10-Q 1 a2193762z10-q.htm 10-Q

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 26, 2009

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-13836
(Commission File Number)



TYCO INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)

Switzerland
(Jurisdiction of Incorporation)
  98-0390500
(I.R.S. Employer Identification Number)

Freier Platz 10 Schaffhausen, CH-8200 Switzerland
(Address of Registrant's principal executive offices)

41-52-633-02-44
(Registrant's telephone number)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý

        The number of common shares outstanding as of July 21, 2009 was 474,105,809.



TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

 
   
 
Page
Part I.   Financial Information    

Item 1.

 

Financial Statements

 

1

 

 

Consolidated Statements of Operations (Unaudited) for the quarters and nine months ended June 26, 2009 and June 27, 2008

 

1

 

 

Consolidated Balance Sheets (Unaudited) as of June 26, 2009 and September 26, 2008

 

2

 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 26, 2009 and June 27, 2008

 

3

 

 

Consolidated Statements of Shareholders' Equity (Unaudited) for the nine months ended June 26, 2009 and June 27, 2008

 

4

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

54

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

82

Item 4.

 

Controls and Procedures

 

82


Part II.


 


Other Information


 


 

Item 1.

 

Legal Proceedings

 

84

Item 1A.

 

Risk Factors

 

90

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

90

Item 3.

 

Defaults Upon Senior Securities

 

90

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

90

Item 5.

 

Other Information

 

91

Item 6.

 

Exhibits

 

91

Signatures

 

92

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        

TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share data)

 
  For the
Quarter Ended
  For the
Nine Months Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Revenue from product sales

  $ 2,541   $ 3,413   $ 7,827   $ 9,617  

Service revenue

    1,699     1,802     4,989     5,298  
                   
 

Net revenue

    4,240     5,215     12,816     14,915  

Cost of product sales

    1,852     2,378     5,692     6,764  

Cost of services

    893     986     2,637     2,942  

Selling, general and administrative expenses

    1,124     1,234     3,464     3,605  

Class action settlement, net

        (7 )       (7 )

Separation costs

                4  

Goodwill and intangible asset impairments (see Note 7)

            2,705      

Restructuring, asset impairment and divestiture charges, net (see Notes 2 and 3)

    32     47     120     95  
                   
 

Operating income (loss)

    339     577     (1,802 )   1,512  

Interest income

    9     16     32     99  

Interest expense

    (74 )   (91 )   (225 )   (323 )

Other income (expense), net

    1     (257 )   12     (205 )
                   
 

Income (loss) from continuing operations before income taxes and minority interest

    275     245     (1,983 )   1,083  

Income tax expense

    (31 )   (45 )   (55 )   (249 )

Minority interest

    (1 )   (1 )   (2 )   (3 )
                   
 

Income (loss) from continuing operations

    243     199     (2,040 )   831  

Income from discontinued operations, net of income taxes

    44     277     37     288  
                   
 

Net income (loss)

  $ 287   $ 476   $ (2,003 ) $ 1,119  
                   

Basic earnings per share:

                         
 

Income (loss) from continuing operations

  $ 0.51   $ 0.41   $ (4.31 ) $ 1.71  
 

Income from discontinued operations

    0.10     0.58     0.08     0.59  
                   
 

Net income (loss)

  $ 0.61   $ 0.99   $ (4.23 ) $ 2.30  
                   

Diluted earnings per share:

                         
 

Income (loss) from continuing operations

  $ 0.51   $ 0.41   $ (4.31 ) $ 1.70  
 

Income from discontinued operations

    0.09     0.57     0.08     0.58  
                   
 

Net income (loss)

  $ 0.60   $ 0.98   $ (4.23 ) $ 2.28  
                   

Weighted-average number of shares outstanding:

                         
 

Basic

    473     482     473     487  
 

Diluted

    475     486     473     491  

See Notes to Consolidated Financial Statements.

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TYCO INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data)

 
  June 26,
2009
  September 26,
2008
 

Assets

             

Current Assets:

             
 

Cash and cash equivalents

  $ 1,779   $ 1,519  
 

Accounts receivable, less allowance for doubtful accounts of $184 and $184, respectively

    2,638     3,024  
 

Inventories

    1,590     1,879  
 

Prepaid expenses and other current assets

    1,756     1,805  
 

Assets held for sale

    27     126  
           
   

Total current assets

    7,790     8,353  

Property, plant and equipment, net

    3,429     3,519  

Goodwill

    8,621     11,619  

Intangible assets, net

    2,566     2,693  

Other assets

    2,857     2,620  
           
   

Total Assets

  $ 25,263   $ 28,804  
           

Liabilities and Shareholders' Equity

             

Current Liabilities:

             
 

Loans payable and current maturities of long-term debt

  $ 19   $ 555  
 

Accounts payable

    1,180     1,632  
 

Accrued and other current liabilities

    2,831     2,766  
 

Deferred revenue

    621     608  
 

Liabilities held for sale

        82  
           
   

Total current liabilities

    4,651     5,643  

Long-term debt

    4,226     3,709  

Other liabilities

    3,778     3,944  
           
   

Total Liabilities

    12,655     13,296  
           

Commitments and Contingencies (see Note 10)

             

Minority interest

    13     14  

Shareholders' Equity (see Note 12):

             
 

Preference shares, Nil at June 26, 2009 and $4 par value, 31,250,000 shares authorized, none outstanding at September 26, 2008

         
 

Common shares, CHF 7.60 par value, 814,801,671 shares authorized; 479,346,720 shares issued at June 26, 2009; $0.80 par value, 1,000,000,000 shares authorized; 477,667,844 shares issued, net of 21,952,786 shares owned by subsidiaries at September 26, 2008

    3,122     382  
 

Common shares held in treasury, 5,726,732 and 4,882,081 shares, at June 26, 2009 and September 26, 2008, respectively

    (236 )   (192 )
 

Capital in excess:

             
   

Share premium

        9,236  
   

Contributed surplus

    10,936     4,711  
 

Accumulated (deficit) earnings

    (978 )   1,125  
 

Accumulated other comprehensive (loss) income

    (249 )   232  
           
   

Total Shareholders' Equity

    12,595     15,494  
           
   

Total Liabilities and Shareholders' Equity

  $ 25,263   $ 28,804  
           

See Notes to Consolidated Financial Statements.

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TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 
  For the Nine Months Ended  
 
  June 26,
2009
  June 27,
2008
 

Cash Flows From Operating Activities:

             

Net (loss) income

  $ (2,003 ) $ 1,119  
 

Income from discontinued operations, net of income taxes

    (37 )   (288 )
           

(Loss) income from continuing operations

    (2,040 )   831  

Adjustments to reconcile net cash provided by (used in) operating activities:

             
 

Goodwill and intangible asset impairments

    2,705      
 

Depreciation and amortization

    839     854  
 

Non-cash compensation expense

    76     78  
 

Deferred income taxes

    (201 )   (115 )
 

Provision for losses on accounts receivable and inventory

    114     99  
 

(Gain) loss on extinguishment of debt

    (2 )   258  
 

Other non-cash items

    62     76  
 

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

             
   

Accounts receivable, net

    184     (243 )
   

Inventories

    181     (173 )
   

Prepaid expenses and other current assets

    (175 )   9  
   

Accounts payable

    (400 )   (135 )
   

Accrued and other liabilities

    (12 )   (357 )
   

Class action settlement liability

        (3,020 )
   

Income taxes, net

    (3 )   (8 )
   

Other

    116     (62 )
           
     

Net cash provided by (used in) operating activities

    1,444     (1,908 )
           
     

Net cash used in discontinued operating activities

    (8 )   (25 )
           

Cash Flows From Investing Activities:

             

Capital expenditures

    (500 )   (545 )

Proceeds from disposal of assets

    6     14  

Acquisition of businesses, net of cash acquired

    (47 )   (92 )

Accounts purchased from ADT dealer program

    (361 )   (269 )

Class action settlement escrow

        2,960  

Other

    40     15  
           
     

Net cash (used in) provided by investing activities

    (862 )   2,083  
           
     

Net cash provided by discontinued investing activities

    41     479  
           

Cash Flows From Financing Activities:

             

Repayment of short-term debt

    (552 )   (373 )

Proceeds from issuance of long-term debt

    2,794     2,663  

Repayment of long-term debt, including debt tenders

    (2,259 )   (2,490 )

Proceeds from exercise of share options

    1     40  

Dividends paid

    (287 )   (221 )

Repurchase of common shares by subsidiary

    (3 )   (756 )

Transfer from discontinued operations

    33     458  

Other

    1     (68 )
           
     

Net cash used in financing activities

    (272 )   (747 )
           
     

Net cash used in discontinued financing activities

    (33 )   (454 )
           

Effect of currency translation on cash

    (50 )   20  
           

Net increase (decrease) in cash and cash equivalents

    260     (552 )

Cash and cash equivalents at beginning of period

    1,519     1,894  
           

Cash and cash equivalents at end of period

  $ 1,779   $ 1,342  
           

See Notes to Consolidated Financial Statements.

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TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the Nine Months Ended June 26, 2009 and June 27, 2008

(in millions)

 
  Number of
Common
Shares
  Common
Shares
$0.80 Par
Value
  Treasury
Shares
  Share
Premium
  Contributed
Surplus
  Accumulated
Earnings
  Accumulated
Other
Comprehensive
Income
  Total  

Balance at September 28, 2007

    496   $ 397   $   $ 9,189   $ 5,439   $ 34   $ 565   $ 15,624  

Comprehensive income:

                                                 
 

Net income

                                  1,119           1,119  
 

Currency translation

                                        258     258  
 

Unrealized gain on marketable securities and derivative instruments

                                        1     1  
 

Change in unrecognized loss and prior service cost (credit), net of income taxes of $5 million

                                        10     10  
                                                 
 

Total comprehensive income

                                              1,388  

Dividends declared

                                  (219 )         (219 )

Share options exercised, including tax benefit of $2 million

    2     2           38     2                 42  

Repurchase of common shares by subsidiary

    (18 )   (15 )               (741 )               (756 )

Compensation expense

                            75                 75  

Exchange of convertible debt

                            1                 1  

Adoption of FIN 48 (see Note 5)

                                  (79 )         (79 )

Other

                                  (19 )         (19 )
                                   

Balance at June 27, 2008

    480   $ 384   $   $ 9,227   $ 4,776   $ 836   $ 834   $ 16,057  
                                   

 

 
  Number of
Common
Shares
  Common
Shares at
Par Value
(see Note
12)
  Common
Shares
$0.80 Par
Value
  Treasury
Shares
  Share
Premium
  Contributed
Surplus
  Accumulated
Earnings
(Deficit)
  Accumulated
Other
Comprehensive
Income (Loss)
  Total  

Balance at September 26, 2008

    473   $   $ 382   $ (192 ) $ 9,236   $ 4,711   $ 1,125   $ 232   $ 15,494  

Comprehensive income:

                                                       
 

Net loss

                                        (2,003 )         (2,003 )
 

Currency translation

                                              (560 )   (560 )
 

Unrealized gain on marketable securities and derivative instruments, net of income taxes of $4 million

                                              7     7  
 

Change in unrecognized loss and prior service cost (credit), net of income taxes of $5 million

                                              11     11  
                                                       
 

Total comprehensive loss

                                                    (2,545 )

Change of Domicile (see Note 12)

                                                       
   

Reclassification of shares owned by subsidiaries and cancellation of common shares held in treasury

          1           (54 )         53                  
   

Reverse share split and issuance of fully paid up shares

          3,498     (382 )         (3,116 )                      
   

Reallocation of share premium to contributed surplus

                            (6,120 )   6,120                  

Dividends declared (see Note 12)

          (377 )                           (95 )         (472 )

Shares issued from treasury for vesting of share based equity awards and other related tax effects

                      10           (16 )               (6 )

Repurchase of common shares by subsidiary

                                  (3 )               (3 )

Compensation expense

                                  77                 77  

Adoption of SFAS No. 158, net of income tax benefit of $2 million and income taxes $28 million, respectively, (see Note 11)

                                        (5 )   61     56  

Other

                                  (6 )               (6 )
                                       

Balance at June 26, 2009

    473   $ 3,122   $   $ (236 ) $   $ 10,936   $ (978 ) $ (249 ) $ 12,595  
                                       

See Notes to Consolidated Financial Statements.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Basis of Presentation and Summary of Significant Accounting Policies

        Basis of Presentation    The unaudited Consolidated Financial Statements include the consolidated results of Tyco International Ltd., a corporation organized under the laws of Switzerland, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Tyco"). Effective March 17, 2009, the Company discontinued its existence as a Bermuda corporation as provided in Section 132G of The Companies Act 1981 of Bermuda and, in accordance with article 161 of the Swiss Federal Code on International Private Law, continued its existence as a Swiss corporation under articles 620 et seq. of the Swiss Federal Code on Obligations (the "Change of Domicile"). The rights of holders of the Company's common shares are now governed by Swiss law, the Company's Swiss articles of association and its Swiss organizational regulations. The articles of association and organizational regulations were included as exhibits to the Company's current report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2009. The financial statements have been prepared in United States dollars ("USD") and in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2008 (the "2008 Form 10-K").

        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 results reported in these Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year.

        References to 2009 and 2008 are to Tyco's fiscal quarters ending June 26, 2009 and June 27, 2008, respectively, unless otherwise indicated.

        Reclassifications    Certain prior period amounts have been reclassified to conform with the current period presentation. During the quarter ended March 27, 2009, the Company reclassified a business previously classified as held for sale as the business no longer met the held for sale criteria (See Note 2). Additionally, the Company has realigned certain business operations as of September 27, 2008 resulting in certain prior period amounts being recast within Note 14.

        Recently Adopted Accounting Pronouncements    In May 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 165, "Subsequent Events". SFAS No. 165 provides authoritative accounting literature related to evaluating subsequent events that was previously addressed only in the auditing literature under Auditing Standard ("AU 560"). SFAS No. 165 is similar to the current guidance with some exceptions that are not intended to result in significant change to current practice. SFAS No. 165 defines subsequent events and also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The Company adopted the disclosure provisions of SFAS No. 165 as of June 26, 2009. The adoption did not have an impact on the Company's financial position, results of operations or cash flows.

        In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS No. 107-1 and Accounting Principles Board ("APB") 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1.    Basis of Presentation and Summary of Significant Accounting Policies (Continued)


amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting" to require those disclosures in summarized financial information in interim financial statements. The Company adopted the disclosure provisions of FSP SFAS No. 107-1 and APB 28-1 as of June 26, 2009. See Note 9 for additional information related to the adoption of FSP SFAS No. 107-1 and APB 28-1. The adoption did not have an impact on the Company's financial position, results of operations or cash flows.

        In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities." SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's results of operations. The Company adopted the disclosure provisions of SFAS No. 161 as of December 27, 2008. See Note 9 for additional information related to the adoption of SFAS No. 161. The adoption did not have an impact on the Company's financial position, results of operations or cash flows.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which enhances existing guidance for measuring assets and liabilities at fair value. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. In February 2008, the FASB issued Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" which permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. During the first quarter of 2009 the Company elected to defer the adoption of SFAS No. 157 for one year for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. SFAS No. 157 became effective for Tyco in the first quarter of 2009 for financial assets and liabilities only. The adoption did not have a material impact on the Company's financial position, results of operations or cash flows. See Note 9 for additional information related to the adoption of SFAS No. 157. The Company is currently assessing the impact, if any, that the adoption of SFAS No. 157 for non-financial assets and liabilities will have on the results of its operations, financial position and cash flows.

        In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)." SFAS No. 158 requires that employers recognize the funded status of defined benefit pension and other postretirement benefit plans as a net asset or liability on the balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as a component of net periodic benefit cost. The Company adopted the recognition and disclosure provisions of SFAS No. 158 as of September 28, 2007.

        SFAS No. 158 also requires companies to measure plan assets and benefit obligations as of their fiscal year end. The Company adopted the measurement date provisions of SFAS No. 158 on September 27, 2008. As a result, Tyco measured its plan assets and benefit obligations on September 26, 2008 and adjusted its opening balances of accumulated earnings and accumulated other comprehensive income for the change in net periodic benefit cost and fair value, respectively, from the previously used measurement date of August 31, 2008. The adoption of the measurement date provisions resulted in a net decrease to accumulated earnings of $5 million, net of an income tax

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1.    Basis of Presentation and Summary of Significant Accounting Policies (Continued)


benefit of $2 million, and a net increase to accumulated other comprehensive income of $61 million, net of income taxes of $28 million. See Note 11 for additional information related to the adoption of SFAS No. 158.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 became effective for Tyco in the first quarter of 2009. On September 27, 2008, the Company did not elect the fair value option under SFAS No. 159 for eligible items.

        Recently Issued Accounting Pronouncements    In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162." SFAS No. 168 establishes the FASB Standards Accounting Codification ("Codification") as the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS No. 168 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" but is not intended to change or alter existing US GAAP. The Codification, will change the references of financial standards in effect for Tyco. Beginning in the fourth quarter of fiscal 2009, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. SFAS No. 168 will not have any impact on the Company's financial position, results of operations and cash flows.

        In June 2009, the FASB issued SFAS No. 167, "New Consolidation Guidance for Variable Interest Entities (VIE)", which amends FASB Interpretation No. ("FIN") 46 (R), "Consolidation of Variable Interest Entities", to address the elimination of the concept of a qualifying special purpose entity. SFAS No. 167 also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of variable interest entity, and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, SFAS No. 167 requires any enterprise that holds a variable interest in a variable interest entity to provide enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity. SFAS No. 167 is effective for Tyco in the first quarter of fiscal 2011. The Company is currently assessing what impact, if any, that SFAS No. 167 will have on its financial position, results of operations and cash flows.

        In June 2008 the FASB ratified FASB Staff Position ("FSP") No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities" (FSP No. EITF 03-6-1), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, "Earnings per Share" (SFAS No. 128). FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1.    Basis of Presentation and Summary of Significant Accounting Policies (Continued)


in calculating earnings per share. FSP No. EITF 03-6-1 is effective for Tyco starting with the first interim period of fiscal 2010, and shall be applied retrospectively to all prior periods. The Company is currently evaluating the effects, if any, that FSP No. EITF 03-6-1 may have on earnings per share.

        In April 2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life of Intangible Assets". FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets". FSP No. 142-3 is effective for Tyco in the first quarter of 2010. The Company is currently assessing what impact, if any, that FSP No. 142-3 will have on its financial position, results of operations and cash flows.

        In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations." SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that business combinations are still accounted for at fair value. However, the accounting for certain other aspects of business combinations will be affected. Acquisition costs will generally be expensed as incurred. Restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date. In-process research and development will be recorded at fair value as an indefinite-lived intangible at the acquisition date until it is completed or abandoned and its useful life can be determined. Changes in deferred tax asset valuation allowances and uncertain tax positions after the acquisition date will generally impact income tax expense. SFAS No. 141(R) also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141(R) is effective, on a prospective basis, for Tyco in the first quarter of fiscal 2010.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51". SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest prior to the adoption of SFAS No. 160) as equity in the Consolidated Financial Statements. The amount of net income attributable to the noncontrolling interest should be included in consolidated net income on the face of the statement of income. SFAS No. 160 also amends certain of Accounting Research Bulletin No. 51's consolidation procedures in order to achieve consistency with the requirements of SFAS No. 141R. The statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This statement is effective for Tyco in the first quarter of fiscal 2010. The Company is currently assessing what impact, if any, that SFAS No. 160 will have on its financial position, results of operations and cash flows.

        In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets". The FSP requires additional disclosures about plan assets related to an employer's defined benefit pension or other post-retirement plans to enable investors to better understand how investment decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and the significant concentrations of risk within plan assets. The disclosure provisions of FSP FAS 132 (R)-1 are effective for Tyco in the first quarter of fiscal 2010.

2.    Divestitures

        The Company has continued to assess the strategic fit of its various businesses and has pursued divestiture of certain businesses which do not align with its long-term strategy.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)

Held for Sale and Reflected as Continuing Operations

        During the third quarter of 2008, the Company approved a plan to sell a business in its Safety Products segment. This business had been classified as held for sale in the Company's historical Consolidated Balance Sheet in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". During the second quarter of 2009, due to a change in strategy by management, the Company decided not to sell the business. As a result, the business no longer satisfied the requirements to be classified as held for sale in the Company's Consolidated Balance Sheet at March 27, 2009. Accordingly, the Consolidated Balance Sheet at September 26, 2008 was recast to reclassify the business from held for sale to held and used. The Company measured the business at the lower of its (i) carrying amount before it was classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used, or (ii) fair value at the date the decision not to sell was made. The Company recorded a charge of $8 million in the second quarter of 2009 relating to the amount of depreciation and amortization expense that would have been recorded had the asset been continuously classified as held and used.

Discontinued Operations

        As previously reported in Tyco's periodic filings, in July 2008, the Company substantially completed the sale of its Infrastructure Services business, which met the criteria to be presented as discontinued operations. In order to complete the sale of Earth Tech Brasil Ltda. ("ET Brasil") and Earth Tech UK businesses and certain assets in China, the Company was required to obtain consents and approvals to transfer the legal ownership of the business and assets. On January 22, 2009, the Company received the necessary consents and approvals to transfer the legal ownership of its ET Brasil business to Carioca Christiani-Nielsen Engenharia S.A. and received cash proceeds of $13 million. During the fourth quarter of 2008, the Company sold its Earth Tech UK business and received net cash proceeds of $53 million. However, the gain was deferred until receipt of the necessary consents and approvals. On May 12, 2009, the Company received the necessary consents and approvals to transfer the legal ownership of its Earth Tech UK business to AECOM and realized the deferred gain in the Company's Consolidated Statements of Operations during the quarter ended June 26, 2009. Furthermore, on May 8, 2009, the Company received the necessary consents to transfer certain of the China assets and received cash proceeds of $6 million. As a result of the above dispositions, a net pre-tax gain of $31 million was recorded in income from discontinued operations, net of income taxes in the Company's Consolidated Statement of Operations. At June 26, 2009, the necessary consents and approvals for the remaining assets in China had not been obtained by the Company. The Company expects to obtain the necessary consents and approvals during the fourth quarter of fiscal year 2009. At June 26, 2009, the Company has assessed and determined that the carrying value of the remaining assets is recoverable based on current fair value, less cost to sell. The Company will continue to assess recoverability until the remaining assets are sold. See Note 19.

        During April 2008, the Company sold Ancon Building Products ("Ancon"), a manufacturer of stainless steel products used in masonry construction. Ancon was part of the Company's Corporate and Other segment. The sale was completed for $164 million in net cash proceeds and a pre-tax gain of $100 million was recorded which was largely exempt from tax. The gain was recorded in income from discontinued operations, net of income taxes in the Company's Consolidated Statement of Operations.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)

        During February 2008, the Company sold Nippon Dry-Chemical Co., Ltd. ("NDC"), one of the leading companies in the Japanese fire protection industry. NDC was part of the Company's Fire Protection and Safety Products segments. The sale was completed for $50 million in net cash proceeds and a pre-tax gain of $7 million was recorded. The gain was recorded in income from discontinued operations, net of income taxes in the Company's Consolidated Statement of Operations.

        In January 2008, the Company sold a European manufacturer of public address products and acoustic systems, which was part of the Company's Fire Protection Services segment and recorded an $8 million pre-tax loss on sale. The loss was recorded in income from discontinued operations, net of income taxes in the Company's Consolidated Statement of Operations.

        During fiscal year 2007, Tyco completed the spin-offs of its Healthcare and Electronics businesses (the "Separation"). The Company has used available information to develop its best estimates for certain assets and liabilities related to the Separation. In limited instances, final determination of the balances will be made in subsequent periods. During the quarter and nine months ended June 27, 2008, $1 million and $19 million, respectively, were recorded as a reduction to shareholders' equity, primarily related to adjustments to certain pre-Separation tax liabilities. During the quarter and nine months ended June 26, 2009, $0 million and $4 million, respectively, of other items were recorded as an increase to shareholders' equity. Adjustments in the future for the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of Tyco, Covidien and/or Tyco Electronics legal entities and for certain amended income tax returns for the periods prior to the Separation may be recorded to either shareholders' equity or the statement of income depending on the specific item giving rise to the adjustment.

        Net revenue, income from operations, loss on sale and income tax expense for discontinued operations are as follows ($ in millions):

 
  For the
Quarter Ended
  For the
Nine Months Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Net revenue

  $   $ 333   $ 3   $ 1,151  
                   

Pre-tax income (loss) from discontinued operations

  $ 1   $ (28 ) $ 5   $ 50  

Pre-tax gain on sale of discontinued operations

    42     363     36     332  

Economic hedge of Empresa de Transmissao do Oeste Ltda. sale price

        (20 )       (36 )

Income tax benefit (expense)

    1     (38 )   (4 )   (58 )
                   

Income from discontinued operations, net of income taxes

  $ 44   $ 277   $ 37   $ 288  
                   

        Balance sheet information for pending divestitures is as follows ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

Accounts receivable, net

  $   $ 14  

Inventories

        10  

Property, plant and equipment, net

        1  

Other assets

    27     101  
           
 

Total assets

  $ 27   $ 126  
           

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)

 
  June 26,
2009
  September 26,
2008
 

Loans payable and current maturities of long-term debt

  $   $ 4  

Accounts payable

        6  

Accrued and other current liabilities

        46  

Other liabilities

        26  
           
 

Total liabilities

  $   $ 82  
           

Gains (Losses) on divestitures

        During the quarter and nine months ended June 26, 2009, the Company recorded a $3 million loss and $4 million loss, respectively, in restructuring, asset impairment and divestiture charges, net in the Company's Consolidated Statements of Operations in connection with the divestiture and write-down to fair value of certain businesses that did not meet the criteria for discontinued operations. There were no divestiture charges classified in continuing operations during the quarter and nine months ended June 27, 2008.

3.    Restructuring and Asset Impairment Charges, Net

        During the first quarter of 2007, the Company launched a restructuring program (the "2007 Program") across all of the Company's segments, including the corporate organization, to streamline some of the businesses and reduce the operational footprint. Upon initiation of the 2007 Program, the Company expected to incur aggregate charges related to the program of approximately $350 million to $400 million primarily through the end of calendar 2008. As of December 26, 2008, the Company had substantially completed this program.

        During the first quarter of 2009, the Company identified additional opportunities for cost savings through restructuring activities and workforce reductions that are expected to occur in fiscal 2009 and 2010. The Company expects to incur restructuring and restructuring related charges of approximately $200 million in fiscal 2009.

        Restructuring and asset impairment charges, net are as follows ($ in millions):

 
  For the
Quarter Ended
  For the
Nine Months Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

ADT Worldwide

  $ 12   $ 30   $ 56   $ 46  

Flow Control

    5     3     11     5  

Fire Protection Services

    3     1     14     4  

Electrical and Metal Products

    6     5     14     12  

Safety Products

    6     12     39     39  

Corporate and Other

    2     1     8     3  
                   

  $ 34   $ 52   $ 142   $ 109  
                   

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.    Restructuring and Asset Impairment Charges, Net (Continued)

        During the quarters ended June 26, 2009 and June 27, 2008, restructuring and asset impairment charges, net were included in the Company's Consolidated Statements of Operations as follows ($ in millions):

 
  For the
Quarter Ended
  For the
Nine Months Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Cost of sales

  $ 4   $ 6   $ 22   $ 13  

Selling, general and administrative

    1         5     2  

Restructuring, asset impairment and divestiture charges, net

    29     46     115     94  
                   

  $ 34   $ 52   $ 142   $ 109  
                   

2009 Net Restructuring

        Net restructuring and asset impairment charges during the quarter ended June 26, 2009 were $34 million, which include $5 million of accelerated depreciation of assets directly related to the underlying restructuring actions. The remaining charge of $29 million consists of $23 million of employee severance and benefits and $10 million of facility exit and other charges, offset by $4 million of restructuring reversals resulting from the Company completing restructuring activities announced in prior years for amounts less than originally estimated.

        Net restructuring and asset impairment charges during the nine months ended June 26, 2009 were $142 million, which include $26 million of accelerated depreciation of assets directly related to underlying restructuring actions and $6 million of asset impairments. The remaining charge of $110 million consists of $95 million of employee severance and benefits and $25 million of facility exit, offset by $10 million of restructuring reversals resulting from the Company completing restructuring activities announced in prior years for amounts less than originally estimated.

2008 Net Restructuring

        Net restructuring and asset impairment charges during the quarter ended June 27, 2008 were $52 million, which include $5 million of accelerated depreciation of assets expected to become obsolete as a result of the restructuring. The remaining charge of $47 million consists of $16 million of employee severance and benefits, $10 million of facility exit charges, $27 million related to the reacquisition of certain unfavorable franchise rights, and $2 million of asset impairments, offset by $8 million of restructuring reversals resulting from the Company completing restructuring activities announced in prior years for amounts less than originally estimated.

        Net restructuring and asset impairment charges during the nine months ended June 27, 2008 were $109 million, which include $13 million of accelerated depreciation of assets expected to become obsolete as a result of the restructuring. The remaining charge of $96 million consists of $56 million of employee severance and benefits and $25 million of facility exit charges, $27 million related to the reacquisition of certain unfavorable franchise rights, and $4 million of asset impairments, offset by $16 million of restructuring reversals resulting from the Company completing restructuring activities announced in prior years for amounts less than originally estimated.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.    Restructuring and Asset Impairment Charges, Net (Continued)

Restructuring Reserves

        Restructuring reserves from September 26, 2008 to June 26, 2009 by the year in which the restructuring action was initiated are as follows ($ in millions):

 
  Year of Restructuring Action  
 
   
  2007 Program    
   
 
 
  2009   2008   2007   Subtotal   Prior   Total  

Balance at September 26, 2008

  $   $ 98   $ 55   $ 153   $ 16   $ 169  

Charges

    104     10     5     15     1     120  

Reversals

    (2 )   (6 )   (2 )   (8 )       (10 )

Utilization

    (43 )   (50 )   (22 )   (72 )   (1 )   (116 )

Reclass/transfers

        (4 )       (4 )       (4 )

Currency translation

    7     (4 )   (5 )   (9 )   (1 )   (3 )
                           

Balance at June 26, 2009

  $ 66   $ 44   $ 31   $ 75   $ 15   $ 156  
                           

        Restructuring reserves by segment are as follows ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

ADT Worldwide

  $ 60   $ 50  

Flow Control

    6     7  

Fire Protection Services

    27     27  

Electrical and Metal Products

    10     14  

Safety Products

    49     66  

Corporate and Other

    4     5  
           

  $ 156   $ 169  
           

        At June 26, 2009 and September 26, 2008, restructuring reserves were included in the Company's Consolidated Balance Sheets as follows ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

Accrued and other current liabilities

  $ 121   $ 148  

Other liabilities

    35     21  
           

  $ 156   $ 169  
           

4.    Acquisitions

Acquisitions

        During the quarter and nine months ended June 26, 2009, cash paid for acquisitions included in continuing operations totaled $0 million and $49 million, respectively, which primarily related to the acquisition of Vue Technology, Inc., a provider of radio frequency identification (RFID) technology, for $43 million by the Company's Safety Products segment.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

        During the quarter and nine months ended June 27, 2008, cash paid for acquisitions included in continuing operations totaled $92 million and $119 million, respectively, which primarily related to the acquisition of substantially all of the assets of Winner Security Services LLC ("Winner") for $90 million by the Company's ADT Worldwide segment. This transaction was accounted for as a business combination and the Company applied Emerging Issues Task Force ("EITF") Issue No. 04-01, "Accounting for Preexisting Relationships between the Parties to a Business Combination," since there was a preexisting relationship between the Company and Winner that needed to be assessed and accounted for separately. After assessing the specific facts and circumstances related to this transaction, the Company recorded a $27 million charge in the third quarter of 2008 for the reacquisition of franchise rights that were deemed to be unfavorable to the Company when compared to pricing for current market transactions for similar arrangements. The Company utilized an income method valuation approach in measuring the value of the preexisting relationship. Since this charge relates to a change in the manner in which the Company will conduct business in these territories, it has been reflected as a restructuring charge. The remaining purchase price is comprised of $58 million of indefinite-lived intangibles and $5 million of goodwill.

        The results of operations of the acquired company have been included in Tyco's consolidated results from the acquisition date. The acquisition did not have a material effect on the Company's financial position, results of operation or cash flows.

ADT Dealer Program

        During the quarter and nine months ended June 26, 2009, the Company paid $130 million and $361 million of cash, respectively, to acquire approximately 116,000 and 338,000 customer contracts for the electronic security services through the ADT dealer program. During the quarter and nine months ended June 27, 2008, Tyco paid $82 million and $269 million of cash, respectively, to acquire approximately 80,000 and 262,000 customer contracts for electronic security services through the ADT dealer program.

5.    Income Taxes

        The Company did not have a significant change to its unrecognized tax benefits during the quarter and nine months ended June 26, 2009.

        Many of Tyco's uncertain tax positions relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local or foreign jurisdictions. Open tax years in significant jurisdictions are as follows:

Jurisdiction
  Years Open To
Audit
 

United States

    1997-2008  

Australia

    2004-2008  

France

    1999-2008  

Germany

    1998-2008  

United Kingdom

    2000-2008  

Canada

    2000-2008  

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Income Taxes (Continued)

        Based on the current status of its income tax audits, the Company does not anticipate a significant change to its unrecognized tax benefits in the next twelve months.

        At each balance sheet date, management evaluates whether the Company's deferred tax assets are more likely than not of being realized and if sufficient future taxable income will be available by assessing current period and projected operating results and other pertinent data. At June 26, 2009, the Company had recorded deferred tax assets of $1.9 billion, net of valuation allowances of $750 million. If current economic conditions persist or worsen, future taxable income of entities with deferred tax assets could be negatively impacted, which may require additional valuation allowances to be recorded in future reporting periods related to the Company's deferred tax assets.

Tax Sharing Agreement

        In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a Tax Sharing Agreement that generally governs Covidien's, Tyco Electronics' and Tyco's respective rights, responsibilities, and obligations after the Separation with respect to taxes, including ordinary course of business taxes and taxes, if any, that may be incurred as a result of any failure of the distribution of all of the shares of Covidien or Tyco Electronics to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Code or certain internal transactions undertaken in anticipation of the spin-offs to qualify for tax-favored treatment under the Code.

        Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco's, Covidien's and Tyco Electronics' income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42% and 31%, respectively, of shared income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and Tyco Electronics' U.S. and certain non-U.S. income tax returns. All costs and expenses associated with the management of these shared tax liabilities are shared equally among the parties. At June 26, 2009 and September 26, 2008, Tyco has recorded a net receivable from Covidien and Tyco Electronics of $123 million and $126 million, respectively, of which $122 million and $113 million, respectively, are included in other noncurrent assets and $1 million and $13 million, respectively, are included in prepaid expenses and other current assets as the Company's estimate of their Tax Sharing obligations. Other liabilities include $554 million at both June 26, 2009 and September 26, 2008 for the fair value of Tyco's obligations under the Tax Sharing Agreement, determined in accordance with FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Tyco assesses the shared tax liabilities and related FIN 45 liability at each reporting period. The receivable and liability were initially recognized with an offset to shareholders' equity in 2007. In the first quarter of 2008, in connection with the adoption of FIN 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109," and the related increase in uncertain tax positions for shared tax liabilities under the Tax Sharing Agreement, Tyco increased its receivable from Covidien and Tyco Electronics under the Tax Sharing Agreement with a corresponding increase to other income, net by $40 million ($0.08 for both basic and diluted earnings per share). In addition, during the quarter ended June 26, 2009, no income for other activity was recorded. During the quarter ended June 27, 2008 there was no income for other activity recorded. During the nine months ended June 26, 2009 and June 27, 2008, $5 million and $10 million, respectively, of income for other activity were recorded in accordance with the Tax Sharing Agreement.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Income Taxes (Continued)

        Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected to occur as the audit process by local taxing authorities is completed for the impacted years. Given the nature of the shared liabilities, the maximum amount of potential future payments is not determinable.

        In the event the Separation is determined to be taxable and such determination was the result of actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure would be responsible for all taxes imposed on each company as a result thereof. If such determination is not the result of actions taken by any of the three companies after the Separation, then Tyco, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%, respectively, of any taxes imposed on any of the companies as a result of such determination. Such tax amounts could be significant. The Company is responsible for all of its own taxes that are not shared pursuant to the Tax Sharing Agreement's sharing formula. In addition, Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula.

        If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be liable under applicable tax law for such liabilities and be required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of its agreed-upon share of Tyco's, Covidien's and Tyco Electronics' tax liabilities. See Note 17 for further discussion of guarantees and indemnifications extended between Tyco, Covidien and Tyco Electronics.

Other Income Tax Matters

        The Company and its subsidiaries' income tax returns periodically are examined by various tax authorities. In connection with these examinations, tax authorities, including the U.S. Internal Revenue Service ("IRS"), have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. The Company has continuing dialogue with the IRS related to these proposed adjustments with the objective of resolving some or all of these matters. Management has assessed the issues related to these adjustments for recognition and measurement under FIN 48 and has recorded unrecognized tax benefits in accordance with FIN 48. The ultimate resolution of these matters is uncertain and could result in a material impact to the Company's financial position, results of operations, cash flows or the effective tax rate in future reporting periods.

        In 2004, in connection with the IRS audit of the 1997 through 2000 years, the Company submitted to the IRS proposed adjustments to certain prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the proposed adjustments, and the Company developed proposed amendments to U.S. federal income tax returns for additional periods through 2002. On the basis of previously accepted amendments, the Company has determined that these adjustments will more-likely-than-not be accepted and, accordingly, has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Income Taxes (Continued)

        Additionally, during 2008 the Company completed proposed amendments to its U.S. federal income tax returns for periods subsequent to 2002, which primarily reflect the roll forward through 2006 of the amendments for the periods 1997 to 2002. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows. While the final adjustments cannot be determined until the income tax return amendment process and the IRS review is completed, the Company believes that any resulting adjustments will not have a material impact on its financial condition, results of operations or cash flows.

        The IRS proposed civil fraud penalties against a subsidiary that was distributed to Tyco Electronics in connection with the Separation. The penalties allegedly arise from actions of former executives taken in connection with intercompany transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory guidelines, the Company estimates the proposed penalties could range between $30 million and $50 million. The Company, as Audit Managing Party as specified in the Tax Sharing Agreement, will vigorously oppose the assertion of any such penalties against Tyco Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company's former Chief Tax Officer on a charge of willful filing of a false tax return. This is a pre-Separation shared tax matter under the Tax Sharing Agreement.

        Except for earnings that are currently distributed, no additional material provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of the distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.

        The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. Further, management has reviewed with tax counsel certain of the issues raised by these taxing authorities and the adequacy of these recorded amounts. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when such liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not expected within one year.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.    Earnings Per Share

        The reconciliations between basic and diluted earnings per share are as follows (in millions, except per share data):

 
  Quarter Ended
June 26, 2009
  Quarter Ended
June 27, 2008
 
 
  Income   Shares   Per Share
Amount
  Income   Shares   Per Share
Amount
 

Basic earnings per share:

                                     
 

Income from continuing operations

  $ 243     473   $ 0.51   $ 199     482   $ 0.41  
 

Share options, restricted share awards and deferred stock units

        2               4        
                               

Diluted earnings per share:

                                     

Income from continuing operations, giving effect to dilutive adjustments

  $ 243     475   $ 0.51   $ 199     486   $ 0.41  
                           

 

 
  Nine Months
Ended June 26, 2009
  Nine Months
Ended June 27, 2008
 
 
  Loss   Shares   Per Share
Amount
  Income   Shares   Per Share
Amount
 

Basic earnings per share:

                                     
 

(Loss) income from continuing operations

  $ (2,040 )   473   $ (4.31 ) $ 831     487   $ 1.71  
 

Share options, restricted share awards and deferred stock units

                      4        
                               

Diluted earnings per share:

                                     

(Loss) income from continuing operations, giving effect to dilutive adjustments

  $ (2,040 )   473   $ (4.31 ) $ 831     491   $ 1.70  
                           

        The computation of diluted earnings per share for the quarter and nine months ended June 26, 2009 excludes the effect of the potential exercise of options to purchase approximately 23 million shares and 27 million shares, respectively, and excludes restricted share awards and deferred stock units of approximately 5 million shares and 6 million shares, respectively, because the effect would be anti-dilutive.

        The computation of diluted earnings per share for both the quarter and nine months ended June 27, 2008 excludes the effect of the potential exercise of options to purchase approximately 17 million and 19 million shares, respectively, and excludes restricted share awards and deferred stock units of approximately 4 million shares in both periods because the effect would be anti-dilutive.

7.    Goodwill and Intangible Assets

        Annually, in the fiscal fourth quarter, and more frequently if triggering events occur, the Company tests goodwill for impairment by comparing the fair value of each reporting unit with its carrying amount.

        As previously reported, the Company began to experience a decline in revenue during the first quarter of 2009 in its ADT Worldwide, Fire Protection Services and Safety Products segments as a

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


result of a slowdown in the commercial markets including the retailer end market as well as a decline in sales volume at its Electrical Metal Products segment. Although the Company considered and concluded that these factors did not constitute triggering events during the first quarter of 2009, the continued existence of these conditions during the second quarter of 2009, along with downward revisions to forecasted results, restructuring actions and weaker industry outlooks, caused the Company to conclude that sufficient indicators of impairment existed for certain reporting units. Reporting units within ADT Worldwide, Fire Protection Services and Safety Products segments continued to be negatively impacted as a result of a slowdown in the commercial markets including the retailer end market. Additionally, the Company's Electrical and Metal Products reporting unit continued to be negatively impacted by a decline in sales volume due to the downturn in the non-residential construction market. During the second quarter of 2009, the Company determined that these underlying events and circumstances constituted triggering events for six reporting units where such events would more likely than not reduce the fair value below their respective carrying amounts. Specifically, the Company concluded that its Europe, Middle East and Africa ("EMEA") Security and EMEA Fire reporting units within the ADT Worldwide and Fire Protection Services segments, respectively, Electrical and Metal Products reporting unit within the Electrical and Metal Products segment and Access Control and Video Systems ("ACVS"), Life Safety and Sensormatic Retail Solutions ("SRS") reporting units within the Safety Products segment experienced triggering events. As a result of the triggering events, the Company assessed the recoverability of the reporting unit's long-lived assets in accordance with SFAS No. 144 and concluded that the carrying amounts were recoverable at March 27, 2009. Subsequently, the Company performed the first step of the goodwill impairment test for the reporting units.

        To perform the first step of the goodwill impairment test under SFAS No. 142 for the six reporting units with triggering events, the Company compared the carrying amounts of these reporting units to their estimated fair values. Fair value for each reporting unit is determined utilizing a discounted cash flow analysis based on the Company's forecasted cash flows and revenue and operating income growth rates, discounted using an estimated weighted average cost of capital of market participants. A market approach was utilized to corroborate the discounted cash flow analysis performed at each reporting unit. If the carrying amount of a reporting unit exceeded its fair value, goodwill was considered potentially impaired. In determining fair value, management relied on and considered a number of factors, including operating results, business plans, economic projections, cash flow forecasts, market data and the Company's overall market capitalization. Fair value determinations are sensitive to changes in the factors described above as well as to inherent uncertainties in applying them to the analysis of goodwill recoverability.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)

        As described above, the Company utilized a discounted cash flow analysis for determining the fair value of each of the reporting units where triggering events had occurred. Based on the factors described above, actual and anticipated reductions in demand for the reporting unit's products and services as well as increased risk due to current economic uncertainty, the estimates of future cash flows used in the second quarter of 2009 discounted cash flow analyses were revised downward from the Company's most recent test conducted during the fourth quarter of 2008. The range of the weighted-average cost of capital utilized was increased to reflect increased risk due to current economic volatility and uncertainties related to demand for the Company's products and services. The weighted-average cost of capital were as follows:

 
  Second Quarter
of 2009
  Fourth Quarter
of 2008

Weighted-Average Cost of Capital

  10.9% to 12.8%   10.0% to 11.7%

        The results of the first step of the goodwill impairment test indicated there was a potential impairment of goodwill in each of the six reporting units identified with triggering events, as the carrying amounts of the reporting units exceeded their respective fair values. As a result, the Company performed the second step of the goodwill impairment test for these reporting units in accordance with SFAS No. 142. The implied fair values of goodwill were determined by allocating the fair values of each reporting unit to all of the assets and liabilities of the applicable reporting unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination. The results of the second step of the goodwill impairment test indicated that the implied goodwill amount was less than the carrying amount of goodwill for each of the aforementioned reporting units. During the second quarter of 2009, the Company recorded an aggregate non-cash impairment charge of $2.6 billion ($2.6 billion after-tax). The non-cash impairment charge was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the nine months ended June 26, 2009. Specifically, the Company recorded the following non-cash goodwill impairment charges to goodwill at the following reporting units ($ in millions):

Reporting Unit
  Pre-tax
Charge
  After-tax
Charge
 

EMEA Fire

  $ 180   $ 179  

EMEA Security

    613     610  

Electrical and Metal Products

    935     913  

ACVS

    327     321  

Life Safety

    240     236  

SRS

    346     340  
           

Total

  $ 2,641   $ 2,599  
           

        During the third quarter of 2009, the Company considered and evaluated whether its goodwill balance at June 26, 2009 was recoverable. In order to evaluate the sensitivity of the fair values associated with the Company's reporting units, the Company utilized the discounted cash flow analyses from the Company's most recent tests updated to reflect each reporting unit's most recent financial forecast as well as applying a hypothetical 100 basis point increase in the weighted average cost of capital. Under this scenario, certain reporting units within the Company's ADT Worldwide, Fire Protection Services and Safety Products segments would have less than a ten percent excess of fair

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


value over carrying amount. The goodwill balance for these reporting units with less than ten percent excess of fair value over carrying amount in the aggregate was approximately $1 billion at June 26, 2009.

        As described above, the Company considers market capitalization as one of a number of factors in its evaluation of recoverability of goodwill. The Company considered and evaluated its market capitalization as well as the other factors described above and concluded that its remaining goodwill balance of $8.6 billion at June 26, 2009 is recoverable. As part of the Company's ongoing monitoring efforts, the Company will continue to consider the uncertainty of the current global economic environment and volatility in the stock market as well as in the Company's own stock price in assessing goodwill recoverability.

        Given the current economic environment and the uncertainties regarding the potential impact on the Company's business, there can be no assurance that the Company's estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the goodwill impairment test during the second quarter of 2009 will prove to be accurate predictions of the future. If the Company's assumptions regarding forecasted cash flow and revenue and operating income growth rates of certain reporting units are not achieved, it is possible that a further impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material.

        The changes in the carrying amount of goodwill by segment are as follows ($ in millions):

 
  ADT
Worldwide
  Flow
Control
  Fire
Protection
Services
  Electrical
and Metal
Products
  Safety
Products
  Total  

Balance at September 26, 2008

  $ 5,081   $ 1,993   $ 1,467   $ 1,024   $ 2,054   $ 11,619  

Purchase Accounting Adjustments

    5         (1 )       (8 )   (4 )

Acquisitions

        2             33     35  

Divestitures

        (3 )       (6 )       (9 )

Impairment

    (613 )       (180 )   (935 )   (913 )   (2,641 )

Goodwill transfer due to segment realignment

    (58 )   2     56     (7 )   7      

Currency translation

    (175 )   (76 )   (25 )   (76 )   (27 )   (379 )
                           

Balance at June 26, 2009

  $ 4,240   $ 1,918   $ 1,317   $   $ 1,146   $ 8,621  
                           

        Goodwill for reporting units that have met the held for sale criteria is included in assets held for sale on the consolidated balance sheets and excluded from the table above. See Note 2.

Intangible Assets

        Annually, in the fiscal fourth quarter, and more frequently if triggering events occur, the Company tests indefinite-lived intangible assets for impairment.

        Indefinite-lived intangible assets consisting primarily of trade names are tested for impairment using either a relief from royalty method or excess earnings method. The impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


impairment loss is recognized in an amount equal to that excess. Fair value determinations require considerable judgment and are sensitive to change. Significant judgments inherent in this analysis include the selection of appropriate discount rates and terminal year growth rate assumptions and estimates of the amount and timing of future cash flows attributable to the underlying intangible assets. Discount rate assumptions are based on an assessment of the risk inherent in the projected future cash flows generated by the intangible asset. Also subject to judgment are assumptions about royalty rates, which are based on the estimated rates at which similar trademarks are being licensed in the marketplace.

        As previously reported, the Company began to experience a decline in revenue during the first quarter of 2009 at its ADT Worldwide and Safety Products segments due to a slowdown in the commercial markets including the retailer end market. Although the Company considered and concluded these factors did not constitute triggering events during the first quarter of 2009, the continued existence of these conditions during the second quarter of 2009, along with downward revisions to forecasted results, restructuring actions and weaker industry outlooks, caused the Company to conclude that sufficient indicators of impairment existed for certain indefinite-lived intangible assets. This deterioration of the business environment related to the retailer business of the Company's ADT Worldwide and Safety Products segments resulted in a further lowering of management's projections of revenues from the retailer end market during the second quarter of 2009.

        Based on these factors and uncertainties, estimates of future cash flows used in determining the fair value of the Company's Safety Products Sensormatic tradename as well as its ADT Worldwide franchise rights relating to Winner and Sensormatic Security Corp ("SSC") during the second quarter of 2009 were revised downward relative to the estimates used in the Company's most recent test during the fourth quarter of 2008. The range of the discount rates utilized was increased to reflect increased risk due to current economic volatility and uncertainties related to demand for the Company's products and services. The discount rates were as follows:

 
  Second Quarter
of 2009
  Fourth Quarter
of 2008
 

Discount Rate

  12.0% to 12.3%     10.4 %

        The results of the impairment test conducted during the second quarter of 2009 indicated that the Safety Products Sensormatic tradename and ADT Worldwide Winner and SSC franchise rights estimated fair values were less than their respective carrying amounts. As such, the Company recorded an aggregate non-cash impairment charge of $64 million ($40 million after-tax) during the second quarter of 2009. The non-cash impairment charge was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the nine months ended

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


June 26, 2009. Specifically, the Company recorded the following non-cash intangible asset impairment charges to reduce the carrying amount of the following indefinite-lived intangible assets (in millions):

Intangible Asset
  Pre-tax
Charge
  After-tax
Charge
 

Sensormatic tradename

  $ 42   $ 26  

Winner franchise rights

    14     9  

SSC franchise rights

    8     5  
           

Total

  $ 64   $ 40  
           

        The carrying amount of these intangible assets is $141 million at June 26, 2009 and the Company believes such amount is recoverable. However, as indicated above, the fair value determinations require considerable judgment and are sensitive to change. In light of current economic conditions and the downturn experienced within the commercial markets including the retailer end market, further or protracted deterioration, especially related to the Company's retailer business within its ADT Worldwide and Safety Products segments, could result in additional impairments to these assets in future periods.

        Given the current economic environment and the uncertainties regarding the potential impact on the Company's business, there can be no assurance that the Company's estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the indefinite-lived intangible asset impairment test during the second quarter of 2009 will prove to be accurate predictions of the future. If the Company's assumptions regarding forecasted cash flow and revenue and operating income growth rates are not achieved, it is possible that a further impairment charge may need to be recorded. However, it is not possible at this time to determine if an impairment charge would result or if such charge would be material.

        The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets ($ in millions):

 
  June 26, 2009   September 26, 2008
 
  Gross
Carrying
Amount
  Accumulated
Amortization
  Weighted Average
Amortization
Period
  Gross
Carrying
Amount
  Accumulated
Amortization
  Weighted Average
Amortization
Period

Amortizable:

                               
 

Contracts and related customer relationships

  $ 6,338   $ 4,175   14 years   $ 6,136   $ 3,958   14 years
 

Intellectual property

    546     444   19 years     553     406   17 years
 

Other

    17     12   12 years     17     12   15 years
                         
 

Total

  $ 6,901   $ 4,631   15 years   $ 6,706   $ 4,376   15 years
                         

Non-Amortizable:

                               
 

Intellectual property

  $ 210             $ 253          
 

Other

    86               110          
                             
 

Total

  $ 296             $ 363          
                             

        Intangible asset amortization expense for the quarters ended June 26, 2009 and June 27, 2008 was $127 million and $129 million, respectively. Intangible asset amortization expense for the nine months ended June 26, 2009 and June 27, 2008 was $384 million and $393 million, respectively.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)

        The estimated aggregate amortization expense on intangible assets is expected to be approximately $150 million for the remainder of 2009, $400 million for 2010, $350 million for 2011, $300 million for 2012, $250 million for 2013 and $200 million for 2014.

8.    Debt

        Debt was as follows ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

Commercial paper

  $ 200   $ 116  

6.125% public notes due 2008(2)

        300  

6.125% public notes due 2009(2)

        215  

6.75% public notes due 2011

    516     516  

6.375% public notes due 2011

    849     849  

Revolving senior credit facility due 2012

        286  

6.0% public notes due 2013

    655     655  

8.5% public notes due 2019

    750      

7.0% public notes due 2019

    434     435  

6.875% public notes due 2021

    716     717  

7.0% public notes due 2028

    14     16  

6.875% public notes due 2029

    21     23  

Other(1)(2)

    90     136  
           

Total debt

    4,245     4,264  

Less current portion

    19     555  
           

Long-term debt

  $ 4,226   $ 3,709  
           

(1)
$19 million of the amount shown as other is the current portion of long-term debt as of June 26, 2009.

(2)
These instruments, plus $40 million of the amount shown as other, comprise the current portion of long-term debt as of September 26, 2008.

        The carrying amount of Tyco's debt subject to the provisions of FSP SFAS 107-1 and APB 28-1 at June 26, 2009 was $4,155 million. The Company has determined the fair value of such debt to be $4,279 million at June 26, 2009. 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 which is traded in active markets. At June 26, 2009, the fair value of the Company's debt which is actively traded was $4,047 million. When quoted market prices are not readily available or representative of fair value, the Company utilizes market information of comparable debt with similar terms, such as maturities, interest rates and credit risk to determine the fair value of its debt which is traded in markets that are not active. At June 26, 2009, the fair value of the Company's debt which is not actively traded was $32 million. Additionally, the Company believes the carrying amount of its commercial paper of $200 million approximates fair value based on the maturities of such debt and the frequency in which the interest rates reset.

        In May 2008, Tyco International Finance S.A. ("TIFSA") commenced issuing commercial paper to U.S. institutional accredited investors and qualified institutional buyers. Borrowings under the commercial paper program are available for general corporate purposes. As of June 26, 2009 and

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8.    Debt (Continued)


September 26, 2008, TIFSA had $200 million and $116 million, respectively, of commercial paper outstanding bearing interest at an average rate of 0.59% and 2.95%, respectively.

        At June 26, 2009 and September 26, 2008, the Company classified $200 million and $116 million, respectively, of short-term commercial paper as long-term. Settlement of the amount outstanding at June 26, 2009 is not expected to require the use of working capital in the next year, as the Company has both the intent and the ability to refinance this debt on a long-term basis.

        On January 9, 2009, TIFSA issued $750 million aggregate principal amount of 8.5% Notes due on January 15, 2019, which are fully and unconditionally guaranteed by the Company (the "2019 Notes"). TIFSA received net proceeds of approximately $745 million after underwriting discounts and offering expenses. The net proceeds may be used for general corporate purposes, which may include repayment of indebtedness, acquisitions, additions to working capital, repurchase of common shares, capital expenditures and investments in the Company's subsidiaries. The 2019 Notes are unsecured and rank equally with TIFSA's other unsecured and unsubordinated debt. TIFSA may redeem any of the 2019 Notes at any time by paying the greater of the principal amount of the notes or a "make-whole" amount, plus accrued and unpaid interest. The holders of the 2019 Notes have the right to require TIFSA to repurchase all or a portion of the notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control triggering event, which requires both a change of control and a rating event as defined by the Indenture governing the Notes. Additionally, the holders of the 2019 Notes have the right to require the Company to repurchase all or a portion of the 2019 Notes on July 15, 2014 at a purchase price equal to 100% of the principal amount of the notes tendered, plus accrued and unpaid interest. Otherwise, the notes mature on January 15, 2019. The Company incurred approximately $5 million of debt issuance costs in connection with the transaction, which includes underwriter discounts, as well as legal, accounting and rating agency fees. The debt issuance costs will be amortized from the date of issuance to the earliest redemption date, which is July 15, 2014. Interest is payable semiannually on January 15th and July 15th. The interest rate payable on the 2019 Notes is subject to escalations, as defined by the Indenture, if either Moody's or S&P downgrades the Company's debt rating below investment grade. The 2019 Notes will not be subject to the preceding adjustments if at any time the Company's debt rating increases one level above its current rating to A3 and A- for Moody's and S&P, respectively.

        On January 15, 2009, TIFSA made a payment of $215 million to extinguish all of its 6.125% notes due 2009 which matured on the same date. Additionally, in November 2008, TIFSA made a payment of $300 million to extinguish all of its 6.125% notes due 2008.

        On June 24, 2008, Tyco and TIFSA entered into a $500 million senior unsecured revolving credit agreement with Citibank, N.A., as administrative agent for the lenders party thereto. This credit agreement has a three-year term. Borrowings under this agreement have a variable interest rate based on LIBOR or an alternate base rate. The margin over LIBOR can vary based on changes in the Company's credit rating and facility utilization. Together with the existing $1.25 billion five-year senior revolving credit agreement, dated as of April 25, 2007, the Company's total committed revolving credit line was $1.75 billion. These revolving credit facilities may be used for working capital, capital expenditures and general corporate purposes. On January 29, 2009, the Company repaid $686 million to extinguish the entire outstanding balance under its revolving credit facilities. As of June 26, 2009, there were no amounts drawn under these facilities.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8.    Debt (Continued)

        On September 15, 2008, Lehman Brothers Holdings Inc. ("Lehman") filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. Lehman was one of the lenders in the Company's $1.25 billion revolving credit facility with a commitment of $60 million. Our $500 million credit facility did not have a commitment from Lehman.

        On December 26, 2008, Lehman relinquished all of its rights and obligations as a lender under the $1.25 billion credit facility. At that time, Lehman assigned all of its commitment under the facility to TIFSA. As a result, the aggregate available commitment under the facility was reduced by the assigned amount. As of June 26, 2009, the aggregate available commitment under the Company's senior revolving credit facilities was $1.69 billion, $200 million of which was dedicated to backstop all of the Company's commercial paper outstanding as of such date.

9.    Financial Instruments

Derivative Instruments

        The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, debt and derivative financial instruments. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximated book value at June 26, 2009. See below for the fair value of investments and financial instruments and Note 8 for debt.

        In the normal course of business, Tyco is exposed to market risk arising from changes in currency exchange rates and interest rates. The Company uses derivative financial instruments to manage exposures to foreign currency and interest rate 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 manages foreign currency exchange rate risk through the use of derivative financial instruments comprised principally of forward foreign currency exchange contracts which are not designated as hedging instruments for accounting purposes. The objective of those derivatives instruments is to minimize the potential variability in cash flows associated with intercompany loans and accounts receivable, accounts payable and forecasted transactions that are denominated in certain foreign currencies. Effective March 17, 2009, Tyco changed its jurisdiction of incorporation from Bermuda to Switzerland. Until January 1, 2011 Tyco intends to make dividend payments in the form of a reduction of capital, denominated in Swiss francs. However, the Company expects to actually pay dividends in U.S. dollars, based on exchange rates in effect shortly before the payment date. Fluctuations in the value of the U.S. dollar compared to the Swiss Franc between the date the dividend is declared and paid will increase or decrease the U.S. dollar amount required to be paid. The Company manages the potential variability in cash flows associated with the dividend payments by entering into derivative financial instruments used as economic hedges of the underlying risk.

        The Company manages interest rate risk through the use of interest rate swap transactions with financial institutions acting as principal counterparties, which are designated as fair value hedges for accounting purposes. The Company enters into interest rate swap transactions with the objective of managing the exposure to interest rate risk by converting the interest rates on fixed-rate debt to variable rates. In these contracts, the Company agrees with financial institutions acting as principal

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9.    Financial Instruments (Continued)


counterparties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount.

        For derivative instruments that are designated and qualify as fair value hedges, the Company documented the relationships between the hedging instruments and hedged items and linked derivatives designated as fair value hedges to specific debt issuances. For transactions designated as hedges, the Company also assessed and documented at the hedge's inception whether the derivatives used in hedging transactions were effective in offsetting changes in fair values associated with the hedged items. The Company will continue to assess hedge effectiveness on an on-going basis. The fair value hedges did not result in any hedge ineffectiveness for the quarter ended June 26, 2009.

        The Company does not use derivative financial instruments for trading or speculative purposes.

        All derivative financial instruments are reported on the Consolidated Balance Sheet at fair value with changes in the fair value of the derivative financial instruments recognized currently in earnings in accordance with SFAS No. 133. The following table summarizes the fair value of derivative instruments and their location in the Consolidated Balance Sheet as of June 26, 2009 ($ in millions).

Fair Values of Derivative Instruments

 
  Balance Sheet
Location
  Fair Value
DR/(CR)
  Balance Sheet
Location
  Fair Value
DR/(CR)
 

Derivatives not designated as hedging instruments under Statement No. 133:

                     

Derivative foreign exchange contracts in an asset position(1)

 

Other Current

       

Other Current

       

  Assets   $ 25   Liabilities   $ 1  

Derivative foreign exchange contracts in a liability position(1)

 

Other Current

       

Other Current

       

  Assets     (1 ) Liabilities     (8 )
                   

Net Asset/(Liability)

      $ 24       $ (7 )
                   

Derivatives designated as hedging instruments under Statement No. 133:

                     

Derivative interest rate swap contracts

 

Other Assets

   
1
       
(—

)
                   

Total Asset/(Liability)

      $ 25       $ (7 )
                   

(1)
The Company applies the guidance in FASB Interpretation 39, Offsetting of Amounts Related to Certain Contracts, which permits the netting of derivative assets and liabilities when aggregating derivative contracts for presentation in the consolidated financial statements if certain criteria are met. The table above presents such contracts on a gross basis as required by SFAS No. 161.

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9.    Financial Instruments (Continued)

        The following table summarizes the fair value of derivative instruments and their location in the Consolidated Statements of Operations at June 26, 2009 ($ in millions).

The Effect of Derivative Instruments on the Consolidated Statements of Operations

 
   
  Amount of Gain or (Loss)
Recognized in Earnings on Derivative
 
Derivatives not designated as hedging
instruments under Statement No. 133:
  Location of Gain or
(Loss) Recognized in
Earnings on Derivative
  For the
Quarter Ended
June 26, 2009
  For the
Nine Months Ended
June 26, 2009
 

Foreign Exchange Contracts(1)

  Selling, general and              

  administrative expenses   $ (4 ) $ (9 )

Foreign Exchange Contracts(2)

  Other income (expense), net   $ 6   $ 27  

(1)
Includes economic hedges related to operating activities

(2)
Includes economic hedges related to dividends declared in Swiss Francs

        As of June 26, 2009, the total gross notional amount of the Company's foreign exchange contracts was $0.6 billion.

 
   
  Amount of Gain or (Loss)
Recognized in Earnings on Derivative
 
Derivatives designated as hedging
instruments under Statement No. 133:
  Location of Gain or
(Loss) Recognized in
Earnings on Derivative
  For the
Quarter Ended
June 26, 2009
  For the
Nine Months Ended
June 26, 2009
 

Interest Rate Swap Contracts(1)

  Interest expense   $ 1   $ 1  

(1)
The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged item in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps. For the quarter and nine months ended June 26, 2009, the Company recognized a $1 million loss on the underlying debt issuances.

        As of June 26, 2009, the total gross notional amount of the Company's interest rate contracts was $1.4 billion.

Counterparty Credit Risk

        The use of derivative financial instruments exposes the Company to counterparty credit risk. If the counterparty fails to perform, the Company is exposed to losses if the derivative is in an asset position. When the fair value of a derivative instrument is an asset, the counterparty has to pay the Company to settle the contract. This exposes the Company to credit risk. However, when the fair value of a derivative instrument is a liability, the Company has to pay the counterparty to settle the contract and therefore there is no 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 long-term Standard & Poor's and Moody's credit ratings of A-/A3 or higher. To further reduce the risk of loss, the Company generally enters into International Swaps and Derivatives Association master agreements with substantially all of its counterparties. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable

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9.    Financial Instruments (Continued)


receivables and payables with the same counterparty to be offset on the Consolidated Balance Sheets, providing for a more meaningful balance sheet presentation of credit exposure. 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. As of June 26, 2009, the Company was exposed to industry concentration with financial institutions as well as risk of loss if an individual counterparty or issuer failed to perform its obligations under contractual terms. The maximum amount of loss that the Company would incur, without giving consideration to the effects of legally enforceable master netting agreements, is approximately $26 million.

Fair Value of Financial Instruments

        Effective September 27, 2008 the Company adopted the provisions of SFAS No. 157 for all financial assets and liabilities as well as non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 provides a single definition of fair value, establishes a comprehensive framework for measuring fair value and expands the related disclosure requirements.

        Specifically, SFAS No. 157 requires fair value to be determined based on the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 emphasizes that fair value is a market-based measurement based on assumptions that "market participants" would use to price the asset or liability. Accordingly, the SFAS No. 157 framework considers markets or observable inputs as the preferred source of value followed by assumptions based on hypothetical transactions, in the absence of market inputs. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company's own credit risk.

        Additionally, SFAS No. 157 establishes a three-level hierarchy that ranks the quality and reliability of information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In cases where two or more levels of inputs are used to determine fair value, a financial instrument's level is determined based on the lowest level input that is considered significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized as follows:

    Level 1—inputs are based upon quoted prices (unadjusted) in active markets for identical assets or liabilities which are accessible as of the measurement date.

    Level 2—inputs are based upon quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations for the asset or liability that are derived principally from or corroborated by market data for which the primary inputs are observable, including forward interest rates, yield curves, credit risk and exchange rates.

    Level 3—inputs for the valuations are unobservable and are based on management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values

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9.    Financial Instruments (Continued)

      are therefore determined using model-based techniques such as option pricing models and discounted cash flow models.

Investments

        Investments primarily include cash equivalents, U.S. government obligations and corporate debt securities.

        When available, the Company uses quoted market prices to determine the fair value of investment securities. Such investments are included in Level 1. When quoted market prices are not readily available, pricing determinations are made based on the results of 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 debt securities and corporate debt securities.

Derivative Financial Instruments

        As described above, under the caption "Derivative Instruments" derivative assets and liabilities consist principally of forward foreign currency exchange contracts and interest rate swaps. The fair values for these derivative financial instruments are derived from pricing models that take into account the contractual terms and features of each instrument, forward foreign currency rates for the Company's foreign exchange contracts and yield curves for the Company's interest rate swaps existing at the end of the period. Valuations are adjusted to reflect creditworthiness of the counterparty for assets and the creditworthiness of the Company for liabilities. Such adjustments are based on observable market evidence and are categorized as Level 2 exposures.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

        The following table presents the Company's assets and liabilities measured at fair value on a recurring basis at June 26, 2009 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the valuation.

($ in millions)
  Level 1   Level 2   Fair Value at
June 26, 2009
 

Assets

                   

Available-for-Sale Securities

  $ 52   $ 269   $ 321  

Derivative foreign exchange contracts in an asset position(1)

        24     24  

Derivative interest rate swap contracts

        1     1  
               
 

Total

  $ 52   $ 294   $ 346  
               

Liabilities

                   

Derivative foreign exchange contracts in a liability position(1)

  $   $ (7 ) $ (7 )
               

(1)
The Company applies the guidance in FASB Interpretation 39, Offsetting of Amounts Related to Certain Contracts, which permits the netting of derivative assets and liabilities when aggregating derivative contracts for presentation in the consolidated financial statements if certain criteria are met. These amounts include fair value adjustments related to the Company's own credit risk and counterparty credit risk.

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9.    Financial Instruments (Continued)

Other

        During fiscal 2008 and through the third quarter of fiscal 2009, the Company designated certain intercompany loans as permanent in nature. As of June 26, 2009, $2.8 billion of intercompany loans have been designated as permanent in nature and for the quarter and nine months ended June 26, 2009, the Company recorded a $230 million cumulative transaction gain and a $123 million cumulative transaction loss, respectively, through accumulated other comprehensive income related to these loans.

10.    Commitments and Contingencies

        In connection with the Separation, the Company entered into a liability sharing agreement regarding certain legal actions that were pending against Tyco prior to the Separation. Under the Separation and Distribution Agreement, the Company, Covidien and Tyco Electronics are jointly and severally liable for the full amount of any judgments resulting from the actions subject to the agreement, which generally relate to legacy matters that are not specific to the business operations of any of the companies (including Employee Retirement Income Security Act ("ERISA"), Foreign Corrupt Practices Act ("FCPA") and securities claims). The Separation and Distribution Agreement also provides that the Company will be responsible for 27%, Covidien 42% and Tyco Electronics 31% of payments to resolve these matters, with costs and expenses associated with the management of these contingencies being shared equally among the parties. In addition, under the agreement, the Company will manage and control all the legal matters related to assumed contingent liabilities as described in the Separation and Distribution Agreement, including the defense or settlement thereof, subject to certain limitations. Additionally, at the time of the Separation, the Company, Covidien and Tyco Electronics agreed to allocate responsibility for certain legacy tax claims pursuant to the same formula under the Tax Sharing Agreement. See Note 5.

Class Action Settlement and Legacy Securities Matters

        As a result of actions taken by certain of the Company's former senior corporate management, Tyco and some members of the Company's former senior corporate management are named defendants in a number of lawsuits alleging violations of the disclosure provisions of the federal securities laws. In addition, Tyco, certain of its current and former employees and some members of the Company's former senior corporate management are named as defendants in several ERISA class actions. The Company is generally obligated to indemnify its directors and officers who are named as defendants in some or all of these matters to the extent required by Bermuda law.

        In 2007, the Company agreed to settle 32 purported securities class action lawsuits arising from actions alleged to have been taken by prior management for $2.975 billion, and the settlement became final in February 2008. Tyco is not subject to any further liability for the class action settlement. Of this amount, the Company contributed $803 million, representing its share under the Separation and Distribution Agreement, to an escrow account established in connection with the settlement and recorded a current liability of $2.975 billion in the third quarter of 2007. Since the settlement was agreed to, the Company has recovered certain amounts from insurers. As a result, the Company recorded $151 million of recoveries in its Consolidated Statements of Operations through the end of fiscal 2008. Based on the Separation and Distribution Agreement, the Company also recorded payables to Covidien and Tyco Electronics for their portion of the recoveries through such date with an offset to

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10.    Commitments and Contingencies (Continued)


Shareholders' Equity. The Company did not recover any additional settlements from insurers during the first nine months of 2009.

        The class action settlement did not purport to resolve all legacy securities cases, and several remain outstanding, including the claims related to the Stumpf matter described below. The settlement also did not release claims arising under ERISA and related lawsuits, which are also described below. In addition, as of the opt-out deadline, Tyco had received opt-out notices from individuals and entities totaling approximately 4% of the shares owned by class members. A number of these individuals and entities have filed claims separately against Tyco. Any judgments resulting from such claims or from claims that are filed in the future would not reduce the class action settlement amount. Generally, the claims asserted by these plaintiffs include claims similar to those asserted by the settling defendants; namely, violations of the disclosure provisions of federal securities laws. Since the class action settlement became final in February 2008, the Company has agreed to settle substantially all of the opt-out claims that had subsequently been filed as well as the ERISA related claims. The Stumpf matter remains outstanding.

        During the first half of fiscal 2009, the Company settled a number of legal matters stemming from alleged violations of federal securities laws committed by former senior management, including three lawsuits from plaintiffs that had opted out of the June 2007 class action settlement for an aggregate amount of approximately $90 million. Pursuant to the Separation and Distribution Agreement, the Company's share of the settlement amount was approximately $24 million, with Covidien and Tyco Electronics responsible for approximately $38 million and $28 million, respectively. The Company recorded the total settlement amount of $90 million as a liability within the Company's Consolidated Balance Sheet at March 27, 2009, and recorded a receivable due from Covidien and Tyco Electronics for their respective portion of the liability of $38 million and $28 million, respectively, which were recorded in other current assets in the Company's Consolidated Balance Sheet at March 27, 2009. As a result, the Company recorded a $24 million charge to its Consolidated Statement of Operations for the quarter ended March 27, 2009.

        At each balance sheet date, the Company assesses the need for reserves related to its contingent liabilities in accordance with SFAS No. 5, "Accounting for Contingencies." Prior to the second quarter of 2009, the Company concluded that it was not possible to reasonably estimate the amount of loss, or range of loss, if any, that might result from an adverse resolution of the legacy securities matters described above. However, in light of the settlements in the second quarter and other recent settlement activity, the Company concluded that its best estimate of probable loss for its remaining legacy securities matters (including the remaining opt-out claims and the Stumpf and ERISA matters described below) was $375 million in the aggregate, which the Company recorded as a liability in other current liabilities in the Consolidated Balance Sheet at March 27, 2009. Because any payments ultimately made in connection with these matters are subject to the sharing provisions of the Separation and Distribution Agreement described above, the Company also recorded receivables from Covidien and Tyco Electronics in the amounts of $158 million and $116 million, respectively, which were recorded in other current assets in the Company's Consolidated Balance Sheet at March 27, 2009. As a result, the Company recorded a net charge of $101 million related to these unresolved legacy securities matters during the quarter ended March 27, 2009 in selling, general, and administrative expenses in the Consolidated Statement of Operations.

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10.    Commitments and Contingencies (Continued)

        During the quarter ended June 26, 2009, the Company agreed to settle with five of the plaintiffs that had opted-out of the class action settlement for a total of $199 million. Pursuant to the Separation and Distribution Agreement, the Company's share of the settlement amount was approximately $54 million, with Covidien and Tyco Electronics responsible for approximately $83 million and $62 million, respectively. This settlement activity did not result in the Company recording a charge to its Consolidated Statement of Operations for the three months ended June 26, 2009 as the Company had established a reserve for its best estimate of the amount of loss during the second quarter of 2009 as discussed above.

        Stumpf v. Tyco International Ltd. is a class action lawsuit in which the plaintiffs assert complaints against Tyco, among others, based on alleged violations of the disclosure provisions of the federal securities laws. The matter arises from Tyco's July 2000 initial public offering of common stock of TyCom Inc, and alleges that the TyCom registration statement and prospectus relating to the sale of common stock were inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. The complaint further alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation, TyCom's business prospects and Tyco's and TyCom's finances. The matter is currently in the pre-trial stages of litigation. As discussed above, the Company has reserved its best estimate of probable loss related to this matter.

        Tyco and certain of its current and former employees, officers and directors, have been named as defendants in eight class actions brought under ERISA. All eight actions have been consolidated in the District Court in New Hampshire. The consolidated complaint purported to bring claims on behalf of the Company's Retirement Savings and Investment Plans and the participants therein and alleged that the defendants breached their fiduciary duties under ERISA by negligently misrepresenting and negligently failing to disclose material information concerning, among other things, the following: related-party transactions and executive compensation; the Company's mergers and acquisitions and the accounting therefor, as well as allegedly undisclosed acquisitions; and misstatements of the Company's financial results. The complaint also asserted that the defendants breached their fiduciary duties by allowing the Plans to invest in the Company's shares when it was not a prudent investment. The complaints sought recovery of alleged plan losses arising from alleged breaches of fiduciary duties. On May 14, 2009, the Company agreed to settle this amount for a total of $70 million, subject to the entry of a final order by the court approving the settlement. Pursuant to the Separation and Distribution Agreement, the Company's share of the settlement amount was approximately $19 million, with Covidien and Tyco Electronics responsible for approximately $29 million and $22 million, respectively. This settlement did not result in the Company recording a charge to its Consolidated Statement of Operations for the three months ended June 26, 2009 as the Company had established a reserve for its best estimate of the amount of loss during the second quarter of 2009 as discussed above.

        Under the terms of the Separation and Distribution Agreement, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full amount of any legacy securities matters, including the Stumpf matter.

        The Company continues to believe that the accrual remaining at June 26, 2009 is its best estimate for the remaining unresolved claims. Although the Company has reserved its best estimate of probable loss related to unresolved legacy securities claims, their ultimate resolution could differ from this

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10.    Commitments and Contingencies (Continued)


estimate and could have a material adverse effect on the Company's financial position, results of operations or cash flows.

Investigations

        The Company and others have received various subpoenas and requests from the Securities and Exchange Commission ("SEC") Division of Enforcement, the United States Department of Labor, state departments of labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into the Company's governance, management, operations, accounting and related controls. The Company cannot predict when these investigations will be completed, nor can the Company predict what the results of these investigations may be. It is possible that the Company will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government entities or instrumentalities (which in turn could negatively impact the Company's business with non-governmental customers) or suffer other penalties or adverse impacts, each of which could have a material adverse effect on the Company's business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters.

Environmental Matters

        Tyco is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of June 26, 2009, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $36 million to $77 million. As of June 26, 2009, Tyco concluded that the best estimate within this range is approximately $43 million, of which $10 million is included in accrued and other current liabilities and $33 million is included in other liabilities in the Company's Consolidated Balance Sheet. In view of the Company's financial position and reserves for environmental matters, the Company believes that any potential payments related to these known environmental liabilities will not have a material adverse effect on its financial position, results of operations or cash flows.

Asbestos Matters

        The Company and some of its subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. Consistent with the national trend of increased asbestos-related litigation, the Company has observed an increase in the number of these lawsuits in the past several years. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. A majority of the cases involve product liability claims, based principally on allegations of past distribution of heat-resistant industrial products incorporating asbestos or the past distribution of industrial valves that incorporated asbestos-containing gaskets or packing. Each case typically names between dozens to hundreds of corporate defendants.

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10.    Commitments and Contingencies (Continued)

        In the Company's experience, a large percentage of these claims were never substantiated and, as a result, have been dismissed by the courts. The Company will continue to vigorously defend the lawsuits that have been filed against it and its subsidiaries, but cannot predict whether it will be successful in those cases that proceed to trial. When appropriate, the Company settles claims. Of the lawsuits that have proceeded to trial since 2008, Tyco has won or settled all but one case, with that one case returning an adverse jury verdict for approximately $7.7 million, which included both compensatory and punitive damages. The Company has appealed the verdict and believes that it will ultimately be overturned. As of June 26, 2009, there were approximately 4,700 asbestos cases pending against the Company and its subsidiaries.

        The Company's estimate of the liability for pending and future claims is based on claim experience over the past five years and covers claims expected to be filed over the next seven years. The Company believes that it has adequate amounts accrued related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all known and anticipated future claims, after taking into account its substantial indemnification rights and insurance coverage, will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

Compliance Matters

        As previously reported in the Company's periodic filings, the Company has received and responded to various allegations and other information that certain improper payments were made by the Company's subsidiaries in recent years. For example, two subsidiaries in the Company's Flow Control business in Italy have been charged, along with numerous other parties, in connection with the Milan public prosecutor's investigation into allegedly improper payments made to certain Italian entities, and the Company has reported to German authorities recently discovered potentially improper conduct involving agents retained by the Company's EMEA water business. The Company has reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations and its internal investigations. The Company also informed the DOJ and the SEC that it has retained outside counsel to perform a Company-wide baseline review of its policies, controls and practices with respect to compliance with the FCPA, and that it would continue to investigate and make periodic progress reports to these agencies. The Company has and will continue to communicate with the DOJ and SEC to provide updates on the baseline review and follow-up investigations, including, as appropriate, briefings concerning additional instances of potential improper conduct identified by the Company in the course of its ongoing compliance activities. To date, the baseline review has revealed that some business practices may not comply with Tyco and FCPA requirements. At this time, the Company cannot predict the outcome of these matters and other allegations reported to U.S. and non-U.S. regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of these matters. However, it is possible that the Company may be required to pay material fines, consent to injunctions on future conduct, or suffer other penalties or adverse impacts, each of which could have a material adverse effect on its financial position, results of operations or cash flows.

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10.    Commitments and Contingencies (Continued)

        Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the Company in its responses regarding these matters. Any judgment required to be paid or settlement or other cost incurred by the Company in connection with the FCPA investigations matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of the Company to Covidien or Tyco Electronics, respectively, and provides that the Company will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among the Company, Covidien and Tyco Electronics.

        The German Federal Cartel Office ("FCO") charged in early 2007 that certain German subsidiaries in the Company's Flow Control business had engaged in anti-competitive practices, in particular with regard to its hydrant, valve, street box and fittings business. The Company investigated this matter and determined that the conduct may have violated German anti-trust law. The Company is cooperating with the FCO in its investigation of this violation. The Company cannot estimate the range of potential loss that may result from this violation. It is possible that the Company may be subject to civil or criminal proceedings and may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on its financial position, results of operations or cash flows.

ERISA Partial Withdrawal Liability Assessment and Demand

        On June 8, 2007, SimplexGrinnell received a notice alleging that it had partially withdrawn from the National Automatic Sprinkler Industry Pension Fund (the "Fund"). Under Title IV of ERISA, if the Fund can prove that an employer completely or partially withdraws from a multi-employer pension plan such as the Fund, the employer is liable for withdrawal liability equal to its proportionate share of the plan's unfunded vested benefits. The alleged withdrawal results from a 1994 labor dispute between Grinnell Fire Protection Systems, SimplexGrinnell's predecessor, and Road Sprinkler Fitters Local Union No. 669.

        ERISA requires that payment of withdrawal liability be made in full or in quarterly installments commencing upon receipt of a liability assessment from the plan. A plan's assessment of withdrawal liability generally may be challenged only in arbitration, and ERISA requires that quarterly payments must continue to be made during the pendency of the arbitration. If the employer prevails in arbitration (and any subsequent appeals), its quarterly withdrawal liability payments are refunded with interest. The Fund's total withdrawal liability assessment against SimplexGrinnell is approximately $25 million. The quarterly withdrawal liability payments are $1.1 million, $8.8 million of which had been paid by June 26, 2009. While the ultimate outcome is uncertain, SimplexGrinnell believes that it has strong arguments that no withdrawal liability is owed to the Fund, and it plans to vigorously defend against the Fund's withdrawal liability assessment. The matter is currently in arbitration. The Company has made no provision for this contingency and believes that its quarterly payments are recoverable.

Other Matters

        Fitzpatrick Contractors Limited v. Tyco Fire and Integrated Solutions (UK) Ltd.    On July 18, 2007, Fitzpatrick Contractors Limited ("FCL") commenced an action against Tyco Fire and Integrated Solutions (UK) Ltd. in the High Court of Justice, Queen Bench Division, Technology and Construction Court, United Kingdom, alleging that Tyco entered into a binding contract in 2002 for the design,

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.    Commitments and Contingencies (Continued)

manufacture and installation of mechanical and electrical works for the refurbishment of a portion of London Transport's Blackwall Tunnel. FCL had sought damages for breach of contract in the amount of approximately $38 million. The Company has settled all of the claims related to this matter for total consideration of 13.3 million British Pounds (approximately $20 million).

        As previously reported, in 2002, the SEC's Division of Enforcement conducted an investigation related to past accounting practices for dealer connect fees that ADT had charged to its authorized dealers upon purchasing customer accounts. The investigation related to accounting practices employed by the Company's former management, which were discontinued in 2003. Although the Company settled with the SEC in 2006, a number of former dealers and related parties have filed lawsuits against the Company, including a class action lawsuit filed in the District Court of Arapahoe County, Colorado, alleging breach of contract and other claims related to ADT's decision to terminate certain authorized dealers in 2002 and 2003. While it is not possible at this time to predict the final outcome of these lawsuits, the Company does not believe these claims will 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, we believe that the resolution of any such proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on our financial condition, results of operations or cash flows beyond amounts recorded for such matters.

11.    Retirement Plans

        Defined Benefit Pension Plans    SFAS No. 158 requires companies to measure plan assets and benefit obligations as of their fiscal year end and provides two transition alternatives related to the change in the measurement date provisions. The Company adopted the measurement date provisions of SFAS No. 158 on the first day of fiscal 2009. As a result, the Company measured its plan assets and benefit obligations on September 26, 2008 and adjusted its opening balances of accumulated earnings and accumulated other comprehensive income for the change in net periodic benefit cost and fair value, respectively, from the previously used measurement date of August 31, 2008. The adoption of the measurement date provisions resulted in a net decrease to accumulated earnings of $5 million, net of an income tax benefit of $2 million, and a net increase to accumulated other comprehensive income of $61 million, net of income taxes of $28 million.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11.    Retirement Plans (Continued)

        The net periodic benefit cost for all U.S. and non-U.S. defined benefit pension plans was as follows ($ in millions):

 
  U.S. Plans  
 
  For the Quarter
Ended
  For the Nine Months
Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Service cost

  $ 2   $ 2   $ 7   $ 6  

Interest cost

    12     12     37     36  

Expected return on plan assets

    (12 )   (15 )   (37 )   (44 )

Amortization of prior service cost

    1         1     1  

Amortization of net actuarial loss

    2     2     7     4  
                   

Net periodic benefit cost

  $ 5   $ 1   $ 15   $ 3  
                   

 

 
  Non-U.S. Plans  
 
  For the Quarter
Ended
  For the Nine Months
Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Service cost

  $ 9   $ 12   $ 26   $ 35  

Interest cost

    21     21     62     63  

Expected return on plan assets

    (18 )   (21 )   (54 )   (63 )

Amortization of prior service credit

    (2 )   (1 )   (2 )   (2 )

Amortization of net actuarial loss

    5     5     14     15  

Plan settlements and curtailments termination benefits

            (1 )    
                   

Net periodic benefit cost

  $ 15   $ 16   $ 45   $ 48  
                   

        The estimated net loss and prior service cost for U.S. pension benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the current fiscal year are expected to be $9 million and $1 million, respectively.

        The estimated net loss and prior service credit for non-U.S. pension benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the current fiscal year are expected to be $18 million and $3 million, respectively.

        The Company anticipates that it will contribute at least the minimum required to its pension plans in fiscal year 2009 of $4 million for U.S. plans and $60 million for non-U.S. plans. The Company also anticipates making a voluntary contribution up to $20 million during the fourth quarter to its U.S. plans. During the nine months ended June 26, 2009, the Company contributed $48 million to its U.S. and non-U.S. pension plans.

        Postretirement Benefit Plans    Net periodic postretirement benefit cost was insignificant for both periods.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

12.    Shareholders' Equity

        As discussed in Note 1, effective March 17, 2009, the Company changed its jurisdiction of incorporation from Bermuda to the Canton of Schaffhausen, Switzerland. In connection with the Change of Domicile, the par value of the Company's common shares increased from $0.80 per share to 8.53 Swiss Francs (CHF) per share (or $7.21 based on the exchange rate in effect on March 17, 2009). The Change of Domicile was approved at a special general meeting of shareholders held on March 12, 2009. The following steps occurred in connection with the Change of Domicile, which did not result in a change to total Shareholders' Equity.

    (1)
    approximately 21 million shares held directly or indirectly in treasury were cancelled;

    (2)
    the par value of common shares was increased from $0.80 to CHF 8.53 through an approximate 1-for-9 reverse share split, followed by the issuance of approximately eight fully paid up shares so that the same number of shares were outstanding before and after the Change of Domicile, which reduced share premium and increased common shares; and

    (3)
    the remaining amount of share premium was eliminated with a corresponding increase to contributed surplus.

        Preference Shares    In connection with the Change of Domicile, all authorized preference shares were cancelled. At September 26, 2008 Tyco had authorized 31,250,000 preference shares, par value of $4 per share, none of which were issued and outstanding.

        Common Shares    As of June 26, 2009 the Company's share capital amounted to CHF 3,978,149,338.30 or 479,295,101 registered common shares with a par value of CHF 8.30 per share. Until March 12, 2011, the Board of Directors may increase the Company's share capital by a maximum amount of CHF 1,989,074,665 by issuing a maximum of 239,647,550 shares. In addition, until March 12, 2011, (i) the share capital of the Company may be increased by an amount not exceeding CHF 397,814,933 through the issue of a maximum of 47,929,510 shares through the exercise of conversion and/or option or warrant rights granted in connection with bonds, notes or similar instruments including convertible debt instruments and (ii) the share capital of the Company may be increased by an amount not exceeding CHF 397,814,933 through the issue of a maximum of 47,929,510 shares to employees and other persons providing services to the Company. Although the Company states its par value in Swiss Francs it continues to use the U.S. dollar as its reporting currency for preparing its consolidated financial statements.

        Shares Owned by Subsidiaries and Common Shares Held in Treasury    Prior to the Change of Domicile, approximately 21 million shares held by the Company directly or indirectly in treasury were cancelled. At June 26, 2009 there were approximately 6 million shares held in treasury. At September 26, 2008 there were approximately 22 million shares held by a subsidiary and 5 million shares held directly in treasury.

        Share Premium and Contributed Surplus    As of September 26, 2008, Tyco International Ltd. was incorporated under the laws of Bermuda. In accordance with the Bermuda Companies Act 1981, when Tyco issued shares for cash at a premium to their par value, the resulting premium was an increase to a share premium account, a non-distributable reserve. Contributed surplus, subject to certain conditions, is a distributable reserve. As discussed above, effective March 17, 2009, the Company discontinued its existence as a Bermuda corporation and became a Swiss corporation. The Company undertook a number of steps in connection with the Change of Domicile described above, that reduced its share

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

12.    Shareholders' Equity (Continued)


premium to zero at March 17, 2009 and increased common shares to approximately $3.5 billion. Any share premium remaining after this recapitalization was allocated to contributed surplus, which eliminated the remaining share premium balance.

        Dividends    Pursuant to Swiss law, dividend payments made prior to January 1, 2011 are subject to Swiss withholding taxes unless made in the form of a return of capital from the Company's registered share capital. As a result, the Company intends to first pay dividends in the form of a reduction of registered share capital until at least January 1, 2011. After January 1, 2011, the Company expects to make dividend payments in the form of a reduction in contributed surplus, which also may be made free of Swiss withholding taxes.

        On March 12, 2009 the Company's Board of Directors declared a quarterly dividend on the Company's common shares of 0.23 CHF per share, which was paid on May 27, 2009 to shareholders of record on April 30, 2009. On May 7, 2009 the Company's Board of Directors declared a quarterly dividend on the Company's common shares of 0.23 CHF per share, which will be paid on August 26, 2009 to shareholders of record on July 31, 2009. These quarterly dividends represent the first and second installments of an annual dividend of CHF 0.93 per share approved by the shareholders on March 12, 2009. Under Swiss law, approval by the shareholders establishes the dividend. As a result, the Company recorded an accrued dividend of CHF 440 million as of March 12, 2009 which approximated $377 million based on the exchange rate in effect on that date. The dividend was approved at the special shareholders meeting on March 12, 2009 and is made in the form of a return of capital. This amount was recorded as a reduction of common shares, which reduced the Company's par value of CHF 8.53 to CHF 7.60. However, the Company expects to actually pay dividends in U.S. dollars, based on exchange rates in effect shortly before the payment date. Prior to the Change of Domicile, on December 4, 2008, the Company's Board of Directors declared a quarterly dividend on the Company's common shares of $0.20 per share, which was paid on February 2, 2009 to shareholders of record on January 5, 2009. This amount was recorded as a reduction of accumulated earnings. On December 6, 2007, March 13, 2008 and May 8, 2008 the Company's Board of Directors declared a quarterly dividend on the Company's common shares of $0.15 per share, which were paid on February 1, 2008, May 1, 2008 and August 1, 2008, respectively, to shareholders of record on January 3, 2008, April 1, 2008 and July 1, 2008, respectively.

13.    Share Plans

        During the nine months ended June 26, 2009, the Company issued its annual share-based compensation grants. The total number of awards issued was approximately 8 million, of which 5 million were share options, 2 million were restricted unit awards and 1 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 share options, restricted unit awards and performance share unit awards was $7.15, $29.00 and $27.84, 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 2.71%, an expected annual dividend per share of $0.80 and an expected option life of 5.2 years.

        During the nine months ended June 27, 2008, there were no material share-based compensation grants.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

14.    Consolidated Segment Data

        The Company, from time to time, will realign businesses and management responsibility within its operating segments that possess similar characteristics such as product and service offerings. These realignments are designed to more fully leverage existing capabilities and enhance development for future products and services. Effective September 27, 2008, certain businesses were transferred from the Company's ADT Worldwide segment to the Company's Fire Protection Services segment, from the Company's Fire Protection Services segment to the Company's Flow Control segment and from the Company's Electrical and Metal Products segment to the Company's Safety Products segment. The realignment of these businesses results in segment data being presented in line with management's view of segment operating results. The revenue and operating income for the period ending June 27, 2008 has been recast to reflect the realignment of the Company's ADT Worldwide businesses to the Company's Fire Protection Services segment. All the other business realignments were not recast because the changes were immaterial. Additionally, the segment data presented have been reclassified to exclude the results of discontinued operations. Selected information by segment is presented in the following tables ($ in millions):

 
  For the Quarter
Ended
  For the Nine Months
Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Net revenue(1):

                         
 

ADT Worldwide

  $ 1,730   $ 1,927   $ 5,216   $ 5,750  
 

Flow Control

    954     1,132     2,840     3,230  
 

Fire Protection Services

    856     992     2,524     2,824  
 

Electrical and Metal Products

    320     652     1,066     1,681  
 

Safety Products

    380     511     1,170     1,427  
 

Corporate and Other

        1         3  
                   
 

Net revenue

  $ 4,240   $ 5,215   $ 12,816   $ 14,915  
                   

(1)
Revenue by operating segment excludes intercompany transactions.
 
  For the Quarter
Ended
  For the Nine Months
Ended
 
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Operating income (loss):

                         
 

ADT Worldwide

  $ 233   $ 237   $ 7   $ 703  
 

Flow Control

    122     152     392     466  
 

Fire Protection Services

    67     99     3     254  
 

Electrical and Metal Products

    (17 )   141     (952 )   254  
 

Safety Products

    34     79     (835 )   219  
 

Corporate and Other

    (100 )   (131 )   (417 )   (384 )
                   
 

Operating income (loss)

  $ 339   $ 577   $ (1,802 ) $ 1,512  
                   

        There were no significant changes to total assets by segment other than the goodwill and intangible asset impairments described in Note 7.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

15.    Inventory

        Inventories consisted of the following ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

Purchased materials and manufactured parts

  $ 559   $ 681  

Work in process

    227     272  

Finished goods

    804     926  
           
 

Inventories

  $ 1,590   $ 1,879  
           

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

16.    Property, Plant and Equipment

        Property, plant and equipment consisted of the following ($ in millions):

 
  June 26,
2009
  September 26,
2008
 

Land

  $ 152   $ 152  

Buildings

    791     772  

Subscriber systems

    5,304     5,235  

Machinery and equipment

    2,332     2,339  

Property under capital leases(1)

    44     51  

Construction in progress

    158     132  

Accumulated depreciation(2)

    (5,352 )   (5,162 )
           
 

Property, Plant and Equipment, net

  $ 3,429   $ 3,519  
           

(1)
Property under capital leases consists primarily of buildings.

(2)
Accumulated amortization of capital lease assets was $26 million and $23 million at June 26, 2009 and September 26, 2008, respectively.

17.    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. The guarantees would typically be triggered in the event of nonperformance and 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 and Tyco Electronics in accordance with the terms of the Separation and Distribution Agreement and the Tax Sharing Agreement. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. At the time of the Separation, Tyco recorded a liability necessary to recognize the fair value of such guarantees and indemnifications in accordance with FIN 45. In the absence of observable transactions for identical or similar guarantees, the Company 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

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17.    Guarantees (Continued)


outcomes, assigning a probability weighting to each potential outcome and estimating the anticipated timing of resolution. The probability weighted outcomes were discounted using the Company's incremental borrowing rate. The liability necessary to reflect the fair value of the guarantees and indemnifications under the Tax Sharing Agreement is $554 million, which is included in other liabilities on the Company's Consolidated Balance Sheet at June 26, 2009 and September 26, 2008, respectively. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. See Note 5 for further discussion of the Tax Sharing Agreement.

        In addition, Tyco historically provided support in the form of financial and/or performance guarantees to various Covidien and Tyco Electronics operating entities. In connection with the Separation, the Company worked with the guarantee counterparties to cancel or assign these guarantees to Covidien or Tyco Electronics. To the extent these guarantees were not assigned prior to the Separation date, Tyco assumed primary liability on any remaining such support. The estimated fair value of these obligations is $4 million and $7 million, which is included in other liabilities on the Company's Consolidated Balance Sheets at June 26, 2009 and September 26, 2008, respectively, and were recorded in accordance with FIN 45 with an offset to shareholders' equity on the 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 uncertainties would have a material adverse effect on the Company's financial position, results of operations or cash flows.

        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 10 for a discussion of these liabilities.

        In the normal course of business, the Company is liable for contract completion and product performance. In the opinion of management, such obligations will not significantly affect the Company's financial position, results of operations or cash flows.

        The Company records estimated product warranty costs at the time of sale. The following is a roll-forward of the Company's warranty accrual ($ in millions):

 
  For the
Quarter Ended
June 26, 2009
  For the
Nine Months
Ended
June 26, 2009
 

Beginning Balance

  $ 84   $ 105  

Warranties issued during the period

    8     19  

Changes in estimates

         

Settlements

    (18 )   (47 )

Currency translation

    2     (1 )
           

Balance at June 26, 2009

  $ 76   $ 76  
           

        In 2001, a division of Safety Products initiated a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain

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17.    Guarantees (Continued)


O-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco's acquisition. Under this program, the sprinkler heads are being replaced free of charge to property owners. On May 1, 2007, the Consumer Product Safety Commission and the Company announced an August 31, 2007 deadline for filing claims to participate in the VRP. The Company will fulfill all valid claims for replacement of qualifying sprinklers received up to August 31, 2007. The ultimate cost to complete the program will be impacted by a number of factors such as changes in material and labor costs, and the actual number of sprinkler heads replaced. Settlements during the quarter and nine months ended June 26, 2009 include cash expenditures of $8 million and $27 million, respectively, related to the VRP.

18.    Tyco International Finance S.A.

        TIFSA, a wholly-owned subsidiary of the Company, has public debt securities outstanding (see Note 8) which are fully and unconditionally guaranteed by Tyco. TIFSA, which was formed in December 2006, is a holding company established in connection with the Separation as the successor company to TIGSA. During the third quarter of 2007, TIGSA's assets and liabilities were contributed to TIFSA, Covidien and Tyco Electronics. TIGSA was put into liquidation on June 1, 2007. TIFSA directly or indirectly owns substantially all of the operating subsidiaries of the Company, performs treasury operations and has assumed the indebtedness of TIGSA. 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.

        During the second quarter of 2008, the Company completed a tax-free restructuring involving the transfer of certain investments from Tyco to TIFSA. Since the transactions were entirely among wholly-owned subsidiaries of Tyco, there was no impact on the Company's financial position, results of operations or cash flows. The transactions did, however, result in an increase to TIFSA's investment in subsidiaries of $1.9 billion. Since these transactions were among entities under common control, their effects have been reflected as of the beginning of the earliest period presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended June 26, 2009

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Net revenue

  $   $   $ 4,240   $   $ 4,240  

Cost of product sales

            1,852         1,852  

Cost of services

            893         893  

Selling, general and administrative expenses

    8     (1 )   1,117         1,124  

Restructuring, asset impairment and divestiture charges, net

            32         32  
                       
 

Operating (loss) income

    (8 )   1     346         339  

Interest income

            9         9  

Interest expense

        (73 )   (1 )       (74 )

Other income, net

    1                 1  

Equity in net income of subsidiaries

    591     284         (875 )    

Intercompany interest and fees

    (341 )   33     308          
                       
 

Income from continuing operations before income taxes and minority interest

    243     245     662     (875 )   275  

Income tax benefit (expense)

        15     (46 )       (31 )

Minority interest

            (1 )       (1 )
                       
 

Income from continuing operations

    243     260     615     (875 )   243  

Income from discontinued operations, net of income taxes

    44     43     44     (87 )   44  
                       
 

Net income

  $ 287   $ 303   $ 659   $ (962 ) $ 287  
                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended June 27, 2008

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Net revenue

  $   $   $ 5,215   $   $ 5,215  

Cost of product sales

            2,378         2,378  

Cost of services

            986         986  

Selling, general and administrative expenses

    14     1     1,219         1,234  

Class action settlement, net

    (7 )               (7 )

Separation (credits) costs

    (4 )       4          

Restructuring, asset impairment and divestiture charges, net

            47         47  
                       
 

Operating (loss) income

    (3 )   (1 )   581         577  

Interest income

            16         16  

Interest expense

        (88 )   (3 )       (91 )

Other income (expense), net

    2     (259 )           (257 )

Equity in net income of subsidiaries

    570     438         (1,008 )    

Intercompany interest and fees

    (370 )   36     334          
                       
 

Income from continuing operations before income taxes and minority interest

    199     126     928     (1,008 )   245  

Income tax benefit (expense)

        99     (144 )       (45 )

Minority interest

            (1 )       (1 )
                       
 

Income from continuing operations

    199     225     783     (1,008 )   199  

Income from discontinued operations, net of income taxes

    277     275     277     (552 )   277  
                       
 

Net income

  $ 476   $ 500   $ 1,060   $ (1,560 ) $ 476  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 26, 2009

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Net revenue

  $   $   $ 12,816   $   $ 12,816  

Cost of product sales

            5,692         5,692  

Cost of services

            2,637         2,637  

Selling, general and administrative expenses

    144     4     3,316         3,464  

Goodwill and intangible asset impairments

            2,705         2,705  

Restructuring, asset impairment and divestiture charges, net

    2         118         120  
                       
 

Operating loss

    (146 )   (4 )   (1,652 )       (1,802 )

Interest income

        1     31         32  

Interest expense

        (219 )   (6 )       (225 )

Other income, net

    6     2     4         12  

Equity in net loss of subsidiaries

    (850 )   (1,741 )       2,591      

Intercompany interest and fees

    (1,050 )   102     948          
                       
 

Loss from continuing operations before income taxes and minority interest

    (2,040 )   (1,859 )   (675 )   2,591     (1,983 )

Income tax benefit (expense)

        49     (104 )       (55 )

Minority interest

            (2 )       (2 )
                       
 

Loss from continuing operations

    (2,040 )   (1,810 )   (781 )   2,591     (2,040 )

Income from discontinued operations, net of income taxes

    37     32     37     (69 )   37  
                       
 

Net loss

  $ (2,003 ) $ (1,778 ) $ (744 ) $ 2,522   $ (2,003 )
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended June 27, 2008

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Net revenue

  $   $   $ 14,915   $   $ 14,915  

Cost of product sales

            6,764         6,764  

Cost of services

            2,942         2,942  

Selling, general and administrative expenses

    52     2     3,551         3,605  

Class action settlement, net

    (7 )               (7 )

Separation (credits) costs

    (18 )       22         4  

Restructuring, asset impairment and divestiture charges, net

            95         95  
                       
 

Operating (loss) income

    (27 )   (2 )   1,541         1,512  

Interest income

    47         52         99  

Interest expense

    (47 )   (263 )   (13 )       (323 )

Other income (expense), net

    52     (257 )           (205 )

Equity in net income of subsidiaries

    1,940     1,204         (3,144 )    

Intercompany interest and fees

    (1,134 )   123     1,011          
                       
 

Income from continuing operations before income taxes and minority interest

    831     805     2,591     (3,144 )   1,083  

Income tax benefit (expense)

        138     (387 )       (249 )

Minority interest

            (3 )       (3 )
                       
 

Income from continuing operations

    831     943     2,201     (3,144 )   831  

Income from discontinued operations, net of income taxes

    288     282     288     (570 )   288  
                       
 

Net income

  $ 1,119   $ 1,225   $ 2,489   $ (3,714 ) $ 1,119  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING BALANCE SHEET

June 26, 2009

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Assets

                               

Current Assets:

                               
 

Cash and cash equivalents

  $   $   $ 1,779   $   $ 1,779  
 

Accounts receivable, net

            2,638         2,638  
 

Inventories

            1,590         1,590  
 

Intercompany receivables

    1,067     98     15,855     (17,020 )    
 

Prepaid expenses and other current assets

    254         1,502         1,756  
 

Assets held for sale

    27         27     (27 )   27  
                       
   

Total current assets

    1,348     98     23,391     (17,047 )   7,790  

Property, plant and equipment, net

            3,429         3,429  

Goodwill

            8,621         8,621  

Intangible assets, net

            2,566         2,566  

Investment in subsidiaries

    44,375     15,672         (60,047 )    

Intercompany loans receivable

        13,301     19,006     (32,307 )    

Other assets

    122     249     2,486         2,857  
                       
 

Total Assets

  $ 45,845   $ 29,320   $ 59,499   $ (109,401 ) $ 25,263  
                       

Liabilities and Shareholder's Equity

                               

Current Liabilities:

                               
 

Loans payable and current maturities of long-term debt

  $   $   $ 19   $   $ 19  
 

Accounts payable

            1,180         1,180  
 

Accrued and other current liabilities

    586     74     2,171         2,831  
 

Deferred revenue

            621         621  
 

Intercompany payables

    9,167     6,746     1,107     (17,020 )    
                       
   

Total current liabilities

    9,753     6,820     5,098     (17,020 )   4,651  

Long-term debt

        4,149     77         4,226  

Intercompany loans payable

    22,938     391     8,978     (32,307 )    

Other liabilities

    559         3,219         3,778  
                       
 

Total Liabilities

    33,250     11,360     17,372     (49,327 )   12,655  

Minority interest

            13         13  

Shareholders' Equity:

                               
 

Preference shares

            2,500     (2,500 )    
 

Common shares

    3,122         (236 )       2,886  
 

Other shareholders' equity

    9,473     17,960     39,850     (57,574 )   9,709  
                       
 

Total Shareholders' Equity

    12,595     17,960     42,114     (60,074 )   12,595  
                       
 

Total Liabilities and Shareholders' Equity

  $ 45,845   $ 29,320   $ 59,499   $ (109,401 ) $ 25,263  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

September 26, 2008

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Assets

                               

Current Assets:

                               
 

Cash and cash equivalents

  $ 1   $ 1   $ 1,517   $   $ 1,519  
 

Accounts receivable, net

            3,024         3,024  
 

Inventories

            1,879         1,879  
 

Intercompany receivables

    1,097     76     15,069     (16,242 )    
 

Prepaid expenses and other current assets

    9         1,796         1,805  
 

Assets held for sale

    44     1     126     (45 )   126  
                       
   

Total current assets

    1,151     78     23,411     (16,287 )   8,353  

Property, plant and equipment, net

            3,519         3,519  

Goodwill

            11,619         11,619  

Intangible assets, net

            2,693         2,693  

Investment in subsidiaries

    45,593     21,787         (67,380 )    

Intercompany loans receivable

        9,799     18,999     (28,798 )    

Other assets

    114     83     2,423         2,620  
                       
 

Total Assets

  $ 46,858   $ 31,747   $ 62,664   $ (112,465 ) $ 28,804  
                       

Liabilities and Shareholders' Equity

                               

Current Liabilities:

                               
 

Loans payable and current maturities of long-term debt

  $   $ 515   $ 40   $   $ 555  
 

Accounts payable

    2         1,630         1,632  
 

Accrued and other current liabilities

    103     76     2,587         2,766  
 

Deferred revenue

            608         608  
 

Intercompany payables

    8,126     6,990     1,126     (16,242 )    
 

Liabilities held for sale

            82         82  
                       
   

Total current liabilities

    8,231     7,581     6,073     (16,242 )   5,643  

Long-term debt

        3,605     104         3,709  

Intercompany loans payable

    22,573     384     5,841     (28,798 )    

Other liabilities

    560         3,384         3,944  
                       
 

Total Liabilities

    31,364     11,570     15,402     (45,040 )   13,296  

Minority interest

            14         14  

Shareholders' Equity:

                               
 

Preference shares

            2,500     (2,500 )    
 

Common shares

    208         (18 )       190  
 

Other shareholders' equity

    15,286     20,177     44,766     (64,925 )   15,304  
                       
 

Total Shareholders' Equity

    15,494     20,177     47,248     (67,425 )   15,494  
                       
 

Total Liabilities and Shareholders' Equity

  $ 46,858   $ 31,747   $ 62,664   $ (112,465 ) $ 28,804  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended June 26, 2009

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Cash Flows From Operating Activities:

                               
 

Net cash (used in) provided by operating activities

  $ (61 ) $ (334 ) $ 1,839   $   $ 1,444  
 

Net cash used in discontinued operating activities

            (8 )       (8 )

Cash Flows From Investing Activities:

                               

Capital expenditures

            (500 )       (500 )

Proceeds from disposal of assets

            6         6  

Acquisition of businesses, net of cash acquired

            (47 )       (47 )

Accounts purchased from ADT dealer program

            (361 )       (361 )

Net increase in intercompany loans

        (1,044 )       1,044      

(Increase) decrease in investment in subsidiaries

    (18 )   1,352         (1,334 )    

Other

            40         40  
                       
 

Net cash (used in) provided by investing activities

    (18 )   308     (862 )   (290 )   (862 )
 

Net cash provided by discontinued investing activities

            41         41  

Cash Flows From Financing Activities:

                               

Net borrowing (repayment) of debt

        28     (45 )       (17 )

Proceeds from exercise of share options

            1         1  

Dividends paid

    (287 )               (287 )

Repurchase of common shares by subsidiary

            (3 )       (3 )

Net intercompany loan borrowings

    365         679     (1,044 )    

Decrease in equity from parent

            (1,334 )   1,334      

Transfer from discontinued operations

            33         33  

Other

        (3 )   4         1  
                       
 

Net cash provided by (used in) financing activities

    78     25     (665 )   290     (272 )
 

Net cash used in discontinued financing activities

            (33 )       (33 )

Effect of currency translation on cash

            (50 )       (50 )
                       

Net (decrease) increase in cash and cash equivalents

    (1 )   (1 )   262         260  

Cash and cash equivalents at beginning of period

    1     1     1,517         1,519  
                       

Cash and cash equivalents at end of period

  $   $   $ 1,779   $   $ 1,779  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18.    Tyco International Finance S.A. (Continued)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended June 27, 2008

(in millions)

 
  Tyco
International
Ltd.
  Tyco
International
Finance S.A.
  Other
Subsidiaries
  Consolidating
Adjustments
  Total  

Cash Flows From Operating Activities:

                               
 

Net cash (used in) provided by operating activities

  $ (3,892 ) $ (2,192 ) $ 4,176   $   $ (1,908 )
 

Net cash used in discontinued operating activities

            (25 )       (25 )

Cash Flows From Investing Activities:

                               

Capital expenditures

            (545 )       (545 )

Proceeds from disposal of assets

            14         14  

Acquisition of businesses, net of cash acquired

            (92 )       (92 )

Accounts purchased from ADT dealer program

            (269 )       (269 )

Class action settlement escrow

    2,960                 2,960  

Intercompany dividend from subsidiary

        62         (62 )    

Net increase in intercompany loans

        (39 )       39      

Decrease in investment in subsidiaries

        2,457         (2,457 )    

Other

            15         15  
                       
 

Net cash provided by (used in) investing activities

    2,960     2,480     (877 )   (2,480 )   2,083  
 

Net cash provided by discontinued investing activities

            479         479  

Cash Flows From Financing Activities:

                               

Net repayment of debt

        (187 )   (13 )       (200 )

Proceeds from exercise of share options

    38         2         40  

Dividends paid

    (221 )               (221 )

Intercompany dividend to parent

            (62 )   62      

Repurchase of common shares by subsidiary

            (756 )       (756 )

Net intercompany loan borrowings (repayments)

    1,100         (1,061 )   (39 )    

Decrease in equity from parent

            (2,457 )   2,457      

Transfer from discontinued operations

            458         458  

Other

        (76 )   8         (68 )
                       
 

Net cash provided by (used in) financing activities

    917     (263 )   (3,881 )   2,480     (747 )
 

Net cash used in discontinued financing activities

            (454 )       (454 )

Effect of currency translation on cash

            20         20  
                       

Net (decrease) increase in cash and cash equivalents

    (15 )   25     (562 )       (552 )

Cash and cash equivalents at beginning of period

    16         1,878         1,894  
                       

Cash and cash equivalents at end of period

  $ 1   $ 25   $ 1,316   $   $ 1,342  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

19.    Subsequent Events

        The Company has evaluated subsequent events through the time it filed its quarterly report on Form 10-Q on July 30, 2009.

        On July 2, 2009, the Company received the necessary consents and approvals to transfer the remaining assets of its Infrastructure Services business in China to Guangzhou Sewage Treatment Co., Ltd. and received cash proceeds of $24 million.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

        The following discussion and analysis of the Company's financial condition and results of operations should be read together with our Consolidated Financial Statements and the related notes included in this Quarterly Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the headings "Risk Factors" and "Forward-Looking Information."

Introduction

        The unaudited Consolidated Financial Statements include the consolidated results of Tyco International Ltd., a company organized under the laws of Switzerland, and its subsidiaries (hereinafter collectively referred to as "we," the "Company" or "Tyco") and have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP").

        The Company operates in the following business segments:

    ADT Worldwide designs, sells, installs, services and monitors electronic security systems for residential, commercial, industrial and governmental customers.

    Flow Control designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for the water and wastewater markets, the oil, gas and other energy markets along with general process industries.

    Fire Protection Services designs, sells, installs and services fire detection and fire suppression systems for commercial, industrial and governmental customers.

    Electrical and Metal Products designs, manufactures and sells galvanized steel tubing, armored wire and cable and other metal products for non-residential construction, electrical, fire and safety and mechanical customers.

    Safety Products designs, manufactures and sells fire protection, security and life safety products, including fire suppression products, breathing apparatus, intrusion security, access control and video management systems. In addition, Safety Products manufactures products installed and serviced by ADT Worldwide and Fire Protection Services.

        We also provide general corporate services to our segments and these costs are reported as Corporate and Other.

        References to the segment data are to the Company's continuing operations. Certain prior period amounts have been reclassified to conform to the current period presentation. The Company has realigned certain business operations as of September 27, 2008, which resulted in certain prior period segment amounts being recast. See Note 14.

Overview and Outlook

        Primarily as a result of changes in foreign currencies and volume decreases in our Electrical and Metal Products business, net revenue for the quarter ended June 26, 2009 decreased $975 million from $5.2 billion for the comparable period ended June 27, 2008 to $4.2 billion in the quarter ended June 26, 2009. Net revenue for the nine months ended June 26, 2009 decreased $2.1 billion from $14.9 billion for the comparable period ended June 27, 2008 to $12.8 billion in the quarter ended June 26, 2009. The significant appreciation of the U.S. dollar against most major currencies for the quarter and nine months ended June 26, 2009 over the comparable periods ended June 27, 2008 negatively impacted our revenue by $407 million and $1.3 billion, respectively, as nearly 50% of our

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revenue is generated outside of the United States. If the U.S. dollar appreciates against the currencies to which we have significant exposure, our reported net revenue can be expected to be adversely affected.

        All of our reportable segments experienced declines in operating income for both the quarter and nine months ended June 26, 2009. On a consolidated basis, operating income for the quarter and nine months ended June 26, 2009 declined $238 million to $339 million and $3.3 billion to $(1.8) billion, respectively, primarily as a result of lower sales volume of steel products at our Electrical and Metal Products segment. The operating loss included goodwill and intangible asset impairments of $2.7 billion for the nine months ended June 26, 2009. The decrease included restructuring, asset impairment and divestiture charges, net of $37 million for the quarter ended June 26, 2009. Additionally, in the quarter ended June 26, 2009 management estimates that $10 million of additional charges were incurred resulting from restructuring actions. The nine months ended June 26, 2009 included legacy legal settlement charges of $110 million as well as restructuring, asset impairment and divestiture charges, net of $147 million. Additionally, in the nine months ended June 26, 2009 management estimates that $14 million of additional charges were incurred resulting from restructuring actions. Additionally, the quarter and nine months ended June 26, 2009, were negatively impacted by $35 million and $43 million, respectively, due to unfavorable changes in foreign currency exchange rates.

        In response to the economic downturn, cost containment actions have been initiated across all of our businesses and corporate. We are also pursuing cost savings through restructuring activities in fiscal 2009 and expect to incur restructuring and restructuring related charges of approximately $200 million in fiscal 2009, of which $34 million and $142 million was incurred during the quarter and nine months ended June 26, 2009, respectively. Additionally, management estimates that $10 million and $14 million of additional charges were incurred resulting from these restructuring actions during the quarter and nine months ended June 26, 2009, respectively. We believe these restructuring activities will strengthen our competitive position over the long term.

        We expect to continue our initiatives to improve our efficiency, manage our working capital effectively and prudently allocate our capital. We expect internal investments to fund growth and productivity in our businesses to continue to be our first priority. As in prior years, we expect to remain active in making bolt-on acquisitions as we continually assess the strategic fit and value of businesses that have potential for success within our existing framework. For example, during the nine months ended June 26, 2009, the Company's Safety Products segment acquired Vue Technology, Inc., a provider of radio frequency identification (RFID) technology, for $43 million to strengthen the technology portfolio offered to retailers.

Goodwill and Intangible Asset Impairments

        During the second quarter of 2009, the Company had concluded that its EMEA Security and EMEA Fire reporting units within the ADT Worldwide and Fire Protection Services segments, respectively, Electrical and Metal Products reporting unit within the Electrical and Metal Products segment and ACVS, Life Safety and SRS reporting units within the Safety Products segment experienced triggering events such that the carrying values of these reporting units likely exceeded their fair values. As a result of the triggering events, the Company performed long-lived asset, goodwill and intangible asset impairment tests for these reporting units and certain of the Company's tradenames and franchise rights. The results of the goodwill impairment tests indicated that the implied goodwill amount was less than the carrying amount of goodwill for each of the aforementioned reporting units. The Company recorded an aggregate non-cash impairment charge of $2.6 billion ($2.6 billion after-tax) during the second quarter of 2009. The non-cash impairment charge was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the quarter ended March 27, 2009.

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        Also, during the second quarter of 2009, the Company's estimates of future cash flows used in determining the fair value of its Safety Products Sensormatic tradename as well as ADT Worldwide franchise rights relating to Winner and SSC were revised downward relative to the estimates used in the Company's tests during the fourth quarter of 2008. The results of the impairment test indicated that the Safety Products Sensormatic tradename and ADT Worldwide Winner and SSC franchise rights estimated fair values were less than their respective carrying amounts. As a result, the Company recorded an aggregate non-cash impairment charge of $64 million ($40 million after-tax) during the second quarter of 2009. The non-cash impairment charge was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the quarter ended March 27, 2009.

Legal Settlements

        In the first half of fiscal 2009, the Company settled a number of legal matters stemming from alleged violations of federal securities laws committed by former senior management, including three lawsuits from plaintiffs that had opted out of the June 2007 class action settlement, for an aggregate amount of approximately $90 million. Pursuant to the Separation and Distribution Agreement, the Company's share of this amount is approximately $24 million, with Covidien and Tyco Electronics responsible for approximately $38 million and $28 million, respectively.

        During the second quarter of 2009, the Company concluded that its best estimate of probable loss for its unresolved legacy securities matters was $375 million. Due to the fact that any payments ultimately made in connection with these matters would be subject to the sharing provisions of the Separation and Distribution Agreement, the Company also recorded receivables from Covidien and Tyco Electronics in the amounts of $158 million and $116 million. As a result, the Company recorded a charge of $101 million during the quarter ended March 27, 2009 in selling, general, and administrative expenses related to these unresolved matters.

        During the quarter ended June 26, 2009, the Company agreed to settle with an additional five plaintiffs that had opted-out of the class action settlement as well as the ERISA related claim for a total of $269 million. Pursuant to the Separation and Distribution Agreement, the Company's share of the settlement amount was approximately $73 million, with Covidien and Tyco Electronics responsible for approximately $112 million and $84 million, respectively. This settlement activity did not result in the Company recording a charge to its Consolidated Statement of Operations for the quarter ended June 26, 2009 as the Company had established a reserve for its best estimate of the amount of loss during the second quarter of 2009 as discussed above. The Company continues to believe that the accrual remaining at June 26, 2009 is its best estimate for the remaining unresolved claims. Although the Company has reserved its best estimate of probable loss, related to unresolved legacy securities claims, their ultimate resolution could differ from the estimate which could have a material adverse effect on the Company's financial position, results of operations or cash flows.

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Table of Contents

Results of Operations:

 
  For the Quarter Ended   For the Nine Months Ended  
 
  June 26,
2009
  June 27,
2008
  June 26,
2009
  June 27,
2008
 

Revenue from product sales

  $ 2,541   $ 3,413   $ 7,827   $ 9,617  

Service revenue

    1,699     1,802     4,989     5,298  
                   

Net revenue

  $ 4,240   $ 5,215   $ 12,816   $ 14,915  
                   

Operating income (loss)

  $ 339   $ 577   $ (1,802 ) $ 1,512  

Interest income

    9     16     32     99  

Interest expense

    (74 )   (91 )   (225 )   (323 )

Other income, net

    1     (257 )   12<