10-Q 1 tyc-20141226x10q.htm 10-Q TYC-2014.12.26-10Q

 
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 December 26, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
333-196049
(Commission File Number)
___________________________________________________________
TYCO INTERNATIONAL PLC
(Exact name of Registrant as specified in its charter)
Ireland
(Jurisdiction of Incorporation)
 
98-0390500
(I.R.S. Employer Identification Number)
Unit 1202 Building 1000 City Gate
Mahon, Cork Ireland
(Address of registrant's principal executive office)
353-21-423-5000
(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 ordinary shares outstanding as of January 23, 2015 was 420,045,569.
 



TYCO INTERNATIONAL PLC
INDEX TO FORM 10-Q

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
    TYCO INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share data)
 
For the Quarters Ended
 
December 26,
2014
 
December 27,
2013
Revenue from product sales
$
1,488

 
$
1,468

Service revenue
991

 
1,025

Net revenue
2,479

 
2,493

Cost of product sales
1,022

 
999

Cost of services
548

 
576

Selling, general and administrative expenses
653

 
571

Restructuring and asset impairment charges, net (see Note 4)
58

 
3

Operating income
198

 
344

Interest income
3

 
3

Interest expense
(24
)
 
(24
)
Other income (expense), net
4

 
(1
)
Income from continuing operations before income taxes
181

 
322

Income tax expense
(19
)
 
(70
)
Equity loss in earnings of unconsolidated subsidiaries

 
(4
)
Income from continuing operations
162

 
248

(Loss) income from discontinued operations, net of income taxes
(1
)
 
24

Net income
161

 
272

Less: noncontrolling interest in subsidiaries net (loss) income
(1
)
 
2

Net income attributable to Tyco ordinary shareholders
$
162

 
$
270

Amounts attributable to Tyco ordinary shareholders:
 

 
 

Income from continuing operations
$
163

 
$
246

(Loss) income from discontinued operations
(1
)
 
24

Net income attributable to Tyco ordinary shareholders
$
162

 
$
270

Basic earnings per share attributable to Tyco ordinary shareholders:
 

 
 

Income from continuing operations
$
0.39

 
$
0.53

Income from discontinued operations

 
0.05

Net income attributable to Tyco ordinary shareholders
$
0.39

 
$
0.58

Diluted earnings per share attributable to Tyco ordinary shareholders:
 

 
 

Income from continuing operations
$
0.38

 
$
0.52

Income from discontinued operations

 
0.05

Net income attributable to Tyco ordinary shareholders
$
0.38

 
$
0.57

Weighted average number of shares outstanding:
 

 
 

Basic
420

 
464

Diluted
427

 
471

   See Notes to Unaudited Consolidated Financial Statements.

3


TYCO INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in millions)
 
For the Quarters Ended
 
December 26,
2014
 
December 27,
2013
Net income
$
161

 
$
272

Other comprehensive (loss) income, net of tax
 
 
 
Foreign currency translation
(198
)
 
(37
)
Defined benefit and post retirement plans
5

 
3

Total other comprehensive loss, net of tax
(193
)
 
(34
)
Comprehensive (loss) income
(32
)
 
238

Less: comprehensive (loss) income attributable to noncontrolling interests
(1
)
 
2

Comprehensive (loss) income attributable to Tyco ordinary shareholders
$
(31
)
 
$
236

   See Notes to Unaudited Consolidated Financial Statements.

4


TYCO INTERNATIONAL PLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except per share data)
 
December 26,
2014
 
September 26,
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
473

 
$
892

Accounts receivable, less allowance for doubtful accounts of $77 and $75, respectively
1,718

 
1,750

Inventories
658

 
628

Prepaid expenses and other current assets
890

 
1,153

Deferred income taxes
307

 
307

Assets held for sale
20

 
21

Total Current Assets
4,066

 
4,751

Property, plant and equipment, net
1,242

 
1,269

Goodwill
4,148

 
4,126

Intangible assets, net
796

 
737

Other assets
946

 
926

Total Assets
$
11,198

 
$
11,809

Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Loans payable and current maturities of long-term debt
$
278

 
$
20

Accounts payable
825

 
871

Accrued and other current liabilities
1,993

 
2,167

Deferred revenue
365

 
400

Liabilities held for sale
14

 
13

Total Current Liabilities
3,475

 
3,471

Long-term debt
1,184

 
1,443

Deferred revenue
324

 
335

Other liabilities
1,918

 
1,877

Total Liabilities
6,901

 
7,126

Commitments and Contingencies (see Note 11)


 

Redeemable noncontrolling interest
13

 
13

Tyco Shareholders' Equity:
 
 
 
Ordinary shares, $0.01 and CHF 0.50 par value, 1,000,000,000 and 825,222,070 shares authorized, and 419,829,278 and 486,363,050 shares issued as December 26, 2014 and September 26, 2014, respectively
4

 
208

Preference shares $0.01 par value, 100,000,000 shares authorized, none outstanding as of December 26, 2014



Ordinary shares held in treasury, nil and 59,460,486 shares as of December 26, 2014 and September 26, 2014, respectively

 
(2,515
)
Additional paid in capital
613

 
3,306

Accumulated earnings
5,035

 
4,873

Accumulated other comprehensive loss
(1,418
)
 
(1,225
)
Total Tyco Shareholders' Equity
4,234

 
4,647

Nonredeemable noncontrolling interest
50

 
23

Total Equity
4,284

 
4,670

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
11,198

 
$
11,809

   See Notes to Unaudited Consolidated Financial Statements.

5


TYCO INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
 
 For the Three Months Ended
 
December 26,
2014
 
December 27,
2013
Cash Flows From Operating Activities:
 
 
 
Net income attributable to Tyco ordinary shareholders
$
162

 
$
270

Noncontrolling interest in subsidiaries net (loss) income
(1
)
 
2

Loss (income) from discontinued operations, net of income taxes
1

 
(24
)
Income from continuing operations
162

 
248

Adjustments to reconcile net cash provided by operating activities:
 
 
 
Depreciation and amortization
91

 
94

Non-cash compensation expense
15

 
15

Deferred income taxes
(6
)
 
51

Provision for losses on accounts receivable and inventory
16

 
10

Legacy legal matters (see Note 11)

 
(92
)
Other non-cash items
(2
)
 
7

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
 
 
 
Accounts receivable, net
(7
)
 
25

Contracts in progress
8

 
13

Inventories
(43
)
 
(30
)
Prepaid expenses and other assets
(3
)
 
(54
)
Accounts payable
(41
)
 
(41
)
Accrued and other liabilities
(33
)
 
(105
)
Deferred revenue
(37
)
 
(40
)
Other
(24
)
 
(1
)
Net cash provided by operating activities
96

 
100

Net cash provided by discontinued operating activities

 
23

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(66
)
 
(63
)
Proceeds from disposal of assets
1

 
4

Acquisition of businesses, net of cash acquired
(152
)
 
(54
)
Acquisition of dealer generated customer accounts and bulk account purchases
(4
)
 
(11
)
Sales and maturities of investments
275

 
112

Purchases of investments
(1
)
 
(32
)
(Increase) decrease in restricted cash
(45
)
 
4

Other
(1
)
 
2

Net cash provided by (used in) investing activities
7

 
(38
)
Net cash used in discontinued investing activities
(15
)
 
(29
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from issuance of short-term debt

 
310

Repayment of short-term debt

 
(150
)
Proceeds from exercise of share options
33

 
40

Dividends paid
(75
)
 
(74
)
Repurchase of ordinary shares by treasury
(417
)
 
(250
)
Transfer to discontinued operations
(15
)
 
(6
)
Payment of contingent consideration
(23
)
 

Other
(15
)
 
(9
)
Net cash used in financing activities
(512
)
 
(139
)
Net cash provided by discontinued financing activities
15

 
6

Effect of currency translation on cash
(10
)
 
(7
)
Net decrease in cash and cash equivalents
(419
)
 
(84
)
Less: net decrease in cash and cash equivalents related to discontinued operations

 

Cash and cash equivalents at beginning of period
892

 
563

Cash and cash equivalents at end of period
$
473

 
$
479

See Notes to Unaudited Consolidated Financial Statements.

6


TYCO INTERNATIONAL PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the Quarters Ended December 26, 2014 and December 27, 2013
(in millions)
 
Number of
Ordinary
Shares
 
Ordinary
Shares at
Par Value
 
Treasury
Shares
 
Additional Paid in Capital
 
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 attributable to Tyco ordinary shareholders
 
 
 
 
 
 
 
 
270

 
 
 
270

 
2

 
272

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(34
)
 
(34
)
 
 
 
(34
)
Shares issued from treasury for vesting of share based equity awards
4

 
 
 
140

 
(100
)
 
 
 
 
 
40

 
 

 
40

Repurchase of ordinary shares
(7
)
 
 
 
(250
)
 
 
 
 
 
 
 
(250
)
 
 

 
(250
)
Compensation expense
 
 
 
 
 
 
15

 
 
 
 
 
15

 
 

 
15

Other
 
 
 
 
(9
)
 
 
 
 
 
 
 
(9
)
 
(1
)
 
(10
)
Balance as of December 27, 2013
460

 
$
208

 
$
(1,031
)
 
$
3,669

 
$
3,305

 
$
(1,021
)
 
$
5,130

 
$
24

 
$
5,154


 
Number of
Ordinary
Shares
 
Ordinary
Shares at
Par Value
 
Treasury
Shares
 
Additional Paid in Capital
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total Tyco
Shareholders'
Equity
 
Nonredeemable
Noncontrolling
Interest
 
Total
Equity
Balance as of September 26, 2014
427

 
$
208

 
$
(2,515
)
 
$
3,306

 
$
4,873

 
$
(1,225
)
 
$
4,647

 
$
23

 
$
4,670

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Tyco ordinary shareholders
 
 
 
 
 
 
 
 
162

 
 
 
162

 
(1
)
 
161

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(193
)
 
(193
)
 
 
 
(193
)
Cancellation of treasury shares
 
 
(34
)
 
2,878

 
(2,844
)
 
 
 
 
 

 
 
 

Dividends declared
 
 
 
 
 
 
2

 
 
 
 
 
2

 
 

 
2

Conversion of Tyco International Ltd. common shares to Tyco International plc ordinary shares
 
 
(170
)
 
 
 
170

 
 
 
 
 

 
 

 

Shares issued for vesting of share based equity awards
3

 
 
 
67

 
(34
)
 
 
 
 
 
33

 
 

 
33

Repurchase of ordinary shares
(10
)
 
 
 
(417
)
 
 
 
 
 
 
 
(417
)
 
 

 
(417
)
Compensation expense
 
 
 
 
 
 
15

 
 
 
 
 
15

 
 

 
15

Noncontrolling interest related to acquisitions
 
 
 
 
 
 
 
 
 
 
 
 

 
29

 
29

Other
 
 
 
 
(13
)
 
(2
)
 
 
 
 
 
(15
)
 
(1
)
 
(16
)
Balance as of December 26, 2014
420

 
$
4

 
$

 
$
613

 
$
5,035

 
$
(1,418
)
 
$
4,234

 
$
50

 
$
4,284

   See Notes to Unaudited Consolidated Financial Statements.

7


TYCO INTERNATIONAL PLC
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 plc, a corporation organized under the laws of Ireland, 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 26, 2014 (the "2014 Form 10-K").
References to 2015 and 2014 are to Tyco's fiscal quarters ending December 26, 2014 and December 27, 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 2015 and 2014 are both 52-week years.
Change of Jurisdiction - On November 17, 2014, Tyco International Ltd., an entity organized under the laws of Switzerland ("Tyco Switzerland"), completed its change of jurisdiction of incorporation from Switzerland to Ireland by merging with its subsidiary, Tyco International plc ("Tyco Ireland"), a public limited company incorporated under the laws of Ireland (the "Merger"). As a result of the Merger, Tyco Ireland is the successor issuer to Tyco Switzerland, has succeeded to the attributes of Tyco Switzerland as the registrant under SEC regulations, and has assumed all pre-Merger obligations of Tyco Switzerland.
Reclassifications - Certain prior period amounts have been reclassified to conform with current period presentation as discussed below.
During the third quarter of fiscal 2014, the Company completed the sale of its South Korean security business (“ADT Korea”) to an affiliate of The Carlyle Group. The Company has reclassified the operations of its South Korean security business to Income from discontinued operations in the Consolidated Statements of Operations for all periods presented and assets and liabilities have been reclassified as held for sale for periods prior to the third quarter of fiscal 2014 as it satisfied the criteria to be presented as discontinued operations for those periods. See Note 3.
In addition, the Company has reclassified several businesses in the Rest of World ("ROW") Installation & Services segment to Income from discontinued operations in the Consolidated Statements of Operations and the assets and liabilities as held for sale within the Consolidated Balance Sheets for all periods presented as they satisfied the criteria to be presented as discontinued operations. The Company expects to complete the sale of these businesses by the end of the third quarter of fiscal 2015. See Note 3.
Recently Adopted 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 became effective for Tyco in the first quarter of fiscal 2015. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.
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 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

8

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 became effective for Tyco during the first fiscal quarter of fiscal 2015. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements - 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.
In May 2014, the FASB issued authoritative guidance for revenue from contracts with customers, which provides a single comprehensive revenue recognition model to apply in determining how and when to recognize revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When applying the new revenue model to contracts with customers the guidance requires five steps to be applied, which include: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires both quantitative and qualitative disclosures, which are more comprehensive than existing revenue standards. The disclosures are intended to enable financial statement users to understand the nature, timing and uncertainty of revenue and the related cash flow. This guidance will be effective for Tyco in the first fiscal quarter of 2018, with early adoption not permitted. The Company is currently assessing the impact 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 ("2012 Separation").
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") within Selling, general and administrative expenses of $2 million and $15 million during the quarters ended December 26, 2014 and December 27, 2013, respectively. The Company received associated tax benefits of $1 million and $6 million during the quarters ended December 26, 2014 and December 27, 2013, respectively. The Company does not expect to incur material separation charges relating to activities taken to complete the 2012 Separation in future periods.
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.
During fiscal 2014, the Company concluded that several businesses in the ROW Installation & Services segment it intends to sell met the criteria to be classified as held for sale. The businesses are accounted for as held for sale on the Consolidated Balance Sheets as of December 26, 2014 and September 26, 2014, and their results of operations have been presented as discontinued operations on the Consolidated Statements of Operations during the quarters ended December 26, 2014 and December 27, 2013. The Company expects to complete the sale of these businesses by the end of the third quarter of fiscal 2015.
On May 22, 2014, the Company, together with its wholly-owned subsidiary Tyco Far East Holdings Ltd. completed the sale of Tyco Fire & Security Services Korea Co. Ltd. and its subsidiaries that form and operate the Company’s ADT Korea business to an affiliate of The Carlyle Group pursuant to a stock purchase agreement for an aggregate purchase price of $1.93 billion. The Company recognized a gain of $1.0 billion, net of a $212 million charge related to the indemnification at fair value for certain tax related matters borne by the buyer that are probable of being paid, which was recorded in Income from

9

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


discontinued operations, net of income taxes, on the Consolidated Statements of Operations during fiscal 2014. Its results of operations have been presented within discontinued operations on the Consolidated Statements of Operations during the quarter ended December 27, 2013.
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. The assets and liabilities have not been presented separately as held-for-sale in the Consolidated Balance Sheets as the amounts were not material to the presentation of all periods. This business has not been presented in discontinued operations as the amounts were not material to the Consolidated Financial Statements.
Discontinued Operations
The components of income from discontinued operations, net of income taxes are as follows ($ in millions):
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
Net revenue
$
4

 
$
154

Pre-tax (loss) income from discontinued operations
(2
)
 
30

Pre-tax gain on sale of discontinued operations
1

 

Income tax expense

 
(6
)
(Loss) income from discontinued operations, net of income taxes
$
(1
)
 
$
24

Balance sheet information for the discontinued operations as of December 26, 2014 and September 26, 2014 was as follows ($ in millions):
 
As of
 
December 26, 2014
 
September 26, 2014
Accounts receivable, net
$
11

 
$
11

Inventories
2

 
3

Prepaid expenses and other current assets
5

 
5

Other assets
2

 
2

  Total assets
$
20

 
$
21

Accounts payable
2

 
2

Accrued and other current liabilities
11

 
9

Other liabilities
1

 
2

  Total liabilities
$
14

 
$
13

4.    Restructuring and Asset Impairment Charges, Net
During the first quarter of fiscal 2015, 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 $75 million to $100 million in fiscal 2015, which does not include repositioning charges as described below.

10

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The Company recorded restructuring and asset impairment charges by action as follows ($ in millions):
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
2015 actions
$
44

 
$

2014 actions
6

 
1

2013 and prior actions
8

 
2

Total
$
58

 
$
3

2015 Actions

Restructuring and asset impairment charges, net, during the quarter ended December 26, 2014 related to the 2015 actions are as follows ($ in millions):
 
For the Quarter Ended 
December 26, 2014
 
Employee
Severance and
Benefits
NA Installation & Services
$
22

ROW Installation & Services
10

Global Products
2

Corporate and other
10

Total
$
44

The rollforward of the reserves from September 26, 2014 to December 26, 2014 is as follows ($ in millions):
Balance as of September 26, 2014
$

Charges
44

Utilization
(11
)
Balance as of December 26, 2014
$
33


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.

2014 Actions

Restructuring and asset impairment charges, net, during the quarters ended December 26, 2014 and December 27, 2013 related to the 2014 actions are as follows ($ in millions):
 
For the Quarter Ended December 26, 2014
 
Employee
Severance and
Benefits
NA Installation & Services
$
1

Global Products
5

Total
$
6



11

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
For the Quarter Ended
December 27, 2013
 
Employee
Severance and
Benefits
ROW Installation & Services
$
1

Total
$
1


Restructuring and asset impairment charges, net, incurred cumulative to date from initiation of the 2014 actions are as follows ($ in millions):
 
Employee
Severance and
Benefits
 
Facility Exit
and Other
Charges
 
Charges Reflected in SG&A
 
Total
NA Installation & Services
$
17

 
$

 
$

 
$
17

ROW Installation & Services
18

 
5

 

 
23

Global Products
8

 

 
2

 
10

Total
$
43

 
$
5

 
$
2

 
$
50

The rollforward of the reserves from September 26, 2014 to December 26, 2014 is as follows ($ in millions):
Balance as of September 26, 2014
$
29

Charges
6

Utilization
(7
)
Currency translation
(1
)
Balance as of December 26, 2014
$
27

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.
2013 and prior actions
The Company continues to maintain restructuring reserves related to actions initiated prior to fiscal 2014. The total amount of these reserves was $66 million and $70 million as of December 26, 2014 and September 26, 2014, respectively. The Company incurred $8 million and $10 million of restructuring charges, nil and $8 million of reversals, and utilized $9 million and $24 million for the quarters ended December 26, 2014 and December 27, 2013, respectively. The remaining change in reserve during the quarters ended December 26, 2014 and December 27, 2013 relates to currency translation. The aggregate remaining reserves primarily relate to facility exit costs for long-term non-cancelable lease obligations primarily within the Company's ROW Installation & Services segment.
Total Restructuring Reserves
As of December 26, 2014 and September 26, 2014, restructuring reserves related to all actions were included in the Company's Consolidated Balance Sheets as follows ($ in millions):
 
As of
 
December 26, 2014
 
September 26, 2014
Accrued and other current liabilities
$
110

 
$
83

Other liabilities
16

 
16

Total
$
126

 
$
99

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.


12

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 quarters ended December 26, 2014 and December 27, 2013, the Company recorded repositioning charges of $17 million and $6 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
During the quarter ended December 26, 2014, total consideration for acquisitions included in continuing operations totaled $152 million, which was comprised of $175 million cash paid, net of $23 million cash acquired, for five acquisitions which were not material. The acquisitions will be integrated into the ROW Installation & Services and Global Products segments. In connection with one of the acquisitions, the Company acquired a majority interest and recorded a nonredeemable noncontrolling interest of $29 million as of December 26, 2014. The final determination of fair value for certain assets and liabilities relating to four of the acquisitions made during the quarter ended December 26, 2014 remain subject to change based on final valuations of the assets acquired and liabilities assumed. The Company does not expect the finalization of these matters to have a material effect on the allocation, which is expected to be completed within fiscal 2015.
In addition, during the quarter ended December 26, 2014, the Company announced that it had reached an agreement to acquire Industrial Safety Technologies ("IST"), a global leader in gas and flame detection, with operations in Europe, the Middle East, China and the U.S. Gulf Coast region from Battery Ventures, for approximately $330 million in cash. IST will be integrated into the Global Products segment. The sale is expected to close during the second quarter of fiscal 2015.
During the quarter ended December 27, 2013, total consideration included in continuing operations was $54 million which was primarily 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 will be integrated with the NA Installation & Services and ROW Installation & Services segments.
6.    Income Taxes
Tyco did not have a significant change to its unrecognized tax benefits during the quarter ended December 26, 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
Years Open
To Audit
Australia
2004-2014
Canada
2006-2014
Germany
2005-2014
Ireland
2010-2014
Switzerland
2005-2014
United Kingdom
2012-2014
United States
1997-2014
Based on the current status of its income tax audits, Tyco believes that it is reasonably possible that between nil and $20 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 December 26, 2014, Tyco recorded deferred tax assets of approximately $382 million, which is comprised of $2.4 billion gross deferred tax assets net of $2.0 billion valuation allowances.

13

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 plc (which merged into Medtronic plc on January 26, 2015, and referred to herein as "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 (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. All costs and expenses associated with the management of these Shared Tax Liabilities will generally be shared 20%, 27.5% and 52.5% by Pentair, ADT and Tyco, respectively. In connection with the execution of the 2012 Tax Sharing Arrangement, Tyco established liabilities representing the fair market value of its obligations which is recorded in Other liabilities in the Company'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, which result 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 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 has been asserted. These amounts exclude interest and do not reflect the impact on subsequent periods if the IRS position described below is ultimately proved correct.

14

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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. A trial date has been set for February 2016. 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 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.

15

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The receivables and liabilities related to the 2012 and 2007 Tax Sharing Agreements as of December 26, 2014 and September 26, 2014, are as follows ($ in millions):
 
2012 Tax Sharing Agreement
 
2007 Tax Sharing Agreement
 
As of
 
As of
 
December 26, 2014
 
September 26, 2014
 
December 26, 2014
 
September 26, 2014
Tax sharing agreement related receivables:
 
 
 
 
 
 
 
Prepaid expenses and other current assets
$

 
$

 
$
3

 
$
3

Other assets

 

 
23

 
23

 

 

 
26

 
26

Tax sharing agreement related liabilities:
 
 
 
 
 
 
 
Accrued and other current liabilities

 

 
(21
)
 
(21
)
Other liabilities
(46
)
 
(46
)
 
(194
)
 
(194
)
 
(46
)
 
(46
)
 
(215
)
 
(215
)
Net liability
$
(46
)
 
$
(46
)
 
$
(189
)
 
$
(189
)
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 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. 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 ordinary shareholders are as follows (in millions, except per share data):
 
For the Quarter Ended
December 26, 2014
 
For the Quarter Ended
December 27, 2013
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic earnings per share attributable to Tyco ordinary shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
163

 
420

 
$
0.39

 
$
246

 
464

 
$
0.53

Share options and restricted share awards

 
7

 
 
 

 
7

 
 
Diluted earnings per share attributable to Tyco ordinary shareholders:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Tyco ordinary shareholders, giving effect to dilutive adjustments
$
163

 
427

 
$
0.38

 
$
246

 
471

 
$
0.52

The computation of diluted earnings per share for the quarter ended December 26, 2014 excludes the effect of the potential exercise of share options to purchase approximately 3 million shares and excludes restricted stock units of approximately 2 million shares because the effect would be anti-dilutive.
The computation of diluted earnings per share for the quarter ended December 27, 2013 excludes the effect of the potential exercise of share options to purchase approximately 2 million shares and excludes restricted stock units of approximately 1 million shares because the effect would be anti-dilutive.

16

TYCO INTERNATIONAL PLC
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
 
 
 
 
 
 
 
 
Gross goodwill
$
2,104

 
$
1,995

 
$
1,824

 
$
5,923

Accumulated impairment
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill as of September 27, 2013
1,978

 
927

 
1,257

 
4,162

2014 activity:


 


 


 


Acquisitions/ purchase accounting adjustments
10

 
15

 
(4
)
 
21

Currency translation
(12
)
 
(34
)
 
(11
)
 
(57
)


 

 

 

Gross goodwill
$
2,102

 
$
1,976

 
$
1,809

 
$
5,887

Accumulated impairment
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill as of September 26, 2014
1,976

 
908

 
1,242

 
4,126

2015 activity:


 


 


 


Acquisitions / purchase accounting adjustments

 
32

 
80

 
112

Currency translation
(8
)
 
(69
)
 
(13
)
 
(90
)


 

 

 

Gross goodwill
$
2,094

 
$
1,939

 
$
1,876

 
$
5,909

Accumulated impairment
(126
)
 
(1,068
)
 
(567
)
 
(1,761
)
Carrying amount of goodwill as of December 26, 2014
$
1,968

 
$
871

 
$
1,309

 
$
4,148

The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets as of December 26, 2014 and September 26, 2014 ($ in millions):
 
As of
 
December 26, 2014
 
September 26, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizable:
 
 
 
 
 
 
 
Contracts and related customer relationships
$
1,370

 
$
1,067

 
$
1,405

 
$
1,117

Intellectual property
664

 
494

 
622

 
492

Other
38

 
18

 
38

 
16

Total
$
2,072

 
$
1,579

 
$
2,065

 
$
1,625

Non-Amortizable:
 
 
 
 
 
 
 
Intellectual property
$
220

 
 

 
$
221

 
 
Franchise rights
76

 
 

 
76

 
 
Other
7

 
 
 

 
 
Total
$
303

 
 

 
$
297

 
 
Intangible asset amortization expense for the quarters ended December 26, 2014 and December 27, 2013 was $21 million and $24 million, respectively.
The estimated aggregate amortization expense on intangible assets is expected to be approximately $55 million for the remainder of 2015, $73 million for 2016, $64 million for 2017, $60 million for 2018, and $241 million for 2019 and thereafter.

17

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.    Debt
Debt as of December 26, 2014 and September 26, 2014 is as follows ($ in millions):
 
As of
 
December 26, 2014
 
September 26, 2014
3.375% public notes due 2015 (1)
$
258

 
$
258

3.75% public notes due 2018
67

 
67

8.5% public notes due 2019
364

 
364

7.0% public notes due 2019
245

 
245

6.875% public notes due 2021
465

 
465

4.625% public notes due 2023
42

 
42

Other (2)
21

 
22

Total debt
1,462

 
1,463

Less current portion
278

 
20

Long-term debt
$
1,184

 
$
1,443

_______________________________________________________________________________
(1) $258 million of 3.375% public notes due October 2015 is included in the current portion of debt as of December 26, 2014.
(2) $20 million of the amount shown as other is included in the current portion of the Company's total debt as of both December 26, 2014 and September 26, 2014.
Fair Value
The carrying amount of Tyco's debt subject to the fair value disclosure requirements as of both December 26, 2014 and September 26, 2014 was $1,441 million. The Company has determined the fair value of such debt to be $1,659 million and $1,670 million as of December 26, 2014 and September 26, 2014, 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 December 26, 2014 and September 26, 2014, $1,441 million of the Company's debt, which is 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 December 26, 2014. As of December 26, 2014 and September 26, 2014, TIFSA had no commercial paper outstanding.
Credit Facilities
The Company's committed revolving credit facility totaled $1 billion as of December 26, 2014. This revolving credit facility may be used for working capital, capital expenditures and general corporate purposes. As of December 26, 2014 and September 26, 2014, 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, time deposits, accounts receivable, investments, accounts payable, and debt and derivative financial instruments. The fair value of cash and cash equivalents, time deposits, accounts receivable, and accounts payable approximated book value as of December 26, 2014 and September 26, 2014. 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.

18

TYCO INTERNATIONAL PLC
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 three months ended December 26, 2014, the Company did not hold or enter into any commodity derivative instruments or interest rate swaps.
As of December 26, 2014 and September 26, 2014, the total gross notional amount of the Company's foreign exchange contracts was $282 million and $258 million, respectively. 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 December 26, 2014 and September 26, 2014 or Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the quarters ended December 26, 2014 and December 27, 2013.
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 may primarily include marketable securities such as U.S. government obligations, U.S. government agency and corporate debt securities, equity securities, or time deposits with banks.
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.
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 December 26, 2014 and September 26, 2014 ($ in millions):
 
 
 
 
 
 
 
Consolidated Balance Sheet
Classification
 
As of December 26, 2014
 
Prepaids and
Other Current
Assets
Investment Assets:
Level 1
 
Level 2
 
Total
 
 
Exchange traded equity funds
$
65

 
$

 
$
65

 
$
65

 
$
65

 
$

 
$
65

 
$
65


19

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
 
 
 
 
 
 
Consolidated Balance Sheet
Classification
 
As of September 26, 2014
 
Prepaids and
Other Current
Assets
Investment Assets:
Level 1
 
Level 2
 
Total
 
Time deposits
$
275

 
$

 
$
275

 
$
275

Exchange traded equity funds
62

 

 
62

 
62

 
$
337

 
$

 
$
337

 
$
337

During the quarters ended December 26, 2014 and December 27, 2013, the Company did not have any significant transfers between levels within the fair value hierarchy.
Other
The Company had $1.5 billion of intercompany loans designated as permanent in nature as of both December 26, 2014 and September 26, 2014. Additionally, for the quarters ended December 26, 2014 and December 27, 2013, the Company recorded $70 million and $12 million of a cumulative translation loss, respectively, through Accumulated other comprehensive loss related to these loans.
11.    Commitments and Contingencies
Legacy Matters Related to Former Management
In recent years, the Company has settled several lawsuits involving disputes with former management. With respect to Mr. Kozlowski, the Company's former chief executive officer, 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. As a result, in the first quarter of fiscal 2014, the Company reversed a non-cash 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. Pursuant to the settlement agreement, 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, the Company's former chief financial officer, in November 2014, the parties reached a definitive agreement to resolve all outstanding disputes, 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. In the first quarter of fiscal 2015, the Company also received approximately $12 million in cash from Mr. Swartz, $5 million of which will be shared pursuant to the terms of the class action lawsuit, resulting in a net recovery of $7 million which was recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The cash received has been classified as restricted.
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 December 26, 2014, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $30 million to $73 million. As of December 26, 2014, Tyco concluded that the best estimate within this range is approximately $34 million, of which $15 million is included in Accrued and other current liabilities and $19 million is included in Other liabilities in the Company's Consolidated Balance Sheet.
The majority of the liabilities described above relate to ongoing remediation efforts at a facility in the Company's Global Products segment located in Marinette, Wisconsin, which the Company acquired in 1990 in connection with its acquisition of, among other things, the Ansul product line. Prior to Tyco's acquisition, Ansul manufactured arsenic-based agricultural herbicides at the Marinette facility, which resulted in significant arsenic contamination of soil and groundwater on the Marinette site and in parts of the adjoining Menominee River. Ansul has been engaged in ongoing remediation efforts at the Marinette site since 1990, and in February 2009 entered into an Administrative Consent Order (the "Consent Order") with the U.S. Environmental Protection Agency to address the presence of arsenic at the Marinette site. Under this agreement, Ansul's principal obligations are to contain the arsenic contamination on the site, pump and treat on-site groundwater, dredge, treat and

20

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


properly dispose of contaminated sediments in the adjoining river areas, and monitor contamination levels on an ongoing basis. Activities completed under the Consent Order since 2009 include the installation of a subsurface barrier wall around the facility to contain contaminated groundwater, the installation of a groundwater extraction and treatment system and the dredging and offsite disposal of treated river sediment. As of December 26, 2014, the Company concluded that its remaining remediation and monitoring costs related to the Marinette facility were in the range of approximately $20 million to $47 million. The Company's best estimate within that range is approximately $23 million, of which $11 million is included in Accrued and other current liabilities and $12 million is included in Other liabilities in the Company's Consolidated Balance Sheet. Although the Company has recorded its best estimate of the costs that it will incur to remediate and monitor the arsenic contamination at the Marinette facility, it is possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could change the Company's expectations with respect to future charges and cash outlays, and such changes could be material to the Company's future results of operations, financial condition or cash flows.
Asbestos Matters
The Company and certain of its subsidiaries, including Yarway Corporation (“Yarway”) and Grinnell LLC (“Grinnell”), along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. Over 90% of cases pending against affiliates of the Company have been filed against Yarway or Grinnell, and have typically involved product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were used with asbestos containing components. Claims filed against Yarway derive from Yarway’s purported use of asbestos-containing gaskets and packing in the sale or distribution of steam valves and traps and from its alleged manufacture of asbestos-containing expansion joint packing. Yarway’s alleged manufacture, distribution and/or sale of asbestos-containing materials ceased by 1988, and Yarway ceased substantially all of its manufacturing, distribution and sales operations in 2003. Claims filed against Grinnell typically allege that it manufactured, sold or distributed valves, gaskets, piping and sprinkler systems containing asbestos.
As of December 26, 2014, the Company has determined that there were approximately 5,700 claims pending against it, which includes approximately 3,200 claims pending against Yarway. This amount reflects the Company's current estimate of the number of viable claims made against it and includes adjustments for claims that are not actively being prosecuted, identify incorrect defendants, are duplicative of other actions or for which the Company is indemnified by third parties. Additionally, as a result of the Yarway bankruptcy filing described below, claims against Yarway have been stayed since April 2013.
As of December 26, 2014, the Company's estimated net liability, including Yarway, recorded within the Company's Consolidated Balance Sheet is $605 million. The net liability is comprised of a liability for pending and future claims and related defense costs of $850 million, of which $353 million is recorded in Accrued and other current liabilities, and $497 million is recorded in Other liabilities. The Company also maintains separate insurance recovery related assets of $245 million, of which $22 million is recorded in Prepaid expenses and other current assets, and $223 million is recorded in Other assets. Insurance recovery related assets include $22 million of cash which has been designated as restricted. The Company believes that its asbestos related liabilities and insurance related assets as of December 26, 2014 are appropriate. Similarly, as of September 26, 2014, the Company's estimated net liability, including Yarway, of $608 million was recorded within the Company's Consolidated Balance Sheet as a liability for pending and future claims and related defense costs of $853 million, and separately as an asset for insurance recoveries of $245 million.
Yarway
As previously disclosed, on April 22, 2013 Yarway filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”). As a result of this filing, the continuation or commencement of asbestos-related litigation against Yarway has been enjoined by the automatic stay imposed by the U.S. Bankruptcy Code. Yarway's goal has been to negotiate, obtain approval of, and consummate a plan of reorganization that establishes a trust to fairly and equitably value and pay current and future Yarway asbestos claims, and that, in exchange for funding of the trust by the Company and/or its subsidiaries, provides permanent injunctive relief protecting the Company, each of its current and former affiliates and various other parties (the “Company Protected Parties”) from any further asbestos claims based on products manufactured, sold, and/or distributed by Yarway. On October 9, 2014, the Company reached an agreement in principle with Yarway, the Official Committee of Asbestos Claimants (“ACC”) appointed in the Yarway Chapter 11 case as the representative of current Yarway asbestos claimants, and the Future Claimants Representative (“FCR”) appointed in the Yarway Chapter 11 case as the representative of future Yarway asbestos claimants, to fund a section 524(g) trust for the resolution and payment of current and future Yarway asbestos claims. The agreement in principle, which will be implemented through a Chapter 11 plan for Yarway, will resolve the potential liability of the Company Protected Parties for pending and future derivative personal injury claims related to exposure to asbestos-containing products

21

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


that were allegedly manufactured, distributed, and/or sold by Yarway (“Yarway Asbestos Claims”). Under the Chapter 11 plan, an asbestos settlement trust (the “Yarway Trust”) that conforms to the provisions of Section 524(g) of the U.S. Bankruptcy Code will be established and, on the effective date of the Chapter 11 plan, the Company and Yarway will contribute to the Yarway Trust a total of $325 million in cash (“Settlement Consideration”), which includes approximately $100 million relating to the settlement of intercompany amounts allegedly due to Yarway. In exchange for the Settlement Consideration, each of the Company Protected Parties will receive the benefit of a release from Yarway and an injunction under section 524(g) of the Bankruptcy Code permanently enjoining the assertion of Yarway Asbestos Claims against those Parties. The agreement in principle is subject, among other things, to the negotiation and filing of a Chapter 11 plan of reorganization for Yarway incorporating the terms of such agreement (the “Plan”), acceptance of the Plan by at least 75% of Yarway’s current asbestos claimants voting on such Plan, confirmation of the Plan by the Bankruptcy Court and approval of the injunction in favor of the Company Protected Parties by the United States District Court for the District of Delaware (“District Court”). On the effective date of the Plan, which is anticipated to occur in the second half of fiscal 2015, the Company and Yarway will pay the Settlement Consideration and Yarway Asbestos Claims against the Company Protected Parties will be permanently enjoined. Yarway is anticipated to become a wholly-owned subsidiary of the Yarway Trust and, accordingly, would no longer be owned by or be part of a consolidated group with the Company. Unless extended by a further agreement, the agreement in principle will expire if the order confirming the Plan and implementing the injunction has not been entered or affirmed by the District Court by June 30, 2015, or if the effective date of the Plan has not occurred by September 15, 2016. As a result of the agreement in principle to settle, the Company recorded a charge of $225 million in Selling, general and administrative expenses in the Consolidated Statement of Operations during the fourth fiscal quarter of 2014.
As a result of filing the voluntary bankruptcy petition during the third quarter of fiscal 2013, the Company recorded an expected loss upon deconsolidation of $10 million related to the Yarway Chapter 11 filing, which continues to represent the Company’s best estimate of its loss.
Other Claims
The Company continuously assesses the sufficiency of its estimated liability for pending and future asbestos claims and defense costs. On a quarterly basis, the Company evaluates actual experience regarding asbestos claims filed, settled and dismissed, amounts paid in settlements, and the recoverability of its insurance assets. If and when data from actual experience demonstrate an unfavorable discernible trend, the Company performs a valuation of its asbestos related liabilities and corresponding insurance assets including a comprehensive review of the underlying assumptions. In addition, the Company evaluates its ability to reasonably estimate claim activity beyond its current look-forward period in order to assess whether such period is appropriate. In addition to claims and litigation experience, the Company considers additional qualitative and quantitative factors such as changes in legislation, the legal environment, the Company’s strategy in managing claims and obtaining insurance, including its defense strategy, and health related trends in the overall population of individuals potentially exposed to asbestos. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs or insurance assets is warranted.
During the fourth quarter of fiscal 2014, the Company concluded that an unfavorable trend had developed in actual claim filing activity compared to projected claim filing activity established during the Company’s most recent valuation. Accordingly, the Company, with the assistance of independent actuarial service providers, performed a revised valuation of its asbestos-related liabilities and corresponding insurance assets. As part of the revised valuation, the Company assessed whether a change in its look-forward period was appropriate, taking into consideration its more extensive history and experience with asbestos-related claims and litigation (including its experience with Yarway), and determined that it was now possible to make a reasonable estimate of the actuarially determined ultimate risk of loss for pending and unasserted potential future asbestos-related claims through 2056. In connection with the revised valuation, the Company considered a recent settlement with one of its insurers calling for the establishment of a qualified settlement fund, and the results of a separate independent actuarial consulting firm report conducted in the fourth quarter to assist the Company in obtaining insurance to fully fund all estimable asbestos-related claims (excluding Yarway claims) incurred through 2056.
The independent actuarial service firm calculated a total estimated liability for asbestos-related claims of the Company, which reflects the Company’s best estimate of its ultimate risk of loss to resolve all pending and future claims (excluding Yarway claims) through 2056, which is the Company’s reasonable best estimate of the actuarially determined time period through which asbestos-related claims will be filed against Company affiliates.
In conjunction with determining the total estimated liability, the Company retained an independent third party to assist it in valuing its insurance assets responsive to asbestos-related claims, excluding Yarway claims. These insurance assets represent amounts due to the Company for previously settled claims and the probable reimbursements relating to its total liability for

22

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


pending and unasserted potential future asbestos claims and defense costs. In calculating this amount, the Company used the estimated asbestos liability for pending and projected future claims and defense costs described above, and it also considered the amount of insurance available, the solvency risk with respect to the Company's insurance carriers, resolution of insurance coverage issues, gaps in coverage, allocation methodologies, and the terms of existing settlement agreements with insurance carriers.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on the Company's strategies for resolving its asbestos claims, currently available information, and a number of estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants, the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of the Company's asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Company's calculations vary significantly from actual results.
In connection with the foregoing, during the third quarter of fiscal 2014, the Company resolved disputes with certain of its historical insurers and agreed that certain insurance proceeds would be used to establish and fund a qualified settlement fund (“QSF”), within the meaning of the Internal Revenue Code, which would be used for the resolution primarily of Grinnell asbestos liabilities of the Company. It is intended that the QSF will receive future insurance payments and proceeds from third party insurers and, in addition, will fund and manage liabilities for certain historical operations  of the Company. On January 9, 2015, the Company completed a series of restructuring transactions related to the establishment and funding of a dedicated structure pursuant to which the Company acquired the assets of Grinnell and transferred cash and other assets totaling approximately $278 million (not including $22 million received by the QSF from historic third-party insurers in settlement of coverage disputes) to the structure. As part of the restructuring, subsidiaries in the structure assumed certain liabilities related to historic Grinnell, Scott and Figgie operations, including all historical Grinnell asbestos liabilities, and such subsidiaries purchased additional insurance by, through or from a wholly-owned subsidiary in the structure in order to supplement and enhance existing insurance assets. The structure and the QSF fully fund all historic Grinnell asbestos liabilities and provide for the efficient and streamlined management of claims related thereto.
Tax Matters
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 a tax sharing agreement entered in 2007 with Covidien and TE Connectivity (the "2007 Tax Sharing Agreement") under which 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. 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

23

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


position and has filed petitions with the U.S. Tax Court contesting the IRS proposed adjustments. A trial date has been set for February 2016. 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 expected to be disallowed by the IRS.
See Note 6 for additional information related to income tax matters.
Other Matters
During the first quarter of fiscal 2014, Tyco settled a tax dispute with its former subsidiary, CIT Group, Inc. ("CIT"). Under the terms of the settlement agreement, Tyco received $60 million during the first quarter of 2014, which was subject to the sharing provisions of the 2007 Tax Sharing Agreement. As a result, the Company recorded a $16 million gain in Selling, general and administrative expenses in the Consolidated Statement of Operations and established payables of $25 million and $19 million due to Covidien and TE Connectivity, respectively, as of December 27, 2013. The Company paid these amounts to Covidien and TE Connectivity during the second fiscal quarter of 2014.
SimplexGrinnell LP (“SG”), a subsidiary of the Company in the North America Installation & Services segment, has been named as a defendant in several lawsuits seeking damages for SG’s alleged failure to pay prevailing wages in connection with work performed on state and local municipal projects. In New York, the U.S. District Court had granted SG’s motion for summary judgment dismissing plaintiffs’ claims for prevailing wages on testing and inspection work, which was based primarily on a 2009 opinion of the New York Department of Labor (“DOL”) that testing and inspection work would be considered covered by the prevailing wage law only on a prospective basis. Plaintiffs appealed this decision to the U.S. Court of Appeals for the Second Circuit, which in turn asked the NY Court of Appeals whether the lower court should have given deference to the DOL’s prospective-only application of law.  In October 2014, the NY Court of Appeals ruled that the lower court did not have to give deference to the DOL based on an amicus brief submitted by the DOL in which it stated the Court need not have given it deference.  As a result, the Company recorded a $10 million charge in Cost of services in the Consolidated Statement of Operations during the fourth quarter of fiscal 2014. During the quarter ended December 26, 2014, the Company recorded an additional charge in Cost of services within the Consolidated Statement of Operations based on a refinement of the underlying data used by the plaintiffs’ experts.  Such amount, which reflects the Company’s best estimate of its probable loss related to this matter, is not material to the financial statements.  SG also is a defendant in two other lawsuits related to prevailing wages in New Jersey and California. SG has agreed in principle to settle the California lawsuit for approximately $5 million subject to Court approval, which the Company had previously reserved.
During the first quarter of fiscal 2015, the Company received and responded to inquiries from the U.S. Department of the Navy regarding the formulation of certain aqueous film forming foam ("AFFF") concentrates. The Company investigated such matters and ceased selling certain AFFF and other foam products pending the outcome of its investigation. During the course of the investigation, three AFFF products were removed from the Navy’s Qualified Products List ("QPL"); one AFFF product remains on the QPL. The Company has shared the results of its investigation with appropriate governmental authorities and is also communicating with the government regarding the re-qualification of these products. The government has confirmed that it considers the Company to be “presently responsible,” and that no suspension or debarment is warranted. At this time, we cannot predict the outcome of these inquiries and whether this will result in further action by the Navy or other governmental authorities, but it is possible that the Company could be required to pay material fines, consent to injunctions on future conduct, or suffer other criminal or civil penalties or adverse impacts, including being subject to lawsuits brought by private litigants, each of which may have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In addition to the foregoing, the Company is subject to claims and suits, including from time to time, contractual disputes and product and general liability claims, incidental to present and former operations, acquisitions and dispositions. With respect to many of these claims, the Company either self-insures or maintains insurance through third-parties, with varying deductibles. While the ultimate outcome of these matters cannot be predicted with certainty, the Company believes that the resolution of any

24

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


such proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows beyond amounts recorded for such matters.
12.    Retirement Plans
Defined Benefit Pension Plans—The Company sponsors a number of pension plans. The following disclosures exclude the impact of plans which are immaterial individually and in the aggregate. The net periodic benefit cost for the Company's material U.S. and non-U.S. defined benefit pension plans is as follows ($ in millions):
 
U.S. Plans
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
Service cost
$
2

 
$
2

Interest cost
9

 
9

Expected return on plan assets
(14
)
 
(12
)
Amortization of net actuarial loss
2

 
2

Net periodic benefit cost
$
(1
)
 
$
1

 
Non-U.S. Plans
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
Service cost
$
2

 
$
2

Interest cost
13

 
14

Expected return on plan assets
(20
)
 
(18
)
Amortization of net actuarial loss
4

 
3

Net periodic benefit cost
$
(1
)
 
$
1

The estimated net actuarial loss for U.S. pension benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the current fiscal year is expected to be $9 million, and the amount for non-U.S. pension benefit plans is expected to be $14 million. Amortization of net periodic benefit cost from accumulated other comprehensive loss for the Company's pension benefit plans is recorded in Selling, general and administrative expenses, Cost of product sales, or Cost of services in the Consolidated Statements of Operations, depending on the employee job classification.
The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which it operates and to make discretionary voluntary contributions from time to time. The Company anticipates that it will contribute at least the minimum required to its pension plans in fiscal year 2015 of $13 million for U.S. plans and $23 million for non-U.S. plans. During the quarter ended December 26, 2014, the Company made required contributions of $1 million to its U.S. pension plans and $5 million to its non-U.S. pension plans.
Postretirement Benefit Plans—Net periodic postretirement benefit cost was not material for both periods.
13.    Equity and Comprehensive Income
As a result of the Merger, the Company’s authorized share capital changed.
Authorized Share Capital
The authorized share capital of Tyco Ireland is $11,000,000 and €40,000, divided into 1,000,000,000 ordinary shares with a par value of $0.01 per share, 100,000,000 preferred shares with a par value of $0.01 per share and 40,000 ordinary A shares with a par value of €1.00 per share. The authorized share capital includes 40,000 ordinary A shares with a par value of €1.00 per share in order to satisfy statutory requirements for the incorporation of all Irish public limited companies. Tyco Ireland may issue shares subject to the maximum prescribed by its authorized share capital contained in its memorandum of association. In connection with the Merger, Tyco Ireland canceled all then outstanding treasury shares, including shares held by subsidiaries, with an offsetting reduction in Additional paid in capital.

25

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Issued Share Capital
Tyco Ireland issued one ordinary share in exchange for each common share of Tyco Switzerland to the former shareholders of Tyco Switzerland. All Tyco Ireland ordinary shares issued at the effective time of the Merger were issued as fully paid-up and non-assessable. As of January 23, 2015, 420,045,569 ordinary shares were outstanding.
Dividends
On March 5, 2014, the Company's shareholders approved an annual cash dividend of $0.72 per ordinary share. Payment of the dividend is to be made in four quarterly installments of $0.18 from May 2014 through February 2015. As a result, during the quarter ended March 28, 2014, the Company recorded an accrued dividend of $332 million within Accrued and other current liabilities and a corresponding reduction to Additional paid in capital on the Company's Consolidated Balance Sheet. The third installment of $0.18 was paid on November 13, 2014 to shareholders of record on October 24, 2014. The fourth installment will be paid on February 18, 2015 to shareholders of record on January 23, 2015.
The timing, declaration and payment of future dividends to holders of our ordinary shares will be determined by the Company's Board of Directors and will depend upon many factors, including Tyco's financial condition and results of operations, the capital requirements of the Company's businesses, industry practice and any other relevant factors.
Under Irish law, dividends may only be paid (and share repurchases and redemptions must generally be funded) out of “distributable reserves.” The creation of distributable reserves of Tyco Ireland was accomplished by way of a capital reduction of Tyco Ireland, which the Irish High Court approved on December 18, 2014.
Share Repurchase Program
The Company's Board of Directors approved $1.75 billion and $1 billion share repurchase programs in March 2014 and September 2014, respectively. During the quarter ended December 26, 2014, the Company repurchased a total of approximately 10 million shares for approximately $417 million which completed the $1.75 billion share repurchase program. As of December 26, 2014, a total of approximately $1 billion in share repurchase authority remained outstanding under the $1 billion share repurchase program. Share repurchases reduce the amount of ordinary shares outstanding and decrease the accrued dividend liability on the Consolidated Statement of Stockholders' Equity, as shares repurchased by the Company or its subsidiaries are not entitled to dividends.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of the following ($ in millions):
 
For the Quarters Ended
 
December 26,
2014
 
December 27,
2013
Net income
$
161

 
$
272

Foreign currency translation, net of tax
(198
)
 
(37
)
Amortization of net actuarial losses
6

 
5

Income tax expense
(1
)
 
(2
)
Defined benefit and post retirement plans, net of tax
5

 
3

  Total other comprehensive loss, net of tax
(193
)
 
(34
)
Comprehensive (loss) income
(32
)
 
238

Less: comprehensive (loss) income attributable to noncontrolling interests
(1
)
 
2

Comprehensive (loss) income attributable to Tyco ordinary shareholders
$
(31
)
 
$
236


26

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


A summary of the changes in each component of Accumulated other comprehensive loss, net of tax, for the quarter ended December 26, 2014 are as follows ($ in millions):
 
Currency
Translation
Adjustments
 
Retirement
Plans
 
Accumulated Other
Comprehensive Loss
Balance as of September 26, 2014
$
(693
)
 
$
(532
)
 
$
(1,225
)
Other comprehensive (loss) income, net of tax
(198
)
 
5

 
(193
)
Balance as of December 26, 2014
$
(891
)
 
$
(527
)
 
$
(1,418
)
14.    Share Plans
During the quarter ended December 26, 2014, the Company issued its annual share-based compensation grants. The total number of awards issued was approximately 2.4 million, of which 1.5 million were stock options, 0.4 million were restricted unit awards and 0.5 million were performance share unit awards. The options and restricted stock units vest in equal annual installments over a period of 4 years, and the performance share unit awards vest after a period of 3 years based on the level of attainment of the applicable performance metrics, which are determined by the Compensation and Human Resources Committee of the Board. The weighted-average grant-date fair value of the stock options, restricted unit awards and performance share unit awards was $11.77, $43.38 and $42.95, respectively. The weighted-average assumptions used in the Black-Scholes option pricing model included an expected stock price volatility of 32%, a risk free interest rate of 1.83%, an expected annual dividend per share of $0.72 and an expected option life of 5.57 years.
During the quarter ended December 27, 2013, the Company issued its annual share-based compensation grants. The total number of awards issued was approximately 3.0 million, of which 1.9 million were stock options, 0.5 million were restricted unit awards and 0.6 million were performance share unit awards. The options and restricted stock units vest in equal annual installments over a period of 4 years, and the performance share unit awards vest after a period of 3 years based on the level of attainment of the applicable performance metrics, which are determined by the Compensation and Human Resources Committee of the Board. The weighted-average grant-date fair value of the stock options, restricted unit awards and performance share unit awards was $10.12, $37.15 and $39.01, respectively. The weighted-average assumptions used in the Black-Scholes option pricing model included an expected stock price volatility of 33%, a risk free interest rate of 1.63%, an expected annual dividend per share of $0.64 and an expected option life of 5.5 years. The preceding annual share-based compensation grant information was not recast for the divestiture of the South Korean security business as the amounts were not material.
The fair value of restricted stock units is determined based on the closing market price of the Company’s shares on the grant date. Performance share units, which are restricted share awards that vest dependent upon attainment of various levels of performance that equal or exceed targeted levels generally vest in their entirety 3 years from the grant date. The fair value of performance share units is determined based on the Monte Carlo valuation model. The compensation expense recognized for all restricted share awards is net of estimated forfeitures.

27

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.    Consolidated Segment Data
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. Selected information by segment is presented in the following tables ($ in millions):
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
Net revenue(1):
 
 
 
NA Installation & Services
$
951

 
$
957

ROW Installation & Services
917

 
971

Global Products
611

 
565

 
$
2,479

 
$
2,493

_____________________________________________________________________________

(1) 
Net revenue by operating segment excludes intercompany transactions.
 
For the Quarters Ended
 
December 26, 2014
 
December 27, 2013
Operating income (loss):
 
 
 
NA Installation & Services
$
105

 
$
117

ROW Installation & Services
69

 
95

Global Products
98

 
86

Corporate and Other (1)
(74
)
 
46

 
$
198

 
$
344

_______________________________________________________________________________

(1) 
Operating income for the quarter ended December 27, 2013 includes $92 million of income related to the settlement of a legacy legal matter with former management and $16 million of income related to the CIT settlement. See Note 11.
16.    Inventory
Inventories consisted of the following ($ in millions):
 
As of
 
December 26,
2014
 
September 26,
2014
Purchased materials and manufactured parts
$
172

 
$
159

Work in process
88

 
86

Finished goods
398

 
383

Inventories
$
658

 
$
628

Inventories are recorded at the lower of cost (primarily first-in, first-out) or market value.

28

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


17.    Property, Plant and Equipment
Property, plant and equipment consisted of the following ($ in millions):
 
As of
 
December 26, 2014
 
September 26, 2014
Land
$
35

 
$
36

Buildings
412

 
417

Subscriber systems
2,135

 
2,213

Machinery and equipment
1,264

 
1,271

Construction in progress
94

 
90

Accumulated depreciation
(2,698
)
 
(2,758
)
Property, plant and equipment, net
$
1,242

 
$
1,269

18.    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 the current fiscal year through the completion of such transactions and would typically be triggered in the event of nonperformance. The Company's performance under the guarantees, if required, 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, TE Connectivity, ADT and Pentair in accordance with the terms of the 2007 and 2012 Separation and Distribution Agreements and Tax Sharing Agreements. These guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreements. See Note 6.
In addition, Tyco historically provided support in the form of financial and/or performance guarantees to various Covidien, TE Connectivity, ADT and Tyco Flow Control operating entities. In connection with both the 2012 and 2007 Separations, the Company worked with the guarantee counterparties to cancel or assign these guarantees to Covidien, TE Connectivity, ADT or Pentair, as appropriate. To the extent these guarantees were not assigned prior to the Separation dates, Tyco remained as the guarantor, but was typically indemnified by the former subsidiary. The Company's obligations related to the 2012 Separation were $3 million, which were included in Other liabilities on the Company's Consolidated Balance Sheets as of both December 26, 2014 and September 26, 2014, with an offset to Tyco's shareholders' equity on the 2012 Separation date. The Company's obligations related to the 2007 Separation were $3 million, which were included in Other liabilities on the Company's Consolidated Balance Sheets as of both December 26, 2014 and September 26, 2014, with an offset to Tyco's shareholders' equity on the 2007 Separation date.
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 has no reason to believe that these contingencies, if realized, 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 11.
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.

29

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The changes in the carrying amount of the Company's warranty accrual from September 26, 2014 to December 26, 2014 were as follows ($ million):
Balance as of September 26, 2014
$
28

Warranties issued
2

Changes in estimates
(1
)
Settlements
(2
)
Balance as of December 26, 2014
$
27

Warranty accruals for businesses that are included within Liabilities held for sale on the Consolidated Balance Sheets are excluded from the table above. See Note 3.

30

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


19.    Guarantor Financial Statements
TIFSA, a 100% owned subsidiary of the Company, has public debt securities outstanding which are fully and unconditionally guaranteed by Tyco and by Tyco Fire & Security Finance SCA, a wholly owned subsidiary of Tyco and parent company of TIFSA. The following tables present condensed consolidating financial information for Tyco, TIFSA and all other subsidiaries. Condensed financial information for Tyco and TIFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended December 26, 2014
($ in millions)
 
Tyco
International
Public Limited Company
 
Tyco
Fire & Security
Finance SCA
 
Tyco
International
Finance S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
Net revenue
$

 
$

 
$

 
$
2,479

 
$

 
$
2,479

Cost of product sales

 

 

 
1,022

 

 
1,022

Cost of services

 

 

 
548

 

 
548

Selling, general and administrative expenses
3

 

 
1

 
649

 

 
653

Restructuring and asset impairment charges, net

 

 

 
58

 

 
58

Operating (loss) income
(3
)
 

 
(1
)
 
202

 

 
198

Interest income

 

 

 
3

 

 
3

Interest expense

 

 
(24
)
 

 

 
(24
)
Other income, net

 

 
4

 

 

 
4

Equity in net income of subsidiaries
143

 
133

 
127

 

 
(403
)
 

Intercompany interest and fees
22

 

 
27

 
(49
)
 

 

Income from continuing operations before income taxes
162

 
133

 
133

 
156

 
(403
)
 
181

Income tax expense

 

 

 
(19
)
 

 
(19
)
Income from continuing operations
162

 
133

 
133

 
137

 
(403
)
 
162

Loss from discontinued operations, net of income taxes

 

 

 
(1
)
 

 
(1
)
Net income
162

 
133

 
133

 
136

 
(403
)
 
161

Less: noncontrolling interest in subsidiaries net loss

 

 

 
(1
)
 

 
(1
)
Net income attributable to Tyco ordinary shareholders
$
162

 
$
133

 
$
133

 
$
137

 
$
(403
)
 
$
162



31

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the Quarter Ended December 26, 2014
($ in millions)
 
Tyco
International
Public Limited Company
 
Tyco
Fire & Security
Finance SCA
 
Tyco
International
Finance S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
Net income
$
162

 
$
133

 
$
133

 
$
136

 
$
(403
)
 
$
161

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
(198
)
 

 
(1
)
 
(197
)
 
198

 
(198
)
Defined benefit and post retirement plans
5

 

 

 
5

 
(5
)
 
5

Total other comprehensive loss, net of tax
(193
)
 

 
(1
)
 
(192
)
 
193

 
(193
)
Comprehensive (loss) income
(31
)
 
133

 
132

 
(56
)
 
(210
)
 
(32
)
Less: comprehensive loss attributable to noncontrolling interests

 

 

 
(1
)
 

 
(1
)
Comprehensive (loss) income attributable to Tyco ordinary shareholders
$
(31
)
 
$
133

 
$
132

 
$
(55
)
 
$
(210
)
 
$
(31
)


32

TYCO INTERNATIONAL PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended December 27, 2013
($ in millions)
 
Tyco
International
Ltd.
 
Tyco