10-Q 1 tyc-2014328x10q.htm 10-Q TYC-2014.3.28-10Q
Table of Contents                                                                                

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 28, 2014
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)
Switzerland
(Jurisdiction of Incorporation)
 
98-0390500
(I.R.S. Employer Identification Number)
Victor von Bruns-Strasse 21
CH-8212 Neuhausen am Rheinfall, Switzerland
(Address of registrant's principal executive office)
41-52-633-02-44
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company 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 number of common shares outstanding as of April 17, 2014 was 461,276,498.
 



TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents                                            

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
    TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share data)
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28,
2014
 
March 29,
2013
 
March 28,
2014
 
March 29,
2013
Revenue from product sales
$
1,470

 
$
1,424

 
$
2,947

 
$
2,854

Service revenue
1,017

 
1,050

 
2,042

 
2,091

Net revenue
2,487

 
2,474

 
4,989

 
4,945

Cost of product sales
1,015

 
983

 
2,022

 
1,975

Cost of services
577

 
608

 
1,153

 
1,207

Selling, general and administrative expenses
639

 
766

 
1,213

 
1,422

Separation costs (see Note 2)
1

 

 
1

 
5

Restructuring and asset impairment charges, net (see Note 4)
7

 
22

 
10

 
29

Operating income
248

 
95

 
590

 
307

Interest income
3

 
3

 
6

 
7

Interest expense
(25
)
 
(25
)
 
(49
)
 
(49
)
Other expense, net
(1
)
 
(20
)
 
(2
)
 
(29
)
Income from continuing operations before income taxes
225

 
53

 
545

 
236

Income tax (expense) benefit
(37
)
 
2

 
(107
)
 
(33
)
Equity loss in earnings of unconsolidated subsidiaries
(5
)
 
(6
)
 
(9
)
 
(12
)
Income from continuing operations
183

 
49

 
429

 
191

Income from discontinued operations, net of income taxes
24

 
21

 
50

 
44

Net income
207

 
70

 
479

 
235

Less: noncontrolling interest in subsidiaries net (loss) income

 
(2
)
 
2

 

Net income attributable to Tyco common shareholders
$
207

 
$
72

 
$
477

 
$
235

Amounts attributable to Tyco common shareholders:
 

 
 

 
 

 
 

Income from continuing operations
$
183

 
$
51

 
$
427

 
$
191

Income from discontinued operations
24

 
21

 
50

 
44

Net income attributable to Tyco common shareholders
$
207

 
$
72

 
$
477

 
$
235

Basic earnings per share attributable to Tyco common shareholders:
 

 
 

 
 

 
 

Income from continuing operations
$
0.40

 
$
0.11

 
$
0.92

 
$
0.41

Income from discontinued operations
0.05

 
0.05

 
0.11

 
0.09

Net income attributable to Tyco common shareholders
$
0.45

 
$
0.16

 
$
1.03

 
$
0.50

Diluted earnings per share attributable to Tyco common shareholders:
 

 
 

 
 

 
 

Income from continuing operations
$
0.39

 
$
0.11

 
$
0.91

 
$
0.40

Income from discontinued operations
0.05

 
0.05

 
0.10

 
0.09

Net income attributable to Tyco common shareholders
$
0.44

 
$
0.16

 
$
1.01

 
$
0.49

Weighted average number of shares outstanding:
 

 
 

 
 

 
 

Basic
461

 
466

 
462

 
466

Diluted
469

 
474

 
470

 
473

   See Notes to Unaudited Consolidated Financial Statements.

1

Table of Contents                                            

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in millions)
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28,
2014
 
March 29,
2013
 
March 28,
2014
 
March 29,
2013
Net income
$
207

 
$
70

 
$
479

 
$
235

Other comprehensive (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(15
)
 
(102
)
 
(52
)
 
(91
)
Defined benefit and post retirement plans
4

 
5

 
7

 
9

Unrealized gain on marketable securities and derivative instruments

 

 

 
1

Total other comprehensive loss, net of tax
(11
)
 
(97
)
 
(45
)
 
(81
)
Comprehensive income (loss)
196

 
(27
)
 
434

 
154

Less: comprehensive (loss) income attributable to noncontrolling interests

 
(2
)
 
2

 

Comprehensive income (loss) attributable to Tyco common shareholders
$
196

 
$
(25
)
 
$
432

 
$
154

   See Notes to Unaudited Consolidated Financial Statements.

2

Table of Contents                                            

TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except per share data)
 
March 28,
2014
 
September 27,
2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
495

 
$
563

Accounts receivable, less allowance for doubtful accounts of $79 and $82, respectively
1,674

 
1,718

Inventories
661

 
647

Prepaid expenses and other current assets
854

 
850

Deferred income taxes
250

 
250

Assets held for sale
839

 
828

Total Current Assets
4,773

 
4,856

Property, plant and equipment, net
1,269

 
1,285

Goodwill
4,176

 
4,163

Intangible assets, net
773

 
791

Other assets
944

 
1,081

Total Assets
$
11,935

 
$
12,176

Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Loans payable and current maturities of long-term debt
$
20

 
$
20

Accounts payable
783

 
851

Accrued and other current liabilities
1,962

 
1,859

Deferred revenue
420

 
394

Liabilities held for sale
221

 
225

Total Current Liabilities
3,406

 
3,349

Long-term debt
1,442

 
1,443

Deferred revenue
352

 
370

Other liabilities
1,667

 
1,881

Total Liabilities
6,867

 
7,043

Commitments and Contingencies (see Note 11)


 

Redeemable noncontrolling interest
12

 
12

Tyco Shareholders' Equity:
 
 
 
Common shares CHF 0.50 par value, 825,222,070 shares authorized, 486,363,050 shares issued as of both March 28, 2014 and September 27, 2013
208

 
208

Common shares held in treasury, 25,187,219 and 22,902,706 shares as of March 28, 2014 and September 27, 2013, respectively
(991
)
 
(912
)
Contributed surplus
3,334

 
3,754

Accumulated earnings
3,512

 
3,035

Accumulated other comprehensive loss
(1,032
)
 
(987
)
Total Tyco Shareholders' Equity
5,031

 
5,098

Nonredeemable noncontrolling interest
25

 
23

Total Equity
5,056

 
5,121

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
11,935

 
$
12,176

   See Notes to Unaudited Consolidated Financial Statements.

3

Table of Contents                                            

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
 
For the Six Months Ended
 
March 28,
2014
 
March 29,
2013
Cash Flows From Operating Activities:
 
 
 
Net income attributable to Tyco common shareholders
$
477

 
$
235

Noncontrolling interest in subsidiaries net income
2

 

Income from discontinued operations, net of income taxes
(50
)
 
(44
)
Income from continuing operations
429

 
191

Adjustments to reconcile net cash provided by operating activities:
 
 
 
Depreciation and amortization
181

 
189

Non-cash compensation expense
31

 
31

Deferred income taxes
56

 
(45
)
Provision for losses on accounts receivable and inventory
24

 
36

Legacy legal matters (see Note 11)
(92
)
 

(Gain) loss on divestitures
(2
)
 
6

Other non-cash items
19

 
33

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
 
 
 
Accounts receivable, net
35

 
6

Contracts in progress
(1
)
 
(13
)
Inventories
(24
)
 
(33
)
Prepaid expenses and other current assets
(29
)
 
34

Accounts payable
(48
)
 
(87
)
Accrued and other liabilities
(222
)
 
(195
)
Deferred revenue
11

 
5

Other
(13
)
 
(12
)
Net cash provided by operating activities
355

 
146

Net cash provided by discontinued operating activities
88

 
63

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(135
)
 
(140
)
Proceeds from disposal of assets
6

 
4

Acquisition of businesses, net of cash acquired
(54
)
 
(38
)
Acquisition of dealer generated customer accounts and bulk account purchases
(16
)
 
(10
)
Sales and maturities of investments
141

 
39

Purchases of investments
(40
)
 
(119
)
Other
6

 
(6
)
Net cash used in investing activities
(92
)
 
(270
)
Net cash used in discontinued investing activities
(57
)
 
(54
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from issuance of short-term debt
715

 
100

Repayment of short-term debt
(715
)
 
(101
)
Proceeds from exercise of share options
62

 
94

Dividends paid
(148
)
 
(140
)
Repurchase of common shares by treasury
(250
)
 
(200
)
Transfer from (to) discontinued operations
31

 
(23
)
Other
(10
)
 
(17
)
Net cash used in financing activities
(315
)
 
(287
)
Net cash (used in) provided by discontinued financing activities
(31
)
 
23

Effect of currency translation on cash
(16
)
 
(3
)
Net decrease in cash and cash equivalents
(68
)
 
(382
)
Less: net increase in cash and cash equivalents related to discontinued operations

 
32

Cash and cash equivalents at beginning of period
563

 
844

Cash and cash equivalents at end of period
$
495

 
$
430

See Notes to Unaudited Consolidated Financial Statements.

4

Table of Contents                                            

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the Six Months Ended March 28, 2014 and March 29, 2013
(in millions)
 
Number of
Common Shares
 
Common
Shares at
Par Value
 
Treasury
Shares
 
Contributed
Surplus
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss

 
Total Tyco
Shareholders'
Equity
 
Nonredeemable
Noncontrolling
Interest
 
Total
Equity
Balance as of September 28, 2012
462

 
$
2,792

 
$
(1,094
)
 
$
1,763

 
$
2,499

 
$
(966
)
 
$
4,994

 
$
16

 
$
5,010

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
 

 
 

 
235

 
 

 
235

 


 
235

Other comprehensive loss, net of tax
 

 
 

 
 

 
 

 
 

 
(81
)
 
(81
)
 
 
 
(81
)
Dividends declared
 

 
 

 
 

 
(297
)
 
 

 
 

 
(297
)
 
 

 
(297
)
Shares issued from treasury for vesting of share based equity awards
9

 
 

 
344

 
(250
)
 
 

 
 

 
94

 
 

 
94

Repurchase of common shares
(7
)
 
 

 
(200
)
 
 

 
 

 
 

 
(200
)
 
 

 
(200
)
Compensation expense
 

 
 

 
 

 
31

 
 

 
 

 
31

 
 

 
31

Other
(1
)
 
 

 
(17
)
 
(45
)
 
 

 
 

 
(62
)
 


 
(62
)
Balance as of March 29, 2013
463

 
$
2,792

 
$
(967
)
 
$
1,202

 
$
2,734

 
$
(1,047
)
 
$
4,714

 
$
16

 
$
4,730


 
Number of
Common
Shares
 
Common
Shares at
Par Value
 
Treasury
Shares
 
Contributed
Surplus
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss

 
Total Tyco
Shareholders'
Equity
 
Nonredeemable
Noncontrolling
Interest
 
Total
Equity
Balance as of September 27, 2013
463

 
$
208

 
$
(912
)
 
$
3,754

 
$
3,035

 
$
(987
)
 
$
5,098

 
$
23

 
$
5,121

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
 

 
 

 
477

 
 

 
477

 
2

 
479

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(45
)
 
(45
)
 
 
 
(45
)
Dividends declared
 

 
 

 
 

 
(332
)
 
 

 
 

 
(332
)
 
 
 
(332
)
Shares issued from treasury for vesting of share based equity awards
5

 
 

 
182

 
(120
)
 
 

 
 

 
62

 
 
 
62

Repurchase of common shares
(7
)
 
 

 
(250
)
 
 

 
 

 
 

 
(250
)
 
 
 
(250
)
Compensation expense
 

 
 

 
 

 
32

 
 

 
 

 
32

 
 
 
32

Other


 
 

 
(11
)
 


 
 

 


 
(11
)
 

 
(11
)
Balance as of March 28, 2014
461

 
$
208

 
$
(991
)
 
$
3,334

 
$
3,512

 
$
(1,032
)
 
$
5,031

 
$
25

 
$
5,056

   See Notes to Unaudited Consolidated Financial Statements.

5


TYCO INTERNATIONAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



1.    Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation—The Consolidated Financial Statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company's financial position, results of operations and cash flows for the interim period. The unaudited Consolidated Financial Statements include the consolidated results of Tyco International Ltd., a corporation organized under the laws of Switzerland, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Tyco"). The unaudited Consolidated Financial Statements have been prepared in United States dollars ("USD") and in accordance with the instructions to Form 10-Q under the Securities and Exchange Act of 1934, as amended. The results reported in these unaudited Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 2013 (the "2013 Form 10-K").
References to 2014 and 2013 are to Tyco's fiscal quarters ending March 28, 2014 and March 29, 2013, respectively, unless otherwise indicated.
The Company has a 52 or 53-week fiscal year that ends on the last Friday in September. Fiscal years 2014 and 2013 are both 52-week years.
Reclassifications - Certain prior period amounts have been reclassified to conform with current period presentation. Specifically, the Company has reclassified its South Korean security business to income from discontinued operations in the Consolidated Statements of Operations and assets and liabilities held for sale within the Consolidated Balance Sheets as it satisfied the criteria to be presented as a discontinued operation. See Note 3.
Recently Adopted Accounting Pronouncements—In January 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance clarifying the scope of disclosures about offsetting assets and liabilities. The guidance clarifies that the scope of the disclosures applies to derivatives accounted for in accordance with authoritative guidance for derivatives and hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that either offset or are subject to an enforceable master netting agreement or similar agreement. The guidance is applied retrospectively and became effective for Tyco in the first quarter of fiscal 2014. The adoption of this guidance did not have a material impact on the Company's disclosures.
In February 2013, the FASB issued authoritative guidance for the reporting of amounts reclassified out of Accumulated other comprehensive income ("AOCI"). The amendment did not change the current requirements for reporting net income or Other comprehensive income ("OCI") in the financial statements. The guidance requires the presentation, either on the face of the statement where net income is presented or in the notes, of the significant reclassifications out of AOCI by the respective line items of net income if the amount reclassified is required under U.S. generally accepted accounting principles ("U.S. GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, the amendment requires a cross-reference to other disclosures under U.S. GAAP that provide additional detail about those amounts. The guidance became effective for Tyco in the first quarter of fiscal 2014 and additional disclosures are provided in Note 13.
Recently Issued Accounting Pronouncements—In March 2013, the FASB issued authoritative guidance to resolve diversity in practice on the accounting for the cumulative translation adjustment ("CTA") when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The guidance requires that the parent release any CTA into net income when the parent ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity which results in a substantially complete liquidation of the foreign entity; when the sale of an investment in a foreign entity results in the loss of a controlling financial interest; or where an acquirer obtains control of an acquiree in which it had an equity interest immediately before the acquisition date. The guidance does not change the requirement to release a pro rata portion of the CTA into net income upon a partial sale of an equity method investment that is a foreign entity. The guidance will be effective for Tyco in the first quarter of fiscal 2015, with early adoption permitted. The Company is currently assessing the timing of its adoption along with what impact, if any, the guidance will have upon adoption.
In July 2013, the FASB issued authoritative guidance for the presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an entity to

6

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


present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a NOL carryforward, a similar tax loss, or a tax credit carryforward. If the NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. This guidance does not require any additional recurring disclosures and will be effective for Tyco the first fiscal quarter of fiscal 2015. The Company is currently assessing the impact, if any, the guidance will have upon adoption.
In April 2014, the FASB issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. This guidance is effective for Tyco in the first quarter of fiscal 2016, with early adoption permitted. The Company is currently assessing the impact, if any, the guidance will have upon adoption.
2.    2012 Separation Transaction
On September 28, 2012, the Company completed the spin-offs of The ADT Corporation ("ADT") and Pentair Ltd. (formerly known as Tyco Flow Control International Ltd. ("Tyco Flow Control")), formerly the North American residential security and flow control businesses of Tyco, respectively, into separate, publicly traded companies in the form of a distribution to Tyco shareholders.
In connection with activities taken to complete the 2012 Separation and to create the revised organizational structure of the Company, the Company incurred pre-tax charges ("Separation Charges") of $17 million and $18 million during the quarters ended March 28, 2014 and March 29, 2013, respectively, and $32 million for both the six months ended March 28, 2014 and March 29, 2013. The amounts presented within discontinued operations are costs directly related to the 2012 Separation that are not expected to provide a future benefit to the Company. The components of the Separation Charges incurred within continuing operations and discontinued operations consisted of the following ($ in millions):
 
For the Quarter Ended March 28, 2014
 
For the Quarter Ended March 29, 2013
 
Continuing
Operations
 
Discontinued
Operations
 
Total
 
Continuing
Operations
 
Discontinued
Operations
 
Total
Professional fees
$
1

 
$

 
$
1

 
$

 
$
1

 
$
1

Information technology related costs
3

 

 
3

 
2

 

 
2

Employee compensation costs

 
1

 
1

 

 
1

 
1

Marketing costs
10

 

 
10

 
13

 

 
13

Other
2

 

 
2

 
1

 

 
1

Total pre-tax separation charges
16

 
1

 
17

 
16

 
2

 
18

Tax-related separation charges

 

 

 

 

 

Tax (benefit) expense on pre-tax separation charges                        
(5
)
 

 
(5
)
 
3

 

 
3

Total separation charges, net of tax
$
11

 
$
1

 
$
12

 
$
19

 
$
2

 
$
21


7

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


 
For the Six Months Ended 
 March 28, 2014
 
For the Six Months Ended 
 March 29, 2013
 
Continuing
Operations
 
Discontinued
Operations
 
Total
 
Continuing
Operations
 
Discontinued
Operations
 
Total
Professional fees
$
2

 
$

 
$
2

 
$

 
$
4

 
$
4

Information technology related costs
6

 

 
6

 
4

 
2

 
6

Employee compensation costs

 
1

 
1

 

 
2

 
2

Marketing costs
20

 

 
20

 
27

 

 
27

Other
3

 

 
3

 
3

 
(10
)
 
(7
)
Total pre-tax separation charges
31

 
1

 
32

 
34

 
(2
)
 
32

Tax-related separation charges

 

 

 
4

 

 
4

Tax (benefit) expense on pre-tax separation charges                        
(11
)
 

 
(11
)
 
(2
)
 

 
(2
)
Total separation charges, net of tax
$
20

 
$
1

 
$
21

 
$
36

 
$
(2
)
 
$
34

Pre-tax Separation Charges were classified in continuing operations within the Company's Consolidated Statement of Operations as follows ($ in millions):
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28, 2014
 
March 29, 2013
 
March 28, 2014

 
March 29, 2013

Selling, general and administrative expenses
$
15

 
$
16

 
$
30

 
$
29

Separation costs
1

 

 
1

 
5

Total
$
16

 
$
16

 
$
31

 
$
34

3.    Divestitures
The Company continually assesses the strategic fit of its various businesses and from time to time divests businesses which do not align with its long-term strategy.
Fiscal 2014
During the quarter ended March 28, 2014, the Company did not complete any divestitures. During the quarter ended December 27, 2013, the Company completed the sale of its Armourguard business in New Zealand and its fire and security business in Fiji, both of which were in its ROW Installation & Services segment, for an immaterial amount. These businesses were accounted for as held for sale as of September 27, 2013; however, the assets and liabilities have not been presented separately in the Consolidated Balance Sheets, and these businesses have not been presented in discontinued operations in the Consolidated Statements of Operations for all periods presented because the amounts were not material.
On March 6, 2014, the Company announced Atkore International Group Inc.'s (“Atkore”) intention to redeem of all of the Company’s remaining common equity stake in Atkore. The redemption was completed on April 9, 2014 for aggregate cash proceeds of $250 million. This amount may be adjusted upward by up to $25 million if, prior to December 31, 2014, there is a sale or merger of Atkore, a sale of substantially all of Atkore's assets or an initial public offering of Atkore's stock. The Company’s ownership interest in Atkore is recorded under the equity method of accounting and its carrying value of $34 million is recorded in Other assets in the Company’s Consolidated Balance Sheet as of March 28, 2014.  The Company’s proportionate share of Atkore’s net loss is recorded within Equity loss in earnings of unconsolidated subsidiaries in the Company’s Consolidated Statement of Operations. 
Fiscal 2013
On September 28, 2012, Tyco completed the 2012 Separation. See Note 2 for additional information. At the time of the 2012 Separation, the Company used available information to develop its best estimates for certain assets and liabilities related to the transaction. In limited instances, final determination of the balances will be made in subsequent periods, such as in the case of when final income tax returns are filed in certain jurisdictions where those returns include a combination of Tyco, ADT

8

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


and/or Tyco Flow Control legal entities. During the six months ended March 29, 2013, $45 million was recorded within the Consolidated Statement of Shareholders' Equity as Other, primarily related to a cash true-up adjustment paid to ADT. During the six months ended March 28, 2014, there were no adjustments recorded within the Consolidated Statement of Shareholders' Equity related to the 2012 Separation. Any additional adjustments are not expected to be material.
Discontinued Operations
On March 2, 2014, Tyco entered into a Stock Purchase Agreement with an affiliate of The Carlyle Group for the sale of Tyco Fire & Security Services Korea Co. Ltd. and its subsidiaries that form and operate the Company’s South Korean security business. Pursuant to the Stock Purchase Agreement, Tyco will sell 100% of the issued and outstanding capital stock of Tyco Fire & Security Services Korea Co. Ltd. for a purchase price of $1.93 billion, subject to customary adjustments. The South Korean security business was accounted for as held for sale on the Consolidated Balance Sheets as of March 28, 2014 and September 27, 2013, and its results of operations have been presented within discontinued operations on the Consolidated Statements of Operations during the quarters and six months ended March 28, 2014 and March 29, 2013. The Company expects the sale to close during the third quarter of fiscal 2014. Tyco expects to recognize a gain on sale upon closing of the agreement.
The components of income from discontinued operations, net of income taxes are as follows ($ in millions):
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28, 2014
 
March 29, 2013
 
March 28, 2014
 
March 29, 2013
Net revenue
$
145

 
$
134

 
$
290

 
$
263

Pre-tax income from discontinued operations
32

 
29

 
64

 
52

Pre-tax separation (charges) gain included within discontinued operations (See Note 2)
(1
)
 
(2
)
 
(1
)
 
2

Pre-tax loss on sale of discontinued operations
(4
)
 

 
(4
)
 

Income tax expense
(3
)
 
(6
)
 
(9
)
 
(10
)
Income from discontinued operations, net of income taxes
$
24

 
$
21

 
$
50

 
$
44

Balance sheet information for the South Korean security business as of March 28, 2014 and September 27, 2013 was as follows ($ in millions):
 
As of
 
March 28, 2014
 
September 27, 2013
Accounts receivables, net
$
24

 
$
21

Inventories
9

 
8

Prepaid expenses and other current assets
15

 
11

Property, plant and equipment, net
408

 
392

Goodwill and intangible assets, net
364

 
370

Other assets
19

 
26

Total assets
$
839

 
$
828

Accounts payable
43

 
48

Accrued and other current liabilities
58

 
59

Other liabilities
120

 
118

Total liabilities
$
221

 
$
225






9

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


Divestiture Gains, Net
For the quarter and six months ended March 28, 2014, the Company recorded a net loss of $1 million and a net gain of $2 million, respectively, in Selling, general and administrative expenses in the Company's Consolidated Statements of Operations, primarily related to a favorable court judgment regarding a divested business.
For the quarter and six months ended March 29, 2013, the Company recorded a net loss of $9 million and $6 million, respectively, in Selling, general and administrative expenses in the Company's Consolidated Statements of Operations, primarily due to an indemnification claim related to the divestiture of the Company's Electrical and Metal Products business and the write-down to fair value, less cost to sell, of a business held for sale. Offsetting the loss for the six months ended March 29, 2013 was a net gain recorded for the quarter ending December 28, 2012 related to the indemnification claim noted above.
4.    Restructuring and Asset Impairment Charges, Net
During the second quarter of fiscal 2014, the Company identified and pursued opportunities for cost savings through restructuring activities and workforce reductions to improve operating efficiencies across the Company's businesses. The Company expects to incur restructuring and restructuring related charges in the range of $50 million to $75 million in fiscal 2014, which does not include repositioning charges as described below.
The Company recorded restructuring and asset impairment charges by action as follows ($ in millions):
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28, 2014
 
March 29, 2013
 
March 28, 2014
 
March 29, 2013
2014 actions
$
8

 
$

 
$
9

 
$

2013 actions
1

 
16

 
2

 
21

2012 and prior actions
(2
)
 
6

 
(1
)
 
8

Total
$
7

 
$
22

 
$
10

 
$
29


2014 Actions

Restructuring and asset impairment charges, net, during the quarter and six months ended March 28, 2014 related to the 2014 actions are as follows ($ in millions):
 
For the Quarter Ended 
 March 28, 2014
 
Employee
Severance and
Benefits
NA Installation & Services
$
3

ROW Installation & Services
4

Global Products
1

Total
$
8


10

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


 
For the Six Months Ended
 March 28, 2014
 
Employee
Severance and
Benefits
NA Installation & Services
$
3

ROW Installation & Services
5

Global Products
1

Total
$
9

The rollforward of the reserves from September 27, 2013 to March 28, 2014 is as follows ($ in millions):
Balance as of September 27, 2013
$

Charges
9

Utilization
(1
)
Balance as of March 28, 2014
$
8

2013 Actions
Restructuring and asset impairment charges, net, during the quarters and six months ended March 28, 2014 and March 29, 2013 related to the 2013 actions are as follows ($ in millions):
 
For the Quarter Ended 
 March 28, 2014
 
Facility Exit
and Other
Charges
Global Products
$
1

Total
$
1


 
For the Quarter Ended 
 March 29, 2013
 
Employee
Severance and
Benefits
 
Facility Exit
and Other
Charges
 
Total
NA Installation & Services
$
4

 
$
2

 
$
6

ROW Installation & Services
7

 

 
7

Global Products
3

 

 
3

Total
$
14

 
$
2

 
$
16


 
For the Six Months Ended March 28, 2014
 
Employee
Severance and
Benefits
 
Facility Exit
and Other
Charges
 
Total
NA Installation & Services
$
(1
)
 
$
1

 
$

ROW Installation & Services
(3
)
 

 
(3
)
Global Products
4

 
1

 
5

Total
$

 
$
2

 
$
2



11

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


 
For the Six Months Ended March 29, 2013
 
Employee
Severance and
Benefits
 
Facility Exit
and Other
Charges
 
Total
NA Installation & Services
$
4

 
$
2

 
$
6

ROW Installation & Services
9

 
1

 
10

Global Products
4

 

 
4

Corporate and Other
1

 

 
1

Total
$
18

 
$
3

 
$
21


Restructuring and asset impairment charges, net, incurred cumulative to date from initiation of the 2013 actions are as follows ($ in millions):
 
Employee
Severance and
Benefits
 
Facility Exit
and Other
Charges
 
Total
NA Installation & Services
$
33

 
$
2

 
$
35

ROW Installation & Services
43

 
4

 
47

Global Products
13

 
3

 
16

Corporate and Other
3

 

 
3

Total
$
92

 
$
9

 
$
101

The rollforward of the reserves from September 27, 2013 to March 28, 2014 is as follows ($ in millions):
Balance as of September 27, 2013
$
68

Charges
9

Reversals
(7
)
Utilization
(27
)
Balance as of March 28, 2014
$
43

Restructuring reserves for businesses that are included within Liabilities held for sale on the Consolidated Balance Sheets are excluded from the table above. See Note 3.
2012 and prior actions
The Company continues to maintain restructuring reserves related to actions initiated prior to fiscal 2012. The total amount of these reserves was $47 million and $62 million as of March 28, 2014 and September 27, 2013, respectively. The Company incurred $1 million and $7 million of restructuring charges, $3 million and $1 million of reversals and utilized $6 million and $18 million for the quarters ended March 28, 2014 and March 29, 2013, respectively. The Company incurred $5 million and $11 million of restructuring charges, $6 million and $3 million of restructuring reversals and utilized $14 million and $36 million for the six months ended March 28, 2014 and March 29, 2013, respectively, related to 2012 and prior actions. The aggregate remaining reserves primarily relate to facility exit costs for long-term non-cancelable lease obligations primarily within the Company's ROW Installation & Services segment.
Total Restructuring Reserves
As of March 28, 2014 and September 27, 2013, restructuring reserves related to all actions were included in the Company's Consolidated Balance Sheets as follows ($ in millions):

12

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


 
As of
 
March 28, 2014
 
September 27, 2013
Accrued and other current liabilities
$
80

 
$
112

Other liabilities
18

 
18

Total
$
98

 
$
130

Restructuring reserves for businesses that are included within Liabilities held for sale on the Consolidated Balance Sheets are excluded from the table above. See Note 3.
Repositioning
The Company has initiated certain global actions designed to reduce its cost structure and improve future profitability by streamlining operations and better aligning functions, which the Company refers to as repositioning actions. These actions may or may not lead to a future restructuring action. During the quarter and six months ended March 28, 2014, the Company recorded repositioning charges of $9 million and $15 million, respectively, primarily related to professional fees which have been reflected in Selling, general and administrative expenses in the Consolidated Statements of Operations.
5.    Acquisitions
Acquisitions
During the quarter ended March 28, 2014, the Company did not complete any acquisitions. During the six months ended March 28, 2014, total consideration included in continuing operations was $57 million, which is comprised of $54 million of cash paid, net of $1 million cash acquired, and $2 million of contingent consideration which was entirely related to the acquisition of Westfire, Inc. ("Westfire") on November 8, 2013. Westfire, a fire protection services company with operations in the United States, Chile and Peru, provides critical special-hazard suppression and detection applications in mining, telecommunications and other vertical markets and is being integrated with the NA Installation & Services and ROW Installation & Services segments.
During the quarter ended March 29, 2013, cash paid for acquisitions included in continuing operations totaled $15 million, net of $3 million cash acquired, which is related to an acquisition within the Company's ROW Installation & Services segment. During the six months ended March 29, 2013, cash paid for acquisitions included in continuing operations totaled $38 million net of $3 million cash acquired, which is related to acquisitions within the Company's NA Installation & Services and ROW Installation & Services segments.
Acquisition and Integration Related Costs
Acquisition and integration costs are expensed as incurred. During the quarter and six months ended March 28, 2014, the Company incurred acquisition and integration costs of $1 million and $2 million, respectively. During the quarter and six months ended March 29, 2013, the Company incurred acquisition and integration costs of nil and $1 million, respectively. Such costs are recorded in Selling, general and administrative expenses in the Company's Consolidated Statements of Operations.


13

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



6.    Income Taxes
Tyco did not have a significant change to its unrecognized tax benefits during the quarter ended March 28, 2014.
Many of Tyco's uncertain tax positions relate to tax years that remain subject to audit by the taxing authorities in U.S. federal, state and local or foreign jurisdictions. Open tax years in significant jurisdictions included in continuing operations are as follows:
Jurisdiction (1)
Years Open
To Audit
Australia
2004-2013
Canada
2005-2013
Germany
2005-2013
Switzerland
2004-2013
United Kingdom
2012-2013
United States
1997-2013
(1) In addition to these jurisdictions, the Company's South Korean security business has tax years 2009-2013 open that are currently under audit.
Based on the current status of its income tax audits, Tyco believes that it is reasonably possible that between nil and $30 million in unrecognized tax benefits may be resolved in the next twelve months.
At each balance sheet date, the Company evaluates whether it is more likely than not that Tyco's deferred tax assets will be realized and if sufficient future taxable income will be available by assessing current period and projected operating results and other pertinent data. As of March 28, 2014, Tyco recorded deferred tax assets of approximately $231 million, which is comprised of $2.2 billion gross deferred tax assets net of $2.0 billion valuation allowances.
Tax Sharing Agreement and Other Income Tax Matters
In connection with the 2012 and 2007 Separations, Tyco entered into the 2012 and 2007 Tax Sharing Agreements, respectively, that govern the respective rights, responsibilities, and obligations of (i) Tyco, Pentair and ADT after the 2012 Separation and (ii) Tyco, Covidien and TE Connectivity after the 2007 Separation, with respect to taxes. Specifically, this includes taxes in the ordinary course of business and taxes, if any, incurred as a result of any failure of the respective distributions to qualify tax-free for U.S. federal income tax purposes within the meaning of Section 355 of the Internal Revenue Code ("the Code") or certain internal transactions undertaken in anticipation of the spin-offs to qualify for tax-favored treatment under the Code.
Under the 2012 Tax Sharing Agreement, Tyco, Pentair and ADT share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to ADT's, Tyco Flow Control's and Tyco's income tax returns, and (ii) payments required to be made by Tyco with respect to the 2007 Tax Sharing Agreement, excluding approximately $175 million of pre-2012 Separation related tax liabilities that were anticipated to be paid prior to the 2012 Separation (collectively, "Shared Tax Liabilities"). Tyco will be responsible for the first $500 million of Shared Tax Liabilities. Pentair and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. Tyco, Pentair and ADT will share 52.5%, 20% and 27.5%, respectively, of Shared Tax Liabilities above $725 million, as well as all costs and expenses associated with the management of these Shared Tax Liabilities. As of September 28, 2012, Tyco established liabilities representing the fair market value of its obligations under the 2012 Tax Sharing Arrangement which is recorded in Other liabilities in Tyco's Consolidated Balance Sheet with an offset to Tyco shareholders' equity.
Under the 2007 Tax Sharing Agreement, Tyco shares responsibility for certain of Tyco's, Covidien's and TE Connectivity's income tax liabilities, resulting in cash payments based on a sharing formula for periods prior to and including June 29, 2007. More specifically, Tyco, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of shared income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and TE Connectivity's U.S. and certain non-U.S. income tax returns. The costs and expenses associated with the management of these shared tax liabilities are generally shared equally among the parties. In connection with the execution of the 2007 Tax Sharing Agreement, Tyco established a net receivable from Covidien and TE Connectivity representing the amount Tyco expected to receive for

14

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


pre-2007 Separation uncertain tax positions, including amounts owed to the Internal Revenue Service ("IRS"). Tyco also established liabilities representing the fair market value of its share of Covidien's and TE Connectivity's estimated obligations, primarily to the IRS, for their pre-2007 Separation taxes covered by the 2007 Tax Sharing Agreement.
Tyco assesses the shared tax liabilities and related guaranteed liabilities related to both the 2012 and 2007 Tax Sharing Agreements at each reporting period. Tyco will provide payment to Pentair and ADT under the 2012 Tax Sharing Agreement and Covidien and TE Connectivity under the 2007 Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected to occur as the tax audit and legal processes are completed for the impacted years and cash payments are made. Due to the nature of the unresolved adjustments described in the next paragraph, the maximum amount of future payments under the 2012 and 2007 Tax Sharing Agreements is not known. Such cash payments, when they occur, will reduce the guarantor liability as they represent an equivalent reduction of risk. Tyco also assesses the sufficiency of the 2012 and 2007 Tax Sharing Agreements guarantee liabilities on a quarterly basis and will increase the liability when it is probable that cash payments expected to be made exceed the recorded balance.
Tyco and its subsidiaries' income tax returns are examined periodically by various tax authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments, in particular with respect to years preceding the 2007 Separation. The issues and proposed adjustments related to such years are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement, and Tyco's liabilities under the 2007 Tax Sharing Agreement are further subject to the sharing provisions in the 2012 Tax Sharing Agreement. Tyco has previously disclosed that in connection with U.S. federal tax audits, the IRS has raised a number of issues and proposed tax adjustments for periods beginning with the 1997 tax year. Although Tyco has been able to resolve substantially all of the issues and adjustments proposed by the IRS for tax years through 2007, it has not been able to resolve matters related to the treatment of certain intercompany debt transactions during the period. As a result, on June 20, 2013, Tyco received Notices of Deficiency from the IRS asserting that several of Tyco's former U.S. subsidiaries owe additional taxes of $883.3 million plus penalties of $154 million based on audits of the 1997 through 2000 tax years of Tyco and its subsidiaries as they existed at that time. In addition, Tyco received Final Partnership Administrative Adjustments for certain U.S. partnerships owned by former U.S. subsidiaries with respect to which an additional tax deficiency of approximately $30 million is expected to be asserted. These amounts exclude interest and do not reflect the impact on subsequent periods if the IRS position described below is ultimately proved correct.
The IRS asserted in the Notices of Deficiency that substantially all of Tyco's intercompany debt originated during the 1997 - 2000 period should not be treated as debt for U.S. federal income tax purposes, and has disallowed interest and related deductions recognized on U.S. income tax returns totaling approximately $2.9 billion. Tyco strongly disagrees with the IRS position and has filed petitions with the U.S. Tax Court contesting the IRS proposed adjustments. Tyco believes that it has meritorious defenses for its tax filings, that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and existing Treasury regulations, and that the previously reported taxes for the years in question are appropriate.
No payments with respect to these matters would be required until the dispute is definitively resolved, which, based on the experience of other companies, could take several years. Tyco believes that its income tax reserves and the liabilities recorded in the Consolidated Balance Sheet for the Tax Sharing Agreements continue to be appropriate. However, the ultimate resolution of these matters, and the impact of that resolution, are uncertain and could have a material impact on Tyco's financial condition, results of operations and cash flows. In particular, if the IRS is successful in asserting its claim, it would have an adverse impact on interest deductions related to the same intercompany debt in subsequent time periods, totaling approximately $6.6 billion, which is also expected to be disallowed by the IRS.
As noted above, Tyco has assessed its obligations under the 2007 Tax Sharing Agreement to determine that its recorded liability is sufficient to cover the indemnifications made by it under such agreement. In the absence of observable transactions for identical or similar guarantees, Tyco determined the fair value of these guarantees and indemnifications utilizing expected present value measurement techniques. Significant assumptions utilized to determine fair value included determining a range of potential outcomes, assigning a probability weighting to each potential outcome and estimating the anticipated timing of resolution. The probability weighted outcomes were discounted using Tyco's incremental borrowing rate. However, the ultimate resolution of these matters is uncertain and could result in a material adverse impact to the Company's financial position, results of operations, cash flows, or the effective tax rate in future reporting periods.
In addition to dealing with tax liabilities for periods prior to the respective Separations, the 2012 and 2007 Tax Sharing Agreements contain sharing provisions to address the contingencies that the 2012 or 2007 Separations, or internal transactions related thereto, may be deemed taxable by U.S. or non U.S. taxing authorities. In the event the 2012 Separation is determined to be taxable and such determination was the result of actions taken after the 2012 Separations by Tyco, ADT or Pentair, the party

15

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


responsible for such failure would be responsible for all taxes imposed on each company as a result thereof. If such determination is not the result of actions taken by Tyco, ADT or Pentair after the 2012 Separation, then Tyco, ADT and Pentair would be responsible for any taxes imposed on any of the companies as a result of such determination in the same manner and in the same proportions as described above. Similar provisions exist in the 2007 Tax Sharing Agreement. If either of the 2007 or 2012 Separation, or internal transactions taken in anticipation thereof, were deemed taxable, the associated liability could be significant. Tyco is responsible for all of its own taxes that are not shared pursuant to the 2012 and 2007 Tax Sharing Agreements sharing formulas. In addition, Pentair and ADT, and Covidien and TE Connectivity are responsible for their tax liabilities that are not subject to the 2012 or 2007 Tax Sharing Agreements' sharing formula.
Each of the 2012 and 2007 Tax Sharing Agreements provides that, if any party to such 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 to the agreement would be required to pay, equally with any other non-defaulting party to the agreement, the amounts in default. In addition, if another party to the 2012 or 2007 Tax Sharing Agreements 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, Tyco could be liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, Tyco may be obligated to pay amounts in excess of its agreed-upon share of its tax liabilities under either of the 2012 or 2007 Tax Sharing Agreements.
The receivables and liabilities related to the 2012 and 2007 Tax Sharing Agreements as of March 28, 2014 and September 27, 2013, are as follows ($ in millions):
 
2012 Tax Sharing Agreement
 
2007 Tax Sharing Agreement
 
As of
 
As of
 
March 28, 2014
 
September 27, 2013
 
March 28, 2014
 
September 27, 2013
Tax sharing agreement related receivables:
 
 
 
 
 
 
 
Prepaid expenses and other current assets
$

 
$

 
$
32

 
$

Other assets

 

 
35

 
67

 

 

 
67

 
67

Tax sharing agreement related liabilities:
 
 
 
 
 
 
 
Accrued and other current liabilities
(33
)
 
(33
)
 
(191
)
 
(130
)
Other liabilities
(37
)
 
(36
)
 
(190
)
 
(254
)
 
(70
)
 
(69
)
 
(381
)
 
(384
)
Net liability
$
(70
)
 
$
(69
)
 
$
(314
)
 
$
(317
)

Tyco recorded amounts in conjunction with the 2012 and 2007 Tax Sharing Agreements within Other expense, net in the Consolidated Statements of Operations for the quarters and six months ended March 28, 2014 and March 29, 2013 as follows ($ in millions):
 
For the Quarters Ended
 
For the Six Months Ended
 
March 28, 2014
 
March 29, 2013
 
March 28, 2014
 
March 29, 2013
(Loss) income
 
 
 
 
 
 
 
2012 Tax Sharing Agreement
$
(3
)
 
$
(20
)
 
$
(5
)
 
$
(30
)
2007 Tax Sharing Agreement
1

 

 
1

 

Pursuant to the terms of the 2012 Separation and Distribution Agreement, Tyco, ADT and Pentair are each responsible for issuing their own shares upon employee exercise of a stock option award or vesting of a restricted unit award. However, the 2012 Tax Sharing Agreement provides that any allowable compensation tax deduction for such awards is to be claimed by the employee's current employer. The 2012 Tax Sharing Agreement requires the employer claiming a tax deduction for shares issued by the other companies to pay a percentage of the allowable tax deduction to the company issuing the equity.
During the quarter ended March 28, 2014, Tyco incurred a charge of $3 million to make payments to ADT and Pentair based on estimated allowable deductions for ADT and Pentair shares issued to Company employees. During the six months

16

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


ended March 28, 2014, Tyco incurred a charge of $6 million to make payments to ADT and Pentair based on estimated allowable deductions for ADT and Pentair shares issued to Company employees, offset by income of $1 million to be received from ADT and Pentair for Company shares issued to their employees, resulting in a net impact of approximately $5 million.
Other Income Tax Matters
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, since the earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or Tyco 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 of. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
7.    Earnings Per Share
The reconciliations between basic and diluted earnings per share attributable to Tyco common shareholders are as follows (in millions, except per share data):
 
For the Quarter Ended 
 March 28, 2014
 
For the Quarter Ended 
 March 29, 2013
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic earnings per share attributable to Tyco common shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
183

 
461

 
$
0.40

 
$
51

 
466

 
$
0.11

Share options and restricted share awards

 
8

 
 
 

 
8

 
 
Diluted earnings per share attributable to Tyco common shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Tyco common shareholders, giving effect to dilutive adjustments
$
183

 
469

 
$
0.39

 
$
51

 
474

 
$
0.11

 
For the Six Months Ended
March 28, 2014
 
For the Six Months Ended
March 29, 2013
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic earnings per share attributable to Tyco common shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
427

 
462

 
$
0.92

 
$
191

 
466

 
$
0.41

Share options and restricted share awards

 
8

 
 
 

 
7

 
 
Diluted earnings per share attributable to Tyco common shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Tyco common shareholders, giving effect to dilutive adjustments
$
427

 
470

 
$
0.91

 
$
191

 
473

 
$
0.40

 
 
 
 
 
 
 
 
 
 
 
 
The computation of diluted earnings per share for the quarter and six months ended March 28, 2014 excludes the effect of the potential exercise of share options to purchase approximately 2 million shares for both periods and excludes restricted stock units of approximately 2 million shares for both periods because the effect would be anti-dilutive.
The computation of diluted earnings per share for the quarter and six months ended March 29, 2013 excludes the effect of the potential exercise of share options to purchase approximately 4 million and 5 million shares, respectively and excludes restricted stock units of 1 million shares for both periods because the effect would be anti-dilutive.

17

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


8.    Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by segment are as follows ($ in millions):
 
NA Installation &
Services
 
ROW
Installation &
Services
 
Global
Products
 
Total
As of September 28, 2012
 
 
 
 
 
 
 
Gross goodwill
$
2,127

 
$
1,973

 
$
1,696

 
$
5,796

Impairments
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill
2,001

 
905

 
1,129

 
4,035

Acquisitions/Purchase accounting adjustments
24

 
42

 
90

 
156

Transfers
(39
)
 

 
39

 

Currency translation
(8
)
 
(19
)
 
(1
)
 
(28
)
As of September 27, 2013
 
 
 
 
 
 
 
Gross goodwill
$
2,104

 
$
1,996

 
$
1,824

 
$
5,924

Impairments
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill
1,978

 
928

 
1,257

 
4,163

Acquisitions/Purchase accounting adjustments
9

 
9

 

 
18

Currency translation
(13
)
 
11

 
(3
)
 
(5
)
As of March 28, 2014
 
 
 
 
 
 
 
Gross goodwill
$
2,100

 
$
2,016

 
$
1,821

 
$
5,937

Impairments
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill
$
1,974

 
$
948

 
$
1,254

 
$
4,176


The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets as of March 28, 2014 and September 27, 2013 ($ in millions):
 
As of
 
March 28, 2014
 
September 27, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizable:
 
 
 
 
 
 
 
Contracts and related customer relationships
$
1,438

 
$
1,126

 
$
1,420

 
$
1,101

Intellectual property
621

 
481

 
623

 
477

Other
40

 
16

 
40

 
13

Total
$
2,099

 
$
1,623

 
$
2,083

 
$
1,591

Non-Amortizable:
 
 
 
 
 
 
 
Intellectual property
$
221

 
 

 
$
223

 
 
Franchise rights
76

 
 

 
76

 
 
Total
$
297

 
 

 
$
299

 
 
Intangible asset amortization expense for the quarters ended March 28, 2014 and March 29, 2013 was $24 million and $26 million, respectively. Intangible asset amortization expense for the six months ended March 28, 2014 and March 29, 2013 was $47 million and $49 million, respectively.
The estimated aggregate amortization expense on intangible assets is expected to be approximately $46 million for the remainder of 2014, $74 million for 2015, $68 million for 2016, $60 million for 2017, and $228 million for 2018 and thereafter.


18

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


9.    Debt
Debt as of March 28, 2014 and September 27, 2013 is as follows ($ in millions):
 
As of
 
March 28,
2014
 
September 27,
2013
3.375% public notes due 2015
$
258

 
$
258

3.75% public notes due 2018
67

 
67

8.5% public notes due 2019
364

 
364

7.0% public notes due 2019
246

 
246

6.875% public notes due 2021
465

 
466

4.625% public notes due 2023
42

 
42

Other(1)
20

 
20

Total debt
1,462

 
1,463

Less current portion
20

 
20

Long-term debt
$
1,442

 
$
1,443

_______________________________________________________________________________
(1) 
$20 million of the amount shown as Other as of both March 28, 2014 and September 27, 2013 represents the current portion of the Company's total debt.
Fair Value
The carrying amount of Tyco's debt subject to the fair value disclosure requirements as of March 28, 2014 and September 27, 2013 was $1,442 million and $1,443 million, respectively. The Company has determined the fair value of such debt to be $1,673 million and $1,676 million as of March 28, 2014 and September 27, 2013, respectively. The Company utilizes various valuation methodologies to determine the fair value of its debt, which is primarily dependent on the type of market in which the Company's debt is traded. When available, the Company uses quoted market prices to determine the fair value of its debt that is traded in active markets. As of March 28, 2014 and September 27, 2013, the fair value of the Company's debt which was actively traded was $1,673 million and $1,676 million, respectively. As of March 28, 2014 and September 27, 2013, the Company's debt that was actively traded and subject to the fair value disclosure requirements is classified as Level 1 in the fair value hierarchy.
Commercial paper
From time to time Tyco International Finance S.A. ("TIFSA") may issue commercial paper for general corporate purposes. The maximum aggregate amount of unsecured commercial paper notes available to be issued on a private placement basis under the commercial paper program is $1 billion as of March 28, 2014. As of March 28, 2014 and September 27, 2013, TIFSA had no commercial paper outstanding.
Credit Facilities
The Company's committed revolving credit facility totaled $1 billion as of March 28, 2014. This revolving credit facility may be used for working capital, capital expenditures and general corporate purposes. As of March 28, 2014 and September 27, 2013 there were no amounts drawn under the Company's revolving credit facility. Interest under the revolving credit facility is variable and is calculated by reference to LIBOR or an alternate base rate.
10.    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, and accounts payable approximated book value as of March 28, 2014 and September 27, 2013. The fair value of derivative financial instruments was not material to any of the periods presented. See below for the fair value of investments and Note 9 for the fair value of debt.

19

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


Derivative Instruments
In the normal course of business, Tyco is exposed to market risk arising from changes in currency exchange rates, interest rates and commodity prices. The Company may use derivative financial instruments to manage exposures to foreign currency, interest rate and commodity risks. The Company's objective for utilizing derivative financial instruments is to manage these risks using the most effective methods to eliminate or reduce the impacts of these exposures. The Company does not use derivative financial instruments for trading or speculative purposes. As of and during the six months ended March 28, 2014, the Company did not hold or enter into any commodity derivative instruments or interest rate swaps.
For derivative instruments that are designated and qualified as hedging instruments for accounting purposes, the Company documents and links the relationships between the hedging instruments and hedged items. The Company also assesses and documents at the hedge's inception whether the derivatives used in hedging transactions are effective in offsetting changes in fair values associated with the hedged items. For the quarters ended March 28, 2014 and March 29, 2013, the Company did not have any derivative instruments that were designated and qualified as hedging instrument for accounting purposes.
Foreign Currency Exposures
The Company manages foreign currency exchange rate risk through the use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the income statement impact and potential variability in cash flows associated with intercompany loans, accounts receivable, accounts payable and forecasted transactions that are denominated in certain foreign currencies. The fair value of these derivative financial instruments and impact of such changes in the fair value was not material to the Consolidated Balance Sheets as of March 28, 2014 and September 27, 2013 or Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the quarters and six months ended March 28, 2014 and March 29, 2013. As of March 28, 2014 and September 27, 2013, the total gross notional amount of the Company's foreign exchange contracts was $295 million and $278 million, respectively, including contracts of $57 million and $60 million, respectively, related to the South Korean security business.
Counterparty Credit Risk
The use of derivative financial instruments exposes the Company to counterparty credit risk. Tyco has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Company deals with major banks worldwide having strong investment grade long-term credit ratings. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association master netting agreements with substantially all of its counterparties. The Company's derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by the Company or the counterparties. The Company's exposure to credit risk associated with its derivative instruments is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. We do not anticipate any non-performance by any of our counterparties, and the concentration of risk with financial institutions does not present significant credit risk to the Company.
Investments
Investments primarily include U.S. government obligations, U.S. government agency securities and corporate debt securities.
When available, the Company uses quoted market prices to determine the fair value of investment securities. Such investments are included in Level 1. When quoted market prices are not readily available, pricing determinations are made based on the results of market approach valuation models using observable market data such as recently reported trades, bid and offer information and benchmark securities. These investments are included in Level 2 and consist primarily of U.S. government agency securities and corporate debt securities.

20

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


Assets Measured at Fair Value on a Recurring Basis
The following table presents the Company's hierarchy for its assets measured at fair value on a recurring basis as of March 28, 2014 and September 27, 2013:
 
 
 
 
 
 
 
Consolidated Balance Sheet
Classification
 
As of March 28, 2014
 
Prepaids and
Other Current
Assets
 
Other Assets
($ in millions)
Level 1
 
Level 2
 
Total
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate debt securities
$

 
$
26

 
$
26

 
$
6

 
$
20

U.S. Government debt securities
97

 
19

 
116

 
21

 
95

Total
$
97

 
$
45

 
$
142

 
$
27

 
$
115

 
 
 
 
 
 
 
Consolidated Balance Sheet
Classification
 
As of September 27, 2013
 
Prepaids and
Other Current
Assets
 
Other
Assets
($ in millions)
Level 1
 
Level 2
 
Total
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate debt securities
$

 
$
34

 
$
34

 
$
11

 
$
23

U.S. Government debt securities
171

 
38

 
$
209

 
89

 
120

Total
$
171

 
$
72

 
$
243

 
$
100

 
$
143

During the quarter and six months ended March 28, 2014, the Company did not have any significant transfers between levels within the fair value hierarchy.
Other
The Company recorded nil and a $7 million loss on the sale of an investment during the quarter and six months ended March 28, 2014, respectively.
Additionally, the Company had $2 billion of intercompany loans designated as permanent in nature as of both March 28, 2014 and September 27, 2013, respectively. For the quarters ended March 28, 2014 and March 29, 2013, the Company recorded $7 million and $84 million of a cumulative translation loss, respectively, through accumulated other comprehensive loss related to these loans.
For the six months ended March 28, 2014 and March 29, 2013, the Company recorded $4 million of cumulative translation gain and $62 million of cumulative translation loss, respectively, through accumulated other comprehensive loss related to these loans.
11.    Commitments and Contingencies
Legacy Matters Related to Former Management
The Company has been a party to several lawsuits involving disputes with former management, including its former chief executive officer, Mr. L. Dennis Kozlowski, and its former chief financial officer, Mr. Mark Swartz. The Company filed civil complaints against Mr. Kozlowski and Mr. Swartz for breach of fiduciary duty and other wrongful conduct relating to alleged abuses of the Company's Key Employee Loan Program and relocation program, unauthorized bonuses, unauthorized payments, self-dealing transactions and other improper conduct. In connection with Tyco's affirmative actions against Mr. Kozlowski and Mr. Swartz, Mr. Kozlowski, through counterclaims, and Mr. Swartz, through a separate lawsuit, sought an aggregate of approximately $140 million allegedly due in connection with their compensation and retention arrangements and under the Employee Retirement Income Security Act ("ERISA").
With respect to Mr. Kozlowski, in the first quarter of fiscal 2014, the parties signed an agreement resolving all outstanding disputes, with Mr. Kozlowski agreeing to release the Company from any claims to monetary amounts related to compensation, retention or other arrangements, including the Key Employee Loan Program, alleged to have existed between

21

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


him and the Company. As a result, in the first quarter of fiscal 2014, the Company reversed the net liability of approximately $92 million which was recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations for the amounts allegedly due to him. Additionally, Tyco will be entitled to a portion of the proceeds, if any, from the future sale of certain assets owned by Mr. Kozlowski, the timing and amount of which is uncertain at this time.
With respect to Mr. Swartz, on March 3, 2011, the U.S. District Court for the Southern District of New York granted the Company's motion for summary judgment as to liability for its affirmative actions and further ruled that issues related to damages would need to be resolved at trial. During the second quarter of fiscal 2012, the Company reversed a $50 million liability related to Mr. Swartz's pay and benefits due to the expiration of the statute of limitations, which was recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. On May 15, 2012, Mr. Swartz filed a lawsuit against Tyco in New York state court claiming entitlement to monies under ERISA. The Company removed the case to the U.S. District Court for the Southern District of New York and filed a motion to dismiss Mr. Swartz's claims for multiple reasons, including that the statute of limitations had expired, at the latest, during the second quarter of fiscal 2012. A trial to determine the Company's damages from Mr. Swartz's breaches of fiduciary duty concluded on October 17, 2012. At the conclusion of the trial, the Court ruled that the Company was entitled to recover all monies earned by Mr. Swartz in connection with his employment by Tyco between September 1, 1995 and June 1, 2002. The Company filed a motion requesting the entry of monetary sum certain judgment in conformity with the Court's ruling regarding the time period of disgorgement. The motion also requested interest related to the monies Mr. Swartz was found to have unlawfully taken from the Company. In March 2013, the Court entered an order awarding the Company's request for interest. In connection with Mr. Swartz's affirmative claims against the Company, the Court dismissed all of Mr. Swartz's claims except one claim in which Mr. Swartz contends he is entitled to reimbursement from the Company for taxes he paid in connection with his 2002 Separation Agreement. In July 2013, the parties reached an agreement in principle to resolve the matter, with Mr. Swartz agreeing to release the Company from any claims to monetary amounts related to compensation, retention or other arrangements alleged to have existed between him and the Company. Although the parties have reached an agreement in principle, a final settlement agreement has not yet been executed.