||||||||||||||||||
| Transfer from discontinued operations | Transfer from discontinued operations | — | — | 2,429 | — | 2,429 | ||||||||||||||||||||||||||||
| Other | Other | — | — | (22 | ) | — | (22 | ) | Other | — | — | (10 | ) | — | (10 | ) | ||||||||||||||||||
| Net cash (used in) provided by financing activities | 512 | (1,008 | ) | (5,849 | ) | 1,749 | (4,596 | ) | Net cash provided by (used in) financing activities | 512 | (1,008 | ) | (4,683 | ) | 3,407 | (1,772 | ) | |||||||||||||||||
| Net provided by discontinued financing activities | — | — | 137 | — | 137 | Net cash used in discontinued financing activities | — | — | (1,357 | ) | (1,330 | ) | (2,687 | ) | ||||||||||||||||||||
| Effect of currency translation on cash | Effect of currency translation on cash | — | — | 42 | — | 42 | Effect of currency translation on cash | — | — | 21 | — | 21 | ||||||||||||||||||||||
| Effect of currency translation on cash related to discontinued operations | Effect of currency translation on cash related to discontinued operations | — | — | 21 | — | 21 | ||||||||||||||||||||||||||||
| Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (1 | ) | (46 | ) | (230 | ) | — | (277 | ) | Net decrease in cash and cash equivalents | (1 | ) | (46 | ) | (230 | ) | — | (277 | ) | ||||||||||||||
| Less: net increase in cash related to discontinued operations | Less: net increase in cash related to discontinued operations | — | — | (9 | ) | — | (9 | ) | Less: net increase in cash related to discontinued operations | — | — | (309 | ) | — | (309 | ) | ||||||||||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 3 | 1,204 | 2,005 | — | 3,212 | Cash and cash equivalents at beginning of year | 3 | 1,204 | 1,572 | — | 2,779 | ||||||||||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 2 | $ | 1,158 | $ | 1,766 | $ | — | $ | 2,926 | Cash and cash equivalents at end of year | $ | 2 | $ | 1,158 | $ | 1,033 | $ | — | $ | 2,193 | ||||||||||||
CONSOLIDATING STATEMENT OF CASH FLOWS (RESTATED)
For the Year Ended September 30, 2005
($ in millions)
| | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net cash provided by operating activities | $ | 628 | $ | 2,429 | $ | 3,097 | $ | — | $ | 6,154 | |||||||
| Net cash provided by discontinued operating activities | — | — | 64 | — | 64 | ||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Capital expenditures | — | — | (1,354 | ) | — | (1,354 | ) | ||||||||||
| Proceeds from disposal of assets | — | — | 91 | — | 91 | ||||||||||||
| Acquisition of customer accounts (ADT dealer program) | — | — | (328 | ) | — | (328 | ) | ||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (82 | ) | — | (82 | ) | ||||||||||
| Purchase accounting and holdback liabilities | — | — | (47 | ) | — | (47 | ) | ||||||||||
| Divestiture of businesses, net of cash retained | — | — | 295 | — | 295 | ||||||||||||
| Increase in investments | — | (99 | ) | (173 | ) | — | (272 | ) | |||||||||
| Decrease in intercompany loans | — | 1,196 | — | (1,196 | ) | — | |||||||||||
| Increase in restricted cash | — | — | (2 | ) | — | (2 | ) | ||||||||||
| Other | — | — | (16 | ) | — | (16 | ) | ||||||||||
| Net cash provided by (used in) investing activities | — | 1,097 | (1,616 | ) | (1,196 | ) | (1,715 | ) | |||||||||
| Net cash used in discontinued investing activities | — | — | (39 | ) | — | (39 | ) | ||||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Net repayments of debt | — | (4,772 | ) | (207 | ) | — | (4,979 | ) | |||||||||
| Proceeds from exercise of share options | — | — | 226 | — | 226 | ||||||||||||
| Dividends paid | (628 | ) | — | — | — | (628 | ) | ||||||||||
| Repurchase of common shares by subsidiary | — | — | (300 | ) | — | (300 | ) | ||||||||||
| Loan repayments to parent | — | — | (1,196 | ) | 1,196 | — | |||||||||||
| Transfer to discontinued operations | — | — | (78 | ) | — | (78 | ) | ||||||||||
| Other | 2 | (2 | ) | (23 | ) | — | (23 | ) | |||||||||
| Net cash used in financing activities | (626 | ) | (4,774 | ) | (1,578 | ) | 1,196 | (5,782 | ) | ||||||||
| Net cash used in discontinued financing activities | — | — | (16 | ) | — | (16 | ) | ||||||||||
| Effect of currency translation on cash | — | — | 65 | — | 65 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 2 | (1,248 | ) | (23 | ) | — | (1,269 | ) | |||||||||
| Less: net increase in cash related to discontinued operations | — | — | (9 | ) | — | (9 | ) | ||||||||||
| Cash and cash equivalents at beginning of year | 1 | 2,452 | 2,037 | — | 4,490 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 3 | $ | 1,204 | $ | 2,005 | $ | — | $ | 3,212 | |||||||
| | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 628 | $ | 2,545 | $ | (846 | ) | $ | — | $ | 2,327 | ||||||
| Net cash provided by discontinued operating activities | — | 58 | 3,833 | — | 3,891 | ||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Capital expenditures | — | — | (516 | ) | — | (516 | ) | ||||||||||
| Proceeds from disposal of assets | — | — | 53 | — | 53 | ||||||||||||
| Acquisition of customer accounts (ADT dealer program) | — | — | (328 | ) | — | (328 | ) | ||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (6 | ) | — | (6 | ) | ||||||||||
| Divestiture of businesses, net of cash retained | — | — | 21 | — | 21 | ||||||||||||
| Increase in investments | — | (99 | ) | (215 | ) | — | (314 | ) | |||||||||
| Decrease in intercompany loans | — | 1,080 | — | (1,080 | ) | — | |||||||||||
| Decrease in restricted cash | — | — | 7 | — | 7 | ||||||||||||
| Other | — | — | (12 | ) | — | (12 | ) | ||||||||||
| Net cash provided by (used in) investing activities | — | 981 | (996 | ) | (1,080 | ) | (1,095 | ) | |||||||||
| Net cash used in discontinued investing activities | — | (58 | ) | (659 | ) | 58 | (659 | ) | |||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Net repayments of debt | — | (4,772 | ) | (18 | ) | — | (4,790 | ) | |||||||||
| Proceeds from exercise of share options | — | — | 226 | — | 226 | ||||||||||||
| Dividends paid | (628 | ) | — | — | — | (628 | ) | ||||||||||
| Repurchase of common shares by subsidiary | — | — | (300 | ) | — | (300 | ) | ||||||||||
| Net intercompany loan repayments | — | — | (1,080 | ) | 1,080 | — | |||||||||||
| Transfer from discontinued operations | — | — | 3,080 | — | 3,080 | ||||||||||||
| Other | 2 | (2 | ) | (11 | ) | — | (11 | ) | |||||||||
| Net cash (used in) provided by financing activities | (626 | ) | (4,774 | ) | 1,897 | 1,080 | (2,423 | ) | |||||||||
| Net cash used in discontinued financing activities | — | — | (3,317 | ) | (58 | ) | (3,375 | ) | |||||||||
| Effect of currency translation on cash | — | — | 52 | — | 52 | ||||||||||||
| Effect of currency translation on cash related to discontinued operations | — | — | 13 | — | 13 | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 2 | (1,248 | ) | (23 | ) | — | (1,269 | ) | |||||||||
| Less: net decrease in cash related to discontinued operations | — | — | 130 | — | 130 | ||||||||||||
| Cash and cash equivalents at beginning of year | 1 | 2,452 | 1,465 | — | 3,918 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 3 | $ | 1,204 | $ | 1,572 | $ | — | $ | 2,779 | |||||||
CONSOLIDATING STATEMENT OF CASH FLOWS (RESTATED)For the Year Ended September 30, 2004($ in millions)
| | Tyco International Ltd. | Tyco International Group S.A. | Other Subsidiaries | Consolidating Adjustments | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | |||||||||||||||||
| Net cash provided by operating activities | $ | 2,311 | $ | 1,109 | $ | 1,785 | $ | — | $ | 5,205 | |||||||
| Net cash provided by discontinued operating activities | — | — | 206 | — | 206 | ||||||||||||
| Cash Flows From Investing Activities: | |||||||||||||||||
| Capital expenditures, net | — | — | (1,127 | ) | — | (1,127 | ) | ||||||||||
| Proceeds from disposal of assets | — | — | 140 | — | 140 | ||||||||||||
| Acquisition of customer accounts (ADT dealer program) | — | — | (254 | ) | — | (254 | ) | ||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (15 | ) | — | (15 | ) | ||||||||||
| Purchase accounting and holdback liabilities | — | — | (104 | ) | — | (104 | ) | ||||||||||
| Divestiture of businesses, net of cash retained | — | — | 236 | — | 236 | ||||||||||||
| Decrease (increase) in investments | — | 470 | (47 | ) | — | 423 | |||||||||||
| Decrease in intercompany loans | 218 | 51 | — | (269 | ) | — | |||||||||||
| Decrease in restricted cash | — | 315 | 27 | — | 342 | ||||||||||||
| Other | — | — | (25 | ) | — | (25 | ) | ||||||||||
| Net cash provided by (used in) investing activities | 218 | 836 | (1,169 | ) | (269 | ) | (384 | ) | |||||||||
| Net cash used in discontinued investing activities | — | — | (48 | ) | — | (48 | ) | ||||||||||
| Cash Flows From Financing Activities: | |||||||||||||||||
| Net repayments of debt | (2,480 | ) | (1,775 | ) | (503 | ) | — | (4,758 | ) | ||||||||
| Proceeds from exercise of share options | — | — | 155 | — | 155 | ||||||||||||
| Dividends paid | (100 | ) | — | — | — | (100 | ) | ||||||||||
| Repurchase of common shares by subsidiary | — | — | (1 | ) | — | (1 | ) | ||||||||||
| Loan repayments to parent | — | — | (269 | ) | 269 | — | |||||||||||
| Transfer from discontinued operations | — | — | 169 | — | 169 | ||||||||||||
| Other | 5 | — | (29 | ) | — | (24 | ) | ||||||||||
| Net cash used in financing activities | (2,575 | ) | (1,775 | ) | (478 | ) | 269 | (4,559 | ) | ||||||||
| Net cash used in discontinued financing activities | — | — | (186 | ) | — | (186 | ) | ||||||||||
| Effect of currency translation on cash | — | — | 45 | — | 45 | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | (46 | ) | 170 | 155 | — | 279 | |||||||||||
| Less: net decrease in cash related to discontinued operations | — | — | 28 | — | 28 | ||||||||||||
| Cash and cash equivalents at beginning of year | 47 | 2,282 | 1,854 | — | 4,183 | ||||||||||||
| Cash and cash equivalents at end of year | $ | 1 | $ | 2,452 | $ | 2,037 | $ | — | $ | 4,490 | |||||||
28.26. Subsequent Events
OnDuring October, 27, 2006, the Company completed the sale of its PCG business, which was part of the Electronics segment, for $226 million and expects to record a gain on the sale of approximately $45 million.
On October 27, 2006, Mark H. Swartz, former Chief Financial Officer and Director, paid restitution to the Company in the amount of $38 million. In addition, on November 17, 2006, the Supreme Court of the State of New York ordered $98 million to be released from an escrow account under the supervision of the Manhattan District Attorney to Tyco on January 2, 2007 in relation to the restitution owed by L. Dennis Kozlowski, former Chairman and Chief Executive Officer.
On October 31, 2006, the Company exercised its right to buy five cable laying sea vessels that were previously included under an off-balance sheet leasing arrangement for $280 million.
In November 2006, the Company announced that it has launched a restructuring program across all segments including the corporate organization which will streamline some of the businesses and reduce Tyco's operational footprint. The Company obtained approval from the Board of Directors for up to $600 million over the next two years for related costs.
Through December 8, 2006, the Company repurchased an additional 9.21.6 million of its common shares for $279$74 million under the $2.0$1.0 billion share repurchase program approved by the Board of Directors in May 2006.September 2007.
TYCO INTERNATIONAL LTD.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in millions)
| Description | Description | Balance at Beginning of Year | Additions Charged to Income | Acquisitions, Divestitures and Other | Deductions | Balance at End of Year | Description | Balance at Beginning of Year | Additions Charged to Income | Divestitures and Other | Deductions | Balance at End of Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accounts Receivable: | Accounts Receivable: | Accounts Receivable: | ||||||||||||||||||||||||||||||
| Year Ended September 30, 2004 | $ | 708 | $ | 156 | $ | 18 | $ | (368 | ) | $ | 514 | Year Ended September 30, 2005 | $ | 365 | $ | 60 | $ | (13 | ) | $ | (152 | ) | $ | 260 | ||||||||
| Year Ended September 30, 2005 | 514 | 93 | (2 | ) | (184 | ) | 421 | Year Ended September 29, 2006 | 260 | 31 | 16 | (104 | ) | 203 | ||||||||||||||||||
| Year Ended September 29, 2006 | 421 | 34 | 19 | (138 | ) | 336 | Year Ended September 28, 2007 | 203 | 51 | 20 | (79 | ) | 195 | |||||||||||||||||||