10-Q 1 a2199445z10-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 25, 2010

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, CH-8200 Schaffhausen, Switzerland
(Address of registrant's principal executive office)

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

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

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

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

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

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

        The number of common shares outstanding as of July 21, 2010 was 497,690,945.


Table of Contents


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 25, 2010 and June 26, 2009

 

1

 

 

Consolidated Balance Sheets (Unaudited) as of June 25, 2010 and September 25, 2009

 

2

 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 25, 2010 and June 26, 2009

 

3

 

 

Consolidated Statements of Equity (Unaudited) for the nine months ended June 25, 2010 and June 26, 2009

 

4

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

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

 

57

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

85

Item 4.

 

Controls and Procedures

 

85


Part II.


 


Other Information


 


 

Item 1.

 

Legal Proceedings

 

86

Item 1A.

 

Risk Factors

 

91

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

91

Item 3.

 

Defaults Upon Senior Securities

 

91

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

91

Item 5.

 

Other Information

 

91

Item 6.

 

Exhibits

 

92

Signatures

 

93

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        

TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share data)

 
  For the
Quarters Ended
  For the
Nine Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Revenue from product sales

  $ 2,532   $ 2,454   $ 7,366   $ 7,576  

Service revenue

    1,742     1,698     5,157     4,984  
                   
 

Net revenue

    4,274     4,152     12,523     12,560  

Cost of product sales

    1,781     1,785     5,218     5,495  

Cost of services

    912     892     2,694     2,634  

Selling, general and administrative expenses

    1,163     1,110     3,380     3,422  

Goodwill and intangible asset impairments (see Note 7)

                2,705  

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

    43     31     26     119  
                   
 

Operating income (loss)

    375     334     1,205     (1,815 )

Interest income

    7     9     24     32  

Interest expense

    (71 )   (74 )   (221 )   (225 )

Other (expense) income, net

    (85 )       (73 )   11  
                   
 

Income (loss) from continuing operations before income taxes

    226     269     935     (1,997 )

Income tax benefit (expense)

    26     (24 )   (78 )   (47 )
                   
 

Income (loss) from continuing operations

    252     245     857     (2,044 )

Income from discontinued operations, net of income taxes

    4     43     14     43  
                   
 

Net income (loss)

    256     288     871     (2,001 )

Less: noncontrolling interest in subsidiaries net income

    2     1     5     2  
                   
 

Net income (loss) attributable to Tyco common shareholders

  $ 254   $ 287   $ 866   $ (2,003 )
                   

Amounts attributable to Tyco common shareholders:

                         
 

Income (loss) from continuing operations

  $ 250   $ 244   $ 852   $ (2,046 )
 

Income from discontinued operations

    4     43     14     43  
                   
 

Net income (loss) attributable to Tyco common shareholders

  $ 254   $ 287   $ 866   $ (2,003 )
                   

Basic earnings per share attributable to Tyco common shareholders:

                         
 

Income (loss) from continuing operations

  $ 0.51   $ 0.52   $ 1.77   $ (4.32 )
 

Income from discontinued operations

    0.01     0.09     0.03     0.09  
                   
 

Net income (loss) attributable to Tyco common shareholders

  $ 0.52   $ 0.61   $ 1.80   $ (4.23 )
                   

Diluted earnings per share attributable to Tyco common shareholders:

                         
 

Income (loss) from continuing operations

  $ 0.50   $ 0.51   $ 1.76   $ (4.32 )
 

Income from discontinued operations

    0.01     0.09     0.03     0.09  
                   
 

Net income (loss) attributable to Tyco common shareholders

  $ 0.51   $ 0.60   $ 1.79   $ (4.23 )
                   

Weighted average number of shares outstanding:

                         
 

Basic

    492     473     481     473  
 

Diluted

    496     475     484     473  

See Notes to Consolidated Financial Statements.

1


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TYCO INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data)

 
  June 25,
2010
  September 25,
2009
 

Assets

             

Current Assets:

             
 

Cash and cash equivalents

  $ 1,823   $ 2,354  
 

Accounts receivable, less allowance for doubtful accounts of $155 and $167, respectively

    2,416     2,544  
 

Inventories

    1,417     1,370  
 

Prepaid expenses and other current assets

    949     963  
 

Deferred income taxes

    414     405  
 

Assets held for sale

    310     404  
           
   

Total current assets

    7,329     8,040  

Property, plant and equipment, net

    4,090     3,437  

Goodwill

    9,388     8,791  

Intangible assets, net

    3,417     2,643  

Other assets

    2,684     2,642  
           
   

Total Assets

  $ 26,908   $ 25,553  
           

Liabilities and Equity

             

Current Liabilities:

             
 

Loans payable and current maturities of long-term debt

  $ 535   $ 245  
 

Accounts payable

    1,213     1,198  
 

Accrued and other current liabilities

    2,470     2,438  
 

Deferred revenue

    644     588  
 

Liabilities held for sale

    97     277  
           
   

Total current liabilities

    4,959     4,746  

Long-term debt

    3,633     4,029  

Deferred revenue

    1,101     1,133  

Other liabilities

    3,074     2,691  
           
   

Total Liabilities

    12,767     12,599  
           

Commitments and Contingencies (see Note 10)

             

Tyco Shareholders' Equity:

             

Common shares, CHF 6.70 par value, 814,801,671 shares authorized, 514,502,770 shares issued as of June 25, 2010; CHF 7.60 par value, 814,801,671 shares authorized, 479,346,720 shares issued as of September 25, 2009. 

    2,940     3,122  

Common shares held in treasury, 10,348,696 and 5,182,984 shares, as of June 25, 2010 and September 25, 2009, respectively

    (393 )   (214 )

Contributed surplus

    12,117     10,940  

Accumulated earnings (deficit)

    46     (820 )

Accumulated other comprehensive loss

    (585 )   (87 )
           
   

Total Tyco Shareholders' Equity

    14,125     12,941  

Noncontrolling interest

    16     13  
           
   

Total Equity

    14,141     12,954  
           
   

Total Liabilities and Equity

  $ 26,908   $ 25,553  
           

See Notes to Consolidated Financial Statements.

2


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TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 
  For the Nine Months Ended  
 
  June 25,
2010
  June 26,
2009
 

Cash Flows From Operating Activities:

             

Net income (loss) attributable to Tyco common shareholders

  $ 866   $ (2,003 )
 

Noncontrolling interest in subsidiaries net income

    5     2  
 

Income from discontinued operations, net of income taxes

    (14 )   (43 )
           

Income (loss) from continuing operations

    857     (2,044 )

Adjustments to reconcile net cash provided by operating activities:

             
 

Goodwill and intangible asset impairments

        2,705  
 

Depreciation and amortization

    869     835  
 

Non-cash compensation expense

    92     76  
 

Deferred income taxes

    (127 )   (203 )
 

Provision for losses on accounts receivable and inventory

    93     113  
 

Other non-cash items

    58     56  
 

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

             
   

Accounts receivable, net

        175  
   

Inventories

    (127 )   175  
   

Prepaid expenses and other current assets

    12     (180 )
   

Accounts payable

    33     (386 )
   

Accrued and other liabilities

    (6 )   (12 )
   

Income taxes, net

    (1 )   (3 )
   

Other

    (86 )   116  
           
     

Net cash provided by operating activities

    1,667     1,423  
           
     

Net cash provided by discontinued operating activities

    12     12  

Cash Flows From Investing Activities:

             

Capital expenditures

    (512 )   (494 )

Proceeds from disposal of assets

    26     5  

Acquisition of businesses, net of cash acquired

    (600 )   (47 )

Accounts purchased by ADT

    (400 )   (361 )

Divestiture of businesses, net of cash retained

    26     11  

Other

    16     31  
           
     

Net cash used in investing activities

    (1,444 )   (855 )
           
     

Net cash (used in) provided by discontinued investing activities

    (7 )   35  
           

Cash Flows From Financing Activities:

             

Net repayments of short-term debt

    (242 )   (552 )

Proceeds from issuance of long-term debt

    1,001     2,794  

Repayment of long-term debt

    (962 )   (2,259 )

Proceeds from exercise of share options

    33     1  

Dividends paid

    (311 )   (287 )

Repurchase of common shares by subsidiary

        (3 )

Repurchase of common shares by treasury

    (276 )    

Transfer from discontinued operations

    5     47  

Other

    11     1  
           
     

Net cash used in financing activities

    (741 )   (258 )
           
     

Net cash used in discontinued financing activities

    (5 )   (47 )
           

Effect of currency translation on cash

    (13 )   (50 )
           

Net (decrease) increase in cash and cash equivalents

    (531 )   260  

Cash and cash equivalents at beginning of period

    2,354     1,519  
           

Cash and cash equivalents at end of period

  $ 1,823   $ 1,779  
           

See Notes to Consolidated Financial Statements.

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TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the Nine Months Ended June 25, 2010 and June 26, 2009

(in millions)

 
  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 Tyco
Shareholders'
Equity
  Noncontrolling
Interest
  Total
Equity
 

Balance as of September 26, 2008

    473   $   $ 382   $ (192 ) $ 9,236   $ 4,711   $ 1,125   $ 232   $ 15,494   $ 14   $ 15,508  

Comprehensive income:

                                                                   
 

Net loss

                                        (2,003 )         (2,003 )   2     (2,001 )
 

Currency translation

                                              (560 )   (560 )         (560 )
 

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

                                              7     7           7  
 

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

                                              11     11           11  
                                                                 
 

Total comprehensive loss

                                                    (2,545 )         (2,543 )

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 )         (472 )

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

                      10           (16 )               (6 )         (6 )

Repurchase of common shares by subsidiary

                                  (3 )               (3 )         (3 )

Compensation expense

                                  77                 77           77  

Cumulative effect of adopting a new accounting principle, net of income tax benefit of $2 million and income taxes $28 million, respectively, (See Note 11)

                                        (5 )   61     56           56  

Other

                                  (6 )               (6 )   (3 )   (9 )
                                               

Balance as of June 26, 2009

    473   $ 3,122   $   $ (236 ) $   $ 10,936   $ (978 ) $ (249 ) $ 12,595   $ 13   $ 12,608  
                                               

 

 
  Number of
Common
Shares
  Common
Shares at
Par Value
(see Note 12)
  Treasury
Shares
  Contributed
Surplus
  Accumulated
Earnings
(Deficit)
  Accumulated
Other
Comprehensive
Income
(Loss)
  Total Tyco
Shareholders'
Equity
  Noncontrolling
Interest
  Total
Equity
 

Balance as of September 25, 2009

    474   $ 3,122   $ (214 ) $ 10,940   $ (820 ) $ (87 ) $ 12,941   $ 13   $ 12,954  

Comprehensive income:

                                                       
 

Net income

                            866           866     5     871  
 

Currency translation

                                  (565 )   (565 )         (565 )
 

Unrealized loss on marketable securities and derivative instruments, net of income taxes

                                  (2 )   (2 )         (2 )
 

Retirement plans, net of income tax benefit of $39 million

                                  69     69           69  
                                                   
 

Total comprehensive income

                                        368     5     373  

Dividends declared (see Note 12)

          (423 )                           (423 )         (423 )

Issuance of shares in connection with the acquisition of Brinks Home Security Inc. 

    35     241     2     1,119                 1,362           1,362  
   

Replacement of share based equity awards issued in connection with the acquisition of Brinks Home Security Inc. 

                      27                 27           27  

Shares issued from treasury for vesting of share based equity awards

    2           95     (62 )               33           33  

Repurchase of common shares

    (7 )         (276 )                     (276 )         (276 )

Compensation expense

                      93                 93           93  

Other

                                              (2 )   (2 )
                                       

Balance as of June 25, 2010

    504   $ 2,940   $ (393 ) $ 12,117   $ 46   $ (585 ) $ 14,125   $ 16   $ 14,141  
                                       

See Notes to Consolidated Financial Statements.

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Table of Contents


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"). 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 25, 2009 (the "2009 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.

        Revenue related to the sale of electronic tags and labels utilized in retailer anti-theft systems is classified as revenue from product sales. In reporting periods prior to the first quarter of fiscal 2010, revenue related to the sale of electronic tags and labels utilized in retailer anti-theft systems was misclassified as service revenue. Such item had no effect on net revenue, operating income (loss), net income (loss) and cash flows. No changes have been made to previously filed financial statements or in the comparative quarterly amounts presented herein, as the effect in prior periods is not material. Revenue related to the sale of such electronic tags and labels reflected as service revenue was $73 million and $215 million and related cost of services was $44 million and $131 million for the quarter and nine months ended June 26, 2009, respectively.

        References to 2010 and 2009 are to Tyco's fiscal quarters ending June 25, 2010 and June 26, 2009, respectively, unless otherwise indicated.

        Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation. Specifically, the Company has reclassified certain businesses which have satisfied the criteria to be presented as discontinued operations to income from discontinued operations in the Consolidated Statements of Operations and assets and liabilities held for sale within the Consolidated Balance Sheets. See Note 2. Additionally, the Company has realigned certain business operations in the first quarter of fiscal 2010, resulting in prior period segment amounts being recast. See Note 14.

        Recently Adopted Accounting Pronouncements—In June 2008, the Financial Accounting Standards Board ("FASB") ratified authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities. The guidance 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. The guidance requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities in calculating earnings per share. The guidance became effective for Tyco in the first quarter of fiscal 2010, and was applied retrospectively to prior periods. The adoption did not have a material impact on the Company's historical annual or quarterly basic and diluted earnings per share. See Note 6 for additional information related to the adoption of the guidance.

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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 December 2007, the FASB revised the authoritative guidance for business combinations. The revised guidance retains the underlying concepts of the existing guidance 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. The revised guidance also expands required disclosures surrounding the nature and financial effects of business combinations. The revised guidance was adopted by the Company in the first quarter of fiscal 2010, which did not have a material impact on the Company's financial position, results of operations or cash flows. The revised guidance is primarily effective for all business combinations beginning in the first quarter of fiscal 2010 and thereafter, including the acquisition of Broadview Security. See Note 4.

        In December 2007, the FASB issued authoritative guidance for noncontrolling interests in consolidated financial statements. The guidance requires the recognition of a noncontrolling interest (minority interest prior to the adoption of the guidance) 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 Consolidated Statements of Operations. The guidance also amends certain existing consolidation procedures in order to achieve consistency with the requirements of the revised authoritative guidance for business combinations discussed above. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The guidance was adopted by Tyco in the first quarter of fiscal 2010 and was applied retrospectively. The adoption did not have a material impact on the Company's financial position, results of operations or cash flows.

        In September 2006, the FASB issued authoritative guidance for fair value measurements, which enhances existing guidance for measuring assets and liabilities at fair value. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. The guidance was adopted in two phases. Tyco adopted the fair value provisions relating to financial assets and liabilities in the first quarter of 2009 and for nonfinancial assets and liabilities in the first quarter of fiscal 2010. The adoption did not have a material impact on the Company's financial position, results of operations or cash flows.

        In April 2008, the FASB issued authoritative guidance for determining the useful life of intangible assets. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The guidance became effective for Tyco in the first quarter of fiscal 2010. The adoption did not have a material impact on the Company's financial position, results of operations or cash flows.

        Recently Issued Accounting Pronouncements—In September 2009, the FASB issued authoritative guidance for the accounting for revenue arrangements with multiple deliverables. The guidance establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific evidence nor third-party evidence is available. The guidance requires arrangements

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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)


under which multiple revenue generating activities to be performed be allocated at inception. The residual method under the existing accounting guidance has been eliminated. The guidance expands the disclosure requirements related to multiple-deliverable revenue arrangements. The guidance becomes effective for revenue arrangements entered into or materially modified beginning in the first quarter of fiscal 2011. The guidance applies on a prospective basis. The Company is currently assessing what impact, if any, the guidance will have on its financial position, results of operations or cash flows.

        In June 2009, the FASB issued authoritative guidance which amended the existing guidance for the consolidation of variable interest entities, to address the elimination of the concept of a qualifying special purpose entity. The guidance 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 a variable interest entity, and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, the guidance 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. The guidance is effective for Tyco in the first quarter of fiscal 2011. The Company is currently assessing what impact, if any, that the guidance will have on its financial position, results of operations or cash flows.

        In December 2008, the FASB issued authoritative guidance for employers' disclosures about postretirement benefit plan assets. The guidance 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 the guidance are effective for Tyco in fiscal 2010 and will be adopted concurrent with the pension disclosures associated with the Company's annual valuation process during the fourth 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.

        On April 22, 2010, the Board of Directors approved a plan to pursue a tax-free spin-off of Tyco's Electrical and Metal Products business. The proposed transaction is expected to be structured as a tax-free distribution to Tyco shareholders, and is subject to a number of uncertainties and conditions, including completion of a review process by the Securities and Exchange Commission, final approval by the Tyco Board of Directors and approval by Tyco shareholders. Tyco expects to complete the proposed transaction in the first half of fiscal 2011, at which time the business would be an independent, publicly traded U.S. company. Pending completion of the spin-off, the Electrical and Metal Products business is presented in continuing operations.

        During the fourth quarter of 2009, the Company approved a plan to sell its french security business, which was part of the Company's ADT Worldwide segment. This business has been classified as held for sale as of September 25, 2009, however, its results of operations were presented in continuing operations as the criteria to be presented as discontinued operations have not been met. During the second quarter of 2010, the Company completed the sale and recorded a $53 million

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)


pre-tax gain within restructuring, asset impairment and divestiture charges, net in the Company's Consolidated Statement of 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. 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. 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

        During the quarter ended June 25, 2010, the Board of Directors approved a plan to sell the Company's European water business, which is part of the Company's Flow Control segment. Subject to the receipt of certain consents and approvals and other customary closing conditions, the Company has agreed to sell the business for approximately $245 million. As of June 25, 2010, the necessary consents and approvals had not been obtained by the Company to transfer the legal ownership of the business. The Company expects to record a gain when the transaction closes, which is expected to occur in the fourth quarter of fiscal 2010. During the quarter ended June 25, 2010, the business met the held for sale and discontinued operations criteria and has been included in discontinued operations in all periods presented. As of June 25, 2010, the Company had assessed and determined that the carrying value of the remaining assets were recoverable based on current fair value, less cost to sell. The Company will continue to assess recoverability until the business is sold. See Note 19.

        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 businesses 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. As of June 26, 2009, the necessary consents and approvals for the remaining assets in China had not been obtained by the Company. As of June 26, 2009, the Company had assessed and determined that the carrying value of the remaining assets were recoverable based on

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)


current fair value, less cost to sell. The remaining consents and approvals for the other businesses and assets were obtained during the fourth quarter of fiscal year 2009.

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

 
  For the
Quarters Ended
  For the
Nine Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Net revenue

  $ 82   $ 89   $ 248   $ 259  
                   

Pre-tax income from discontinued operations

  $ 11   $ 6   $ 22   $ 17  

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

    (5 )   42     (5 )   38  

Income tax expense

    (2 )   (5 )   (3 )   (12 )
                   

Income from discontinued operations, net of income taxes

  $ 4   $ 43   $ 14   $ 43  
                   

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

 
  June 25,
2010
  September 25,
2009
 

Accounts receivables, net

  $ 72   $ 124  

Inventories

    65     74  

Prepaid expenses and other current assets

    16     38  

Property, plant and equipment, net

    52     82  

Goodwill and intangible assets, net

    97     14  

Other assets

    8     72  
           
 

Total assets

  $ 310   $ 404  
           

Accounts payable

  $ 38     67  

Accrued and other current liabilities

    35     108  

Other liabilities

    24     102  
           
 

Total liabilities

  $ 97   $ 277  
           

        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 26, 2009, nil and $4 million, respectively, of other items was recorded as an increase to shareholders' equity. There were no adjustments during the quarter and nine months ended June 25, 2010. 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 equity or the statement of operations depending on the specific item giving rise to the adjustment.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Divestitures (Continued)

Divestiture Charges, Net

        During the quarter and nine months ended June 25, 2010, the Company recorded a net loss and net gain of $1 million and $43 million, 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 less cost to sell of certain businesses that did not meet the criteria for discontinued operations. The net gain for the nine months ended June 25, 2010 includes the $53 million gain recognized upon the sale of the Company's french security business.

        During the quarter and nine months ended June 26, 2009, the Company recorded a net loss of $3 million and $5 million, 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.

3.    Restructuring and Asset Impairment Charges, Net

2009 Program

        During fiscal 2009 and 2010, the Company identified and pursued opportunities for cost savings through restructuring activities and workforce reductions to improve operating efficiencies across the Company's businesses (the "2009 Program"). The Company expects such actions to be substantially completed by the end of fiscal 2010 and to incur restructuring and restructuring related charges of approximately $100 million in fiscal 2010. During the quarter and nine months ended June 25, 2010, the Company incurred charges of $40 million and $69 million, respectively. The Company has incurred $293 million of restructuring charges cumulative to date relating to the 2009 Program.

        Restructuring and asset impairment charges, net, during the quarter and nine months ended June 25, 2010 and June 26, 2009 related to the 2009 Program are as follows ($ in millions):

 
  For the Quarter Ended June 25, 2010  
 
  Employee
Severance and
Benefits
  Facility Exit
and Other
Charges
  Charges
Reflected in
Cost of Sales
  Total  

ADT Worldwide

  $ 23   $ 2   $   $ 25  

Flow Control

    3     3         6  

Fire Protection Services

    4     1         5  

Electrical and Metal Products

        2     (1 )   1  

Safety Products

    1     1         2  

Corporate and Other

    1             1  
                   

Total

  $ 32   $ 9   $ (1 ) $ 40  
                   

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

 

 
  For the Quarter Ended June 26, 2009  
 
  Employee
Severance and
Benefits
  Facility Exit
and Other
Charges
  Charges
Reflected in
Cost of Sales
  Charges
Reflected in
SG&A
  Total  

ADT Worldwide

  $ 7   $ 5   $ 1   $ 1   $ 14  

Flow Control

    2         1         3  

Fire Protection Services

    3                 3  

Electrical and Metal Products

    2         2         4  

Safety Products

    3                 3  

Corporate and Other

        2             2  
                       

Total

  $ 17   $ 7   $ 4   $ 1   $ 29  
                       

 

 
  For the Nine Months Ended June 25, 2010  
 
  Employee
Severance and
Benefits
  Facility Exit
and Other
Charges
  Charges
Reflected in
Cost of Sales
  Charges
Reflected in
SG&A
  Total  

ADT Worldwide

  $ 29   $ 5   $   $   $ 34  

Flow Control

    13     4     1         18  

Fire Protection Services

    11     1         1     13  

Electrical and Metal Products

        3     (1 )       2  

Safety Products

    2     (1 )           1  

Corporate and Other

    1                 1  
                       

Total

  $ 56   $ 12   $   $ 1   $ 69  
                       

 

 
  For the Nine Months Ended June 26, 2009  
 
  Employee
Severance and
Benefits
  Facility Exit
and Other
Charges
  Charges
Reflected in
Cost of Sales
  Charges
Reflected in
SG&A
  Total  

ADT Worldwide

  $ 44   $ 13   $ 8   $ 4   $ 69  

Flow Control

    5     1     2         8  

Fire Protection Services

    13                 13  

Electrical and Metal Products

    3     1     7         11  

Safety Products

    18         5         23  

Corporate and Other

    1     6         1     8  
                       

Total

  $ 84   $ 21   $ 22   $ 5   $ 132  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

        Restructuring and asset impairment charges, net incurred cumulative to date from initiation of the 2009 Program are as follows ($ in millions):

 
  Employee
Severance and
Benefits
  Facility Exit
and Other
Charges
  Charges
Reflected in
Cost of Sales
  Charges
Reflected in
SG&A
  Total  

ADT Worldwide

  $ 95   $ 24   $ 9   $ 5   $ 133  

Flow Control

    26     8     3         37  

Fire Protection Services

    55     2         1     58  

Electrical and Metal Products

    10     5     6         21  

Safety Products

    25     1     8         34  

Corporate and Other

    2     8             10  
                       

Total

  $ 213   $ 48   $ 26   $ 6   $ 293  
                       

        The rollforward of the reserves related to the 2009 Program from September 25, 2009 to June 25, 2010 is as follows ($ in millions):

Balance as of September 25, 2009

  $ 126  

Charges

    80  

Reversals

    (7 )

Utilization

    (98 )

Reclass/transfers

    (1 )

Currency translation

    (6 )
       

Balance as of June 25, 2010

  $ 94  
       

        Restructuring reserves for businesses that have met the held for sale criteria are included in liabilities held for sale on the Consolidated Balance Sheets and excluded from the table above. See Note 2.

2007 Program and pre-2006 Actions

        During fiscal 2007 and 2008, the Company launched a restructuring program across all of the Company's segments, including the corporate organization, to streamline some of the businesses and reduce the operational footprint (the "2007 Program"). As of December 26, 2008, the Company had substantially completed this program. The Company maintained a restructuring reserve related to the 2007 Program of $26 million and $59 million as of June 25, 2010 and September 25, 2009, respectively. The Company utilized $30 million of the restructuring reserve balance during the nine months ended June 25, 2010. In addition, the Company continues to maintain restructuring reserves related to certain actions initiated prior to 2006. The total amount of these reserves were $14 million as of June 25, 2010 and $15 million as of September 25, 2009. The aggregate remaining reserves related to the 2007 Program and pre-2006 actions include employee severance and benefits as well as facility exit costs for long-term non-cancelable lease obligations with expiration dates that range from 2010 to 2022 primarily within the Company's ADT Worldwide, Safety Products and Fire Protection Services segments. The Company incurred $1 million and $3 million of charges related to the 2007 Program and pre-2006 actions during the quarters ended June 25, 2010 and June 26, 2009, respectively. The Company incurred $1 million and $8 million of charges related to the 2007 Program and pre-2006 actions for the nine months ended June 25, 2010 and June 26, 2009, respectively.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

        As of June 25, 2010 and September 25, 2009, restructuring reserves related to the 2009 Program, 2007 Program and pre-2006 actions, were included in the Company's Consolidated Balance Sheets as follows ($ in millions):

 
  June 25,
2010
  September 25,
2009
 

Accrued and other current liabilities

  $ 93   $ 155  

Other liabilities

    41     45  
           

Total

  $ 134   $ 200  
           

4.    Acquisitions

Acquisition of Brink's Home Security Holdings, Inc.

        On May 14, 2010, the Company's ADT Worldwide segment acquired all of the outstanding equity of Brink's Home Security Holdings, Inc ("BHS" or "Broadview Security"), a publicly traded company that was formerly owned by The Brink's Company, in a cash-and-stock transaction valued at approximately $2.0 billion. Broadview Security is being integrated into the Company's ADT Worldwide segment. Under the terms of the transaction, each outstanding share of BHS common stock was converted into the right to receive: (1) $13.15 in cash and 0.7562 Tyco common shares, for those shareholders who made an all-cash election, (2) 1.0951 Tyco common shares, for those shareholders who made an all stock election or (3) $12.75 in cash and 0.7666 Tyco common shares, for those shareholders who made a mixed cash/stock election or who failed to make an election.

        Broadview Security's core business is to provide security alarm monitoring services for residential and commercial properties in North America. Broadview Security has a large residential recurring customer base, which expands the Company's presence in the North American residential security business. Broadview Security is also a leader in technologies and services, which are expected to enhance ADT Worldwide's service offerings to its customers. The Company expects to realize cost savings and other synergies through operational efficiencies including consolidation of both marketing and general and administrative functions.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

Fair Value Calculation of Consideration Transferred

        The calculation of the consideration transferred to acquire BHS is as follows. Certain amounts below cannot be recalculated as the exact BHS common share amounts have not been presented. ($ and common share data in millions, except per share data):

Cash consideration

       

All cash consideration

       

Number of shares of BHS common shares outstanding as of May 14, 2010 electing all cash

    37  

Cash consideration per common share outstanding

  $ 13.15  
       
 

Total cash paid to BHS shareholders making all cash election

  $ 490  

Mixed cash/stock consideration

       

Number of shares of BHS common shares outstanding as of May 14, 2010 electing mixed consideration or not making an election

    7  

Cash consideration per common share outstanding

  $ 12.75  
       
 

Total cash paid to BHS shareholders making a mixed election or not making an
election

  $ 95  
       
   

Total cash consideration

  $ 585  
       

Stock consideration

       

All cash consideration

       

Number of shares of BHS common shares outstanding as of May 14, 2010 electing all cash

    37  

Exchange ratio

    0.7562  
       
 

Tyco shares issued to BHS shareholders making an all cash election

    28  

All stock consideration

       

Number of shares of BHS common shares outstanding as of May 14, 2010 electing all stock

    1  

Exchange ratio

    1.0951  
       
 

Tyco shares issued to BHS shareholders making an all stock election

    1  

Mixed cash/stock consideration

       

Number of shares of BHS common shares outstanding as of May 14, 2010 electing mixed consideration or not making an election

    7  

Exchange ratio

    0.7666  
       
 

Tyco shares issued to BHS shareholders making a mixed election or not making an
election

    6  
       

Total Tyco common shares issued

    35  
       

Tyco's average common share price on May 14, 2010

  $ 38.73  
       
   

Total stock consideration

  $ 1,362  
       

Fair value of BHS stock option, restricted stock unit and deferred stock unit replacement awards(1)

  $ 27  
       

Total fair value of consideration transferred

  $ 1,974  
       

(1)
Represents the fair value of BHS stock option, restricted stock unit and deferred stock unit replacement awards attributable to pre-combination service issued to holders of these awards in the acquisition. The fair value was determined using the Black-Scholes model for stock option awards and Tyco's closing stock price for the restricted and deferred stock unit awards. The fair value of outstanding BHS stock-

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

    based compensation awards which, immediately vested at the effective time of the acquisition, was attributed to pre-combination service and was included in the consideration transferred. In addition, there were certain BHS stock-based compensation awards which did not immediately vest upon completion of the acquisition. For those awards, the fair value of the awards attributed to pre-combination service was included as part of the consideration transferred and the fair value attributed to post-combination service is being recognized as compensation expense over the requisite service period in the post-combination financial statements of Tyco.

Fair Value Allocation of Consideration Transferred to Assets Acquired and Liabilities Assumed

        The consideration transferred for BHS has been allocated to identifiable assets acquired and liabilities assumed as of the acquisition date based on preliminary estimates of fair value. The final determination of fair value for certain assets and liabilities remain subject to change based on final valuations of the assets acquired and liabilities assumed. The company does not expect the finalization of these matters to have a material effect on the allocation, which is expected to be completed no later than one year from the acquisition date. The following amounts represent the preliminary determination of the fair value of the identifiable assets acquired and liabilities assumed ($ in millions):

Net current assets(1)

    68  
 

Subscriber systems

    629  
 

Other property, plant and equipment

    49  
       
   

Total property, plant and equipment

    678  
       
 

Contracts and related customer relationships (10-year weighted average useful life)

    737  
 

Other intangible assets (4-year weighted average useful life)

    12  
       
   

Total intangible assets

    749  
       

Net non-current liabilities(2)

    (441 )
       
 

Net assets acquired

    1,054  

Goodwill(3)

  $ 920  
       

Purchase price

  $ 1,974  
       

(1)
As of the acquisition date, the fair value of accounts receivable approximated book value. Included in net current assets is $32 million of accounts receivable. The gross contractual amount receivable was approximately $35 million of which $3 million was not expected to be collected.

(2)
Included in net non-current liabilities is approximately $430 million of deferred tax liabilities which are recorded in other liabilities in the Company's Consolidated Balance Sheet as of June 25, 2010.

(3)
The goodwill recognized is primarily related to expected synergies and other benefits that the Company believes will result from combining the operations of BHS with the operations of ADT Worldwide. All of the goodwill has been allocated to the Company's ADT Worldwide segment. None of the goodwill is expected to be deductible for tax purposes.

The recorded amounts are preliminary and subject to change. Among the items that may change are amounts for certain intangible assets, income taxes and guarantees pending finalization of valuation efforts.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

Actual BHS Financial Results

        BHS actual results from the acquisition date, May 14, 2010, which are included in the consolidated statement of operations for the quarter and nine months ended June 25, 2010, are as follows ($ in millions):

 
  For the Quarter and
Nine Months Ended
 
 
  June 25,
2010
 

Net Revenue

  $ 54  
       

Loss from continuing operations attributable to Tyco common shareholders

    (26 )
       

Net loss attributable to Tyco common shareholders

    (26 )
       

Acquisition Related Costs

        Acquisition costs were expensed as incurred. The Company has incurred approximately $14 million and $17 million of costs directly related to the acquisition during the quarter and nine months ended June 25, 2010. In addition, the Company recorded $10 million of integration costs during the quarter and $11 million during the nine months ended June 25, 2010. Both acquisition and integration costs have been recorded within selling, general and administrative expenses in the Company's Consolidated Statement of Operations for the quarter and nine months ended June 25, 2010. The Company's ADT Worldwide segment recorded $24 million and $25 million of acquisition and integration costs for the quarter and nine months ended June 25, 2010, respectively. The Company's Corporate and Other segment recorded nil and $3 million of acquisition costs for the quarter and nine months ended June 25, 2010, respectively. In addition, the Company's ADT Worldwide segment recorded $13 million of restructuring expenses, which have been recorded within restructuring, asset impairments and divestiture charges, net in the Company's Consolidated Statement of Operations for the quarter and nine months ended June 25, 2010.

Supplemental Pro Forma Financial Information (unaudited)

        The supplemental pro forma financial information for the quarter and nine months ended June 25, 2010 and June 26, 2009 is as follows ($ in millions):

 
  For the
Quarter Ended
  For the
Quarter Ended
 
 
  June 25,
2010
  June 26,
2009
 

Net revenue

  $ 4,342   $ 4,289  
           

Income from continuing operations attributable to Tyco common shareholders

    244     251  
           

Net income attributable to Tyco common shareholders

    248     294  
           

Income from continuing operations per share:

             

Basic earnings per share attributable to Tyco common shareholders

  $ 0.46   $ 0.49  

Diluted earnings per share attributable to Tyco common shareholders

  $ 0.46   $ 0.49  

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

 

 
  For the
Nine Months Ended
  For the
Nine Months Ended
 
 
  June 25,
2010
  June 26,
2009
 

Net revenue

  $ 12,877   $ 12,952  
           

Income from continuing operations attributable to Tyco common shareholders

    870     (2,043 )
           

Net income attributable to Tyco common shareholders

    884     (2,000 )
           

Income from continuing operations per share:

             

Basic earnings (loss) per share attributable to Tyco common shareholders

  $ 1.69   $ (4.02 )

Diluted earnings (loss) per share attributable to Tyco common shareholders

  $ 1.68   $ (4.02 )

        The supplemental pro forma financial information is based on the historical financial information for Tyco and BHS. The supplemental pro forma financial information for the period ended June 25, 2010 utilized BHS' historical financial information for its fiscal fourth quarter ended December 31, 2009 and the pre-acquisition period from January 1, 2010 through the acquisition date. The supplemental pro forma financial information for the period ended June 26, 2009 utilized BHS' historical financial information for its fiscal fourth quarter ended December 31, 2008 and the six months ended June 30, 2009. The supplemental pro forma financial information reflect primarily the following pro forma pre-tax adjustments:

    Elimination of BHS historical intangible asset amortization and property, plant and equipment depreciation expense;

    Elimination of BHS historical deferred acquisition costs amortization;

    Elimination of BHS historical deferred revenue amortization;

    Additional amortization and depreciation expense related to the fair value of identifiable intangible assets and property, plant and equipment acquired;

    Reduction of interest income on cash used to fund the acquisition and Tyco dividends assumed to be paid to BHS shareholders; and

    All of the above pro forma adjustments were tax effected using a statutory tax rate of 39%

        The supplemental pro forma financial information for the quarter and nine months ended June 25, 2010 reflect the following non-recurring adjustments:

    Direct acquisition costs primarily relating to advisory and legal fees and integration costs; and

    Restructuring charges primarily related to employee severance and one-time benefit arrangements

        The supplemental pro forma financial information gives effect to the acquisition, but should not be considered indicative of the results that would have occurred in the periods presented above, nor are they indicative of future results. In addition, the supplemental pro forma financial information does not reflect the potential realization of cost savings relating to the integration of the two companies.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Acquisitions (Continued)

Acquisitions

        During the quarter and nine months ended June 25, 2010, cash paid for acquisitions included in continuing operations totaled $448 million and $600 million, respectively, net of cash acquired of $136 million and $137 million, respectively, which primarily related to the acquisition of Broadview Security. Net cash paid for Broadview Security totaled $448 million by the Company's ADT Worldwide segment. During the nine months ended June 25, 2010, the Company's Flow Control segment acquired two Brazilian valve companies, including Hiter Industria e Comercio de Controle Termo-Hidraulico Ltda ("Hiter"), a valve manufacturer which serves a variety of industries including the oil and gas, chemical and petrochemical markets. Net cash paid for the Brazilian valve companies totaled $104 million. The Company's Electrical and Metal Products segment acquired certain assets of a business for $39 million and its Safety Products segment acquired a business for $9 million during the nine months ended June 25, 2010.

        During the quarter and nine months ended June 26, 2009, cash paid for acquisitions included in continuing operations totaled nil and $47 million, respectively, net of cash acquired of nil and $2 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.

ADT Worldwide Account Acquisitions

        During the quarter and nine months ended June 25, 2010, the Company paid $134 million and $400 million of cash, respectively, to acquire approximately 122,000 and 356,000 customer contracts for electronic security services through the 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 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 25, 2010.

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

Jurisdiction
  Years Open To
Audit
 

Australia

    2004-2009  

Canada

    2000-2009  

France

    1999-2009  

Germany

    1998-2009  

Switzerland

    2000-2009  

United Kingdom

    2000-2009  

United States

    1997-2009  

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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 believes that it is reasonably possible that between nil and $100 million in unrecognized tax benefits may be resolved in the next twelve months.

        At each balance sheet date, management evaluates whether it is more likely than not that the Company's deferred tax assets will be realized and if sufficient future taxable income will be available by assessing current period and projected operating results and other pertinent data. As of June 25, 2010, the Company had recorded deferred tax assets of $1.6 billion, net of valuation allowances of $747 million. Depending on prevailing economic conditions future taxable income of entities with deferred tax assets may 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, 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, which result in cash payments, 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. In conjunction with estimating its Tax Sharing obligations, Tyco has recorded a net receivable from Covidien and Tyco Electronics representing their estimated share of the Tax Sharing obligations of $117 million and $106 million, as of June 25, 2010 and September 25, 2009, respectively. As of June 25, 2010 and September 25, 2009, $113 million and $103 million, respectively, are included in other assets and $4 million and $3 million, respectively, are included in prepaid expenses and other current assets on the Consolidated Balance Sheet. Other liabilities include $554 million as of June 25, 2010 and September 25, 2009 for Tyco's obligations under the Tax Sharing Agreement. Tyco assesses the shared tax liabilities and related guaranteed liabilities at each reporting period. The receivable and liability were initially recognized with an offset to shareholders' equity in 2007. During the quarter ended June 25, 2010 and June 26, 2009, the Company recorded no income in accordance with the Tax Sharing agreement. For the nine months ended June 25, 2010 and June 26, 2009, the Company recorded income of $11 million and $5 million, respectively, in accordance with the Tax Sharing Agreement. Tyco will provide payment to Covidien and Tyco Electronics under the Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected to occur as the audit process by applicable taxing authorities is completed for the impacted years and cash payments are made. Given the nature of the shared liabilities, the maximum amount of potential future payments is not determinable. Such cash payments, when they occur, will reduce the guarantor liability as such payments represent an equivalent reduction of risk. The Company also assesses the sufficiency of the Tax Sharing Agreement guarantee liability on a

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Income Taxes (Continued)


quarterly basis and will increase the liability when it is probable that cash payments expected to be made under the Tax Sharing Agreement exceed the recorded balance.

        During the fourth quarter of 2009, the Company, as Audit Management Party under the Tax Sharing Agreement, reached a settlement agreement with the Internal Revenue Service ("IRS") on certain deductions taken by Tyco, Covidien and Tyco Electronics on pre-separation tax returns filed for the periods 2001 to 2004. The settlement did not have a material effect to the Company's results of operations, financial position or cash flows. Additionally, the Company considered the potential impact of the settlement as part of its quarterly assessment of the guarantee liability and concluded that no adjustment to the liability was needed.

        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 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 are examined periodically by various tax authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. 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 and has recorded unrecognized tax benefits pursuant to the guidance for accounting for uncertain income tax positions. 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. Subsequently, the Company developed proposed amendments to U.S. federal

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Income Taxes (Continued)


income tax returns for additional periods through 2006. 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 such adjustments 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. While the final adjustments cannot be determined until 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 prior 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 Management Party as specified in the Tax Sharing Agreement, intends to 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, since the 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 the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across the Company's global operations. The Company 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 liabilities in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. 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 the Company determines the liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not expected within one year.

6.    Earnings Per Share

        As discussed in Note 1, the Company adopted the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities in the first quarter

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.    Earnings Per Share (Continued)


of fiscal 2010. The Company historically issued certain restricted stock awards that vest over a period of three years which contained non-forfeitable rights to dividends and should be treated as participating securities. These types of awards were last issued during fiscal 2006. Awards containing such rights that are unvested are considered to be participating securities and are included in the computation of earnings per share pursuant to the two-class method. All of these awards were vested as of September 25, 2009. As a result, the Company is not required to compute earnings per share for fiscal 2010 using the two-class method unless new awards are granted. The retrospective application of this guidance did not have an impact on the Company's historically reported earnings per share for the quarter ended June 26, 2009. In addition, the retrospective application of this guidance for the nine months ended June 26, 2009 did not have an impact on the Company's historically reported earnings per share as the effects would be anti-dilutive because the Company reported a loss from continuing operations.

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

 
  For the
Quarter Ended
June 25, 2010
  For the
Quarter Ended
June 26, 2009
 
 
  Income   Shares   Per Share
Amount
  Income   Shares   Per Share
Amount
 

Basic earnings per share attributable to Tyco common shareholders:

                                     
 

Income from continuing operations

  $ 250     492   $ 0.51   $ 244     473   $ 0.52  
 

Less: Income allocated to participating securities

    NA (1)             (2)          
 

Share options, restricted share awards and deferred stock units

        4               2        

Diluted earnings per share attributable to Tyco common shareholders:

                                     
 

Add: Income allocated to participating securities

    NA (1)             (2)          
                               

Income from continuing operations attributable to Tyco common shareholders, giving effect to dilutive adjustments

  $ 250     496   $ 0.50   $ 244     475   $ 0.51  
                           

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.    Earnings Per Share (Continued)

 

 
  For the
Nine Months Ended
June 25, 2010
  For the
Nine Months Ended
June 26, 2009
 
 
  Income   Shares   Per Share
Amount
  Loss   Shares   Per Share
Amount
 

Basic earnings per share attributable to Tyco common shareholders:

                                     
 

Income (loss) from continuing operations

  $ 852     481   $ 1.77   $ (2,046 )   473   $ (4.32 )
 

Less: Income allocated to participating securities

    NA (1)             NA (3)          
 

Share options, restricted share awards and deferred stock units

        3                      

Diluted earnings per share attributable to Tyco common shareholders:

                                     
 

Add: Income allocated to participating securities

    NA (1)             NA (3)          
                               

Income (loss) from continuing operations attributable to Tyco common shareholders, giving effect to dilutive adjustments

  $ 852     484   $ 1.76   $ (2,046 )   473   $ (4.32 )
                           

(1)
The two-class method is not applicable for the quarter and nine months ended June 25, 2010 as all participating securities were vested as of September 25, 2009.

(2)
Income allocated to participating securities rounds to zero.

(3)
The two-class method is not applicable for the nine months ended June 26, 2009 as the effects would be anti-dilutive because the Company reported a loss from continuing operations for this period.

        The computation of diluted earnings per share for the quarter and nine months ended June 25, 2010 excludes the effect of the potential exercise of share options to purchase approximately 14 million and 16 million shares, respectively, and excludes restricted share awards of approximately 2 million shares in both periods because the effect would be anti-dilutive.

        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 share options to purchase approximately 23 million and 27 million shares, respectively, and excludes restricted share awards of approximately 5 million and 6 million shares, respectively, because the effect would be anti-dilutive.

7.    Goodwill and Intangible Assets

Goodwill

        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. Fair value for each reporting unit is determined utilizing a discounted cash flow analysis based on the Company's forecast cash flows discounted using an estimated weighted-average cost of capital of market participants. A market approach is utilized to corroborate the discounted cash flow analysis performed at each reporting unit. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered potentially impaired. In determining fair value, management relies on and considers a number of factors, including operating results, business plans, economic projections, including expectations and assumptions regarding the timing and degree of any economic recovery, anticipated future cash flow, comparable market transactions (to the extent available), other market data and the Company's overall market capitalization.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)

        During the first nine months of fiscal 2010, the Company continued to monitor the recoverability of its goodwill. The Company considered and evaluated its market capitalization as well as the other factors described above and concluded its remaining goodwill balance of $9.4 billion as of June 25, 2010 is recoverable. As part of the Company's ongoing monitoring efforts, the Company will continue to consider the 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 forecast cash flows of certain of its reporting units, as well as the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the annual goodwill impairment test performed during the fourth quarter of 2009, will prove to be accurate predictions of the future. At the last annual goodwill testing date, the Company had certain reporting units within the Company's ADT Worldwide and Safety Products segments with less than a ten percent excess of fair value over carrying value based on the discounted cash flow analyses. The Company monitored the recoverability of its goodwill and concluded none of the aforementioned reporting units experienced a triggering event which would require goodwill to be tested for impairment on an interim basis. The goodwill balance for these reporting units was approximately $838 million as of June 25, 2010. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. While historical performance and current expectations have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in the future an impairment charge may need to be recorded. However, it is not possible at this time to determine if future impairment charges will be required or if such charges would be material.

        During fiscal 2010, businesses were realigned among the ADT Worldwide and Fire Protection Services segments, ADT Worldwide and Safety Products segments and Fire Protection Services and Safety Products segments. As a result of these realignments, goodwill was reallocated as detailed below. As part of the realignment the Company tested the related goodwill balances for recoverability and determined goodwill was recoverable.

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

 
  ADT
Worldwide
  Flow
Control
  Fire
Protection
Services
  Safety
Products
  Total  

Balance as of September 25, 2009

  $ 4,302   $ 1,993   $ 1,334   $ 1,162   $ 8,791  

Acquisitions

    920     76             996  

Divestitures

    (4 )   (5 )   (1 )   (9 )   (19 )

Goodwill transfer due to realignment

    112         23     (135 )    

Held for sale reclass

        (93 )           (93 )

Currency translation

    (110 )   (156 )   (2 )   (19 )   (287 )
                       

Balance as of June 25, 2010

  $ 5,220   $ 1,815   $ 1,354   $ 999   $ 9,388  
                       

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)

Second Quarter 2009 Goodwill Impairment

        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 result of a slowdown in the commercial markets including the retailer end market as well as a decline in sales volume at its Electrical and Metal Products segment due to the slow down in the non-residential construction market. 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 forecast results, restructuring actions and weaker industry outlooks, caused the Company to conclude that sufficient indicators of impairment existed for certain reporting units in the above mentioned businesses. The Company determined that these events and changes in circumstances constituted triggering events for the following six reporting units: 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. As a result of the triggering events, the Company assessed the recoverability of each of the reporting unit's long-lived assets 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 these reporting units.

        To perform the first step of the goodwill impairment test 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 was determined utilizing a discounted cash flow analysis based on forecast cash flows (including estimated underlying revenue and operating income growth rates) discounted using an estimated weighted average cost of capital of market participants. A market approach, utilizing observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available), was used 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, including expectations and assumptions regarding the timing and degree of any economic recovery, anticipated future cash flow, comparable market transactions (to the extent available), other market data and the Company's overall market capitalization.

        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

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


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 the second step of the goodwill impairment test, the Company compared the implied fair value of reporting unit goodwill with the carrying amount of the reporting unit's goodwill. 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. The Company recorded an aggregate non-cash impairment charge of $2.6 billion ($2.6 billion after-tax) which was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the quarter ended March 27, 2009. Specifically, the Company recorded the following non-cash goodwill impairment charges at the following reporting units ($ in millions):

Reporting Unit
  Pre-tax
Charge
  After-tax
Charge
 

EMEA Fire

  $ 180   $ 179  

EMEA Security

    613     610  

Electrical and Metal Products

    935     915  

ACVS

    327     321  

Life Safety

    240     236  

SRS

    346     340  
           

Total

  $ 2,641   $ 2,601  
           

Intangible Assets

        During the first nine months of fiscal 2010, the Company continued to monitor the recoverability of its indefinite lived intangible assets. Based on its evaluation, the Company concluded that its indefinite lived intangible asset balance of $304 million as of June 25, 2010 continues to be recoverable. Indefinite lived intangible assets consisting primarily of trade names are tested for impairment using the relief from royalty method. However, fair value determinations require considerable judgment and are sensitive to change. In light of current economic conditions and the downturn within the retail industry, impairments to intangible assets could occur in future periods. However, it is not possible at this time to determine if an impairment charge would result or if such a charge would be material.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)

        The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets as of June 25, 2010 and September 25, 2009 ($ in millions):

 
  June 25, 2010   September 25, 2009  
 
  Gross Carrying Amount   Accumulated Amortization   Weighted Average Amortization Period   Gross Carrying Amount   Accumulated Amortization   Weighted Average Amortization Period  

Amortizable:

                                     
 

Contracts and related customer relationships

  $ 7,633   $ 4,607     14 years   $ 6,529   $ 4,275     14 years  
 

Intellectual property

    544     472     20 years     545     459     18 years  
 

Other

    27     12     6 years     17     13     10 years  
                               
 

Total

  $ 8,204   $ 5,091     14 years   $ 7,091   $ 4,747     14 years  
                               

Non-Amortizable:

                                     
 

Intellectual property

  $ 213               $ 212              
 

Other

    91                 87              
                                   
 

Total

  $ 304               $ 299              
                                   

        Intangible asset amortization expense for the quarters ended June 25, 2010 and June 26, 2009 was $141 million and $127 million, respectively. Intangible asset amortization expense for the nine months ended June 25, 2010 and June 26, 2009 was $397 million and $383 million, respectively.

        The estimated aggregate amortization expense on intangible assets is expected to be approximately $150 million for the remainder of 2010, $525 million for 2011, $425 million for 2012, $375 million for 2013, $325 million for 2014 and $275 million for 2015.

Second Quarter 2009 Intangible Asset Impairment

        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 forecast 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 described above, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Goodwill and Intangible Assets (Continued)


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 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) which was recorded in goodwill and intangible asset impairments in the Company's Consolidated Statement of Operations for the quarter ended March 27, 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  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8.    Debt

        Debt as of June 25, 2010 and September 25, 2009 is as follows ($ in millions):

 
  June 25, 2010   September 25, 2009  

Commercial paper(2)

  $   $ 200  

6.75% public notes due 2011(1)

    516     516  

6.375% public notes due 2011

        849  

Revolving senior credit facility due 2011

         

Revolving senior credit facility due 2012

         

6.0% public notes due 2013

    655     655  

4.125% public notes due 2014

    499      

3.375% public notes due 2015

    498      

8.5% public notes due 2019

    750     750  

7.0% public notes due 2019

    433     434  

6.875% public notes due 2021

    716     716  

7.0% public notes due 2028

        14  

6.875% public notes due 2029

        21  

Other(1)(2)

    101     119  
           

Total debt

    4,168     4,274  

Less current portion

    535     245  
           

Long-term debt

  $ 3,633   $ 4,029  
           

(1)
6.75% public notes due 2011, plus $19 million of the amount shown as other, comprise the current portion of the Company's total debt as of June 25, 2010.

(2)
Commercial paper, plus $45 million of the amount shown as other, comprise the current portion of the Company's total debt as of September 25, 2009.

        The carrying amount of Tyco's debt subject to the fair value disclosure requirements as of June 25, 2010 and September 25, 2009 was $4,067 million and $4,155 million, respectively. The Company has determined the fair value of such debt to be $4,603 million and $4,578 million as of June 25, 2010 and September 25, 2009, respectively. The Company utilizes various valuation methodologies to determine the fair value of its debt, which is primarily dependent on the type of market in which the Company's debt is traded. When available, the Company uses quoted market prices to determine the fair value of its debt that is traded in active markets. As of June 25, 2010 and September 25, 2009, the fair value of the Company's debt that was actively traded was $4,603 million and $4,338 million, respectively. 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 that is traded in markets that are not active. As of June 25, 2010, all of the Company's debt was actively traded as a result of the redemption of all of the public notes due 2028 and 2029, which were redeemed during the third quarter of 2010. As of September 25, 2009, the fair value of the Company's debt that was not actively traded was $40 million. Additionally, the Company believes the carrying amount of its commercial paper of $200 million as of September 25, 2009 approximated fair value based on the short-term nature of such debt.

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8.    Debt (Continued)

        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 25, 2010, TIFSA had no commercial paper outstanding. As of September 25, 2009, TIFSA had $200 million of commercial paper outstanding, which bore interest at an average rate of 0.33%.

        The Company's committed revolving credit facilities totaled $1.69 billion as of June 25, 2010. These revolving credit facilities may be used for working capital, capital expenditures and general corporate purposes. As of June 25, 2010, there were no amounts drawn under these facilities. On January 29, 2009, the Company repaid $686 million to extinguish the entire outstanding balance under its revolving credit facilities. As of September 25, 2009, there were no amounts drawn under these facilities, although the Company had dedicated $200 million of availability to backstop its outstanding commercial paper.

        On May 5, 2010, TIFSA issued $500 million aggregate principal amount of 3.375% notes due on October 15, 2015, which are fully and unconditionally guaranteed by the Company (the "2015 notes"). TIFSA received net proceeds of approximately $495 million after deducting debt issuance costs of approximately $3 million and a debt discount of approximately $2 million. The net proceeds, along with other available funds, were used to redeem all of the Company's outstanding 6.375% notes due October 2011. The 2015 notes are unsecured and rank equally with TIFSA's other unsecured and unsubordinated debt. TIFSA may redeem any of the 2015 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 2015 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 the occurrence of both a change of control and a rating event, each as defined in the Indenture governing the notes. The debt issuance costs will be amortized from the date of issuance to the maturity date. Interest is payable semiannually on April 15th and October 15th.

        On May 28, 2010, the Company redeemed all of its 6.375% public notes due 2011 (the "2011 notes"), 7% notes due 2028 and 6.875% notes due 2029, outstanding at that time, which aggregated $878 million in principal amount. As a result of the debt redemption, the Company recorded an $87 million charge to other expense, net as a loss on extinguishment of debt. The charge is comprised of the make-whole premium, write-off of the unamortized debt issuance costs and discount related to the extinguished bonds and a net loss recognized upon termination of the associated interest rate swap contracts related to the 2011 notes.

        On October 5, 2009, TIFSA issued $500 million aggregate principal amount of 4.125% notes due on October 15, 2014, which are fully and unconditionally guaranteed by the Company (the "2014 notes"). TIFSA received net proceeds of approximately $495 million after deducting debt issuance costs of approximately $3 million and a debt discount of approximately $2 million. The 2014 notes are unsecured and rank equally with TIFSA's other unsecured and unsubordinated debt. TIFSA may redeem any of the 2014 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 2014 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,

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8.    Debt (Continued)


each as defined in the Indenture governing the notes. The debt issuance costs will be amortized from the date of issuance to the maturity date. Interest is payable semiannually on April 15th and October 15th.

        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 Company may be required to repurchase all or part of the 2019 Notes at par in July of 2014 at the option of the noteholders.

        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.

9.    Financial Instruments

        The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, debt and derivative financial instruments. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximated book value as of June 25, 2010 and September 25, 2009. The fair value of derivative financial instruments was not material to any of the periods presented. See below for the fair value of investments and Note 8 for debt.

Derivative Instruments

        In the normal course of business, Tyco is exposed to market risk arising from changes in currency exchange rates, interest rates and commodity prices. The Company uses derivative financial instruments to manage exposures to foreign currency, interest rate and commodity price 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.

        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 fair value hedges did not result in any hedge ineffectiveness for the quarter and nine months ended June 25, 2010. 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 with the exception of net investment hedges for which changes in fair value are reported in the cumulative translation component of accumulated other comprehensive income to the extent the hedges are effective. The ineffective portion of the hedge, if any, is recognized in the Company's Consolidated Statement of Operations. The derivative financial instruments and impact of such changes in the fair value of the derivative financial instruments was not material to the Consolidated Balance Sheets as of June 25, 2010 and September 25, 2009 or Consolidated Statements of Operations and Cash Flows for the quarters and nine months ended June 25, 2010 and June 26, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Financial Instruments (Continued)

Foreign Currency Exposures

        The Company manages foreign currency exchange rate risk through the use of derivative financial instruments comprised principally of forward contracts on foreign currency, which are not designated as hedging instruments for accounting purposes. The objective of those derivatives instruments is to minimize the income statement impact and potential variability in cash flows associated with intercompany loans and accounts receivable, accounts payable and forecasted transactions that are denominated in certain foreign currencies. As of June 25, 2010 and September 25, 2009, the total gross notional amount of the Company's foreign exchange contracts was $881 million and $525 million, respectively. 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.

        During the third quarter of 2010, the Company hedged its net investment in certain foreign operations through the use of foreign exchange forward contracts. The objective is to minimize the exposure to changes in the value of the foreign currency denominated net investment. The aggregate notional amount of these hedges was approximately $245 million as of June 25, 2010. As of September 25, 2009, the Company did not hedge any net investments in foreign operations.

Interest Rate Exposures

        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. During the third quarter of 2009, first quarter of 2010 and third quarter of 2010, the Company entered into interest rate swap transactions with the objective of managing the exposure to interest rate risk by converting the interest rates on $1.4 billion, $500 million, and $501 million respectively, of fixed-rate debt to variable rates. In these contracts, the Company agrees with financial institutions acting as principal counterparties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. In connection with the redemption of all of the 6.375% public notes due 2011 during the third quarter of 2010, the Company terminated the corresponding interest rate swaps. As of June 25, 2010 and September 25, 2009, the total gross notional amount of the Company's interest rate swap contracts was $1.5 billion and $1.4 billion, respectively.

Commodity Exposures

        During fiscal 2010, the Company entered into commodity swaps for copper, which are not designated as hedging instruments for accounting purposes. These swaps did not have a material impact on the Company's financial position, results of operations or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Financial Instruments (Continued)

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 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 25, 2010, 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 as of June 25, 2010 without giving consideration to the effects of legally enforceable master netting agreements, was approximately $28 million.

Fair Value of Financial Instruments

        Authoritative guidance for fair value measurements 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, U.S. government agency securities and corporate debt securities.

        When available, the Company uses quoted market prices to determine the fair value of investment securities. Such investments are included in Level 1. When quoted market prices are not readily available, pricing determinations are made based on the results of market approach valuation models using observable market data such as recently reported trades, bid and offer information and benchmark securities. These investments are included in Level 2 and consist primarily of U.S. government agency securities and corporate debt securities.

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 market approach 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. Derivative financial instruments are not presented in the following tables as the derivative financial instruments were not material to any of the periods presented.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

        The following tables present the Company's assets and liabilities measured at fair value on a recurring basis as of June 25, 2010 and September 25, 2009 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the valuation.

 
  June 25, 2010  
($ in millions)
  Level 1   Level 2   Total  

Assets

                   

Available-for-Sale Securities:

                   
 

Corporate debt securities

  $   $ 82   $ 82  
 

U.S. Government debt securities

    104     135     239  
 

Other debt securities

        8     8  
               

Total

  $ 104   $ 225   $ 329  
               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Financial Instruments (Continued)

 

 
  September 25, 2009  
($ in millions)
  Level 1   Level 2   Total  

Assets

                   

Available-for-Sale Securities:

                   
 

Corporate debt securities

  $   $ 104   $ 104  
 

U.S. Government debt securities

    60     171     231  
 

Other debt securities

        5     5  
               

Total

  $ 60   $ 280   $ 340  
               

        During the quarter and nine months ended June 25, 2010, the Company did not have any significant transfers within the fair value hierarchy.

Other

        The Company had $2.9 billion and $3.0 billion of intercompany loans designated as permanent in nature as of June 25, 2010 and September 25, 2009, respectively. For the quarters ended June 25, 2010 and June 26, 2009, the Company recorded $59 million and $230 million, respectively, of cumulative translation loss through accumulated other comprehensive income (loss) related to these loans. For the nine months ended June 25, 2010 and June 26, 2009, the Company recorded $174 million and $123 million, respectively, of cumulative translation loss through accumulated other comprehensive income (loss) 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. 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.

Legacy Securities Matters

        As previously reported, 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 June 2007, the Company settled 32 purported securities

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.    Commitments and Contingencies (Continued)


class action lawsuits arising from actions alleged to have been taken by prior management. The June 2007 class action settlement did not purport to resolve all legacy securities cases.

        During the second quarter of 2009, the Company concluded that its best estimate of probable loss for the legacy securities matters outstanding at the time was $375 million in the aggregate, which the Company recorded as a liability in accrued and other current liabilities in the Consolidated Balance Sheet as of March 27, 2009. Due to the sharing provisions in the Separation and Distribution Agreement, 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 as of March 27, 2009. As a result, the Company recorded a net charge of $101 million related to legacy securities matters during the quarter ended March 27, 2009 in selling, general, and administrative expenses in the Consolidated Statements of Operations.

        In the second half of fiscal 2009, the Company agreed to settle with all of the remaining plaintiffs that had opted-out of the class action settlement as well as plaintiffs who had brought Employee Retirement Income Security Act ("ERISA") related claims for a total of $271 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 $114 million and $84 million, respectively. This settlement activity did not result in the Company recording a charge to its Consolidated Statements of Operations 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. Since the June 2007 class action settlement, the Company has resolved all of its significant legal claims stemming from allegations of securities laws violations, with the exception of the matters noted below.

        The most significant outstanding legacy securities matter is Stumpf v. Tyco International Ltd., which is a class action lawsuit in which the plaintiffs alleged that Tyco, among others, violated the disclosure provisions of the federal securities laws. The matter arose from Tyco's July 2000 initial public offering of common stock of TyCom Ltd, and alleged 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 alleged 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. On May 6, 2010, the United States District Court for the District of New Jersey granted preliminary approval of settlement of the Stumpf matter. The proposed settlement is subject to final court approval at a hearing scheduled for August 25, 2010. Any settlement will be subject to the liability sharing provisions of the Separation and Distribution Agreement with Covidien and Tyco Electronics. The Company believes its remaining reserve related to legacy securities matters is sufficient to satisfy the resolution of this matter.

        In addition to the Stumpf matter, Tyco is a party to several lawsuits involving disputes with former management, among which are affirmative cases brought by Tyco against Mr. Dennis L. Kozlowski, Tyco's former chief executive officer, Mr. Mark Swartz, its former chief financial officer, and Mr. Frank Walsh Jr., a former director. In connection with these affirmative actions, Messrs. Kozlowski and Swartz have made claims seeking amounts allegedly due in connection with their compensation and retention arrangements and under ERISA, and Mr. Walsh has made claims alleging that Tyco is required to

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10.    Commitments and Contingencies (Continued)


indemnify him for his defense costs arising from his role as a Tyco director. Tyco intends to vigorously defend each of these actions.

        Tyco has reserved its best estimate of probable loss for these legacy matters. However, their ultimate resolution could differ materially from these estimates and could have a material adverse effect on Tyco's financial position, results of operations or cash flows.

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 25, 2010, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $25 million to $86 million. As of June 25, 2010, Tyco concluded that the best estimate within this range is approximately $35 million, of which $18 million is included in accrued and other current liabilities and $17 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 of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows.

Asbestos Matters

        The Company and certain of its subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. These cases typically involve product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were attached to or used with asbestos-containing components manufactured by third-parties. Each case typically names between dozens to hundreds of corporate defendants. While the Company has observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims, a large percentage of these suits have not presented viable legal claims and, as a result, have been dismissed by the courts. The Company's strategy has been, and continues to be, to mount a vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits before trial. Although a large percentage of litigated suits have been dismissed, the Company cannot predict the extent to which it will be successful in resolving lawsuits in the future. Of the lawsuits that have proceeded to trial since 2005, the Company 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 25, 2010, there were approximately 3,500 lawsuits pending against the Company and its subsidiaries. Each lawsuit typically includes several claims, and the Company has determined that there were approximately 4,300 claims outstanding as of June 25, 2010, which amount reflects the Company's current estimate of the number of active claims made against it or its affiliates, and includes adjustments for claims that are not actively being prosecuted, identify incorrect defendants or are duplicative of other actions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.    Commitments and Contingencies (Continued)

        Annually, the Company performs an analysis to update its estimated asbestos-related assets and liabilities. The Company's estimate of the liability and corresponding insurance recovery for pending and future claims and defense costs is based on claim experience over the past five years and covers claims expected to be filed, including related defense costs, over the next seven years on an undiscounted basis. On a quarterly basis, the Company re-evaluates the assumptions used to perform the annual analysis and records an expense as necessary to reflect any changes in its estimated liability and related insurance asset for the seven year horizon at each balance sheet date. Due to a high degree of uncertainty regarding the pattern and length of time over which claims will be made and other factors, the Company has concluded that estimating the liability beyond the seven year period will not provide a reasonable estimate, as these uncertainties increase as the projection period lengthens. The Company's estimate of asbestos-related insurance recoveries represents estimated amounts due to the Company for previously paid and settled claims and the probable reimbursements relating to its estimated liability for pending and future claims. In determining the amount of insurance recoverable, the Company considers available insurance, allocation methodologies, solvency and creditworthiness of the insurers.

        The Company performed its annual analysis of asbestos-related liabilities and insurance assets during the third quarter of 2010. During the third quarter of 2010, the Company settled a higher than expected number of claims at above average amounts as compared to the estimates used during the Company's valuation performed during fiscal 2009. Based on the company's claim experience over the past 5 years, including the impact of the above mentioned increase in settlements and average settlement amounts during fiscal 2010, the Company increased its estimated net liability, which resulted in the Company recording a net charge of approximately $52 million during the quarter ended June 25, 2010. As of June 25, 2010, the Company's estimated net liability of $104 million was recorded within the Company's Consolidated Balance Sheet as a liability for pending and future claims and related defense costs of $317 million, and separately as an asset for insurance recoveries of $213 million. Similarly, as of September 25, 2009, the Company's estimated net liability of $49 million was recorded within the Company's Consolidated Balance Sheet as a liability for pending and future claims and related defense costs of $240 million, and separately as an asset for insurance recoveries of $191 million. The estimated insurance asset increased due to the responsiveness of pertinent insurance policies that cover a portion of the increased liability.

        The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on currently available information as well as estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the resolution of coverage issues with insurance carriers, amount of available insurance and the solvency risk with respect to the Company's insurance carriers. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. The Company believes that its asbestos-related reserves as of June 25, 2010 are appropriate. However, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Company's calculations vary significantly from actual results.

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10.    Commitments and Contingencies (Continued)

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 and agents 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 potentially improper conduct involving agents retained by the Company's EMEA water business. The Company has since resolved this matter with German authorities. The Company 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 these allegations and its internal investigations. In 2005, the Company informed the DOJ and the SEC that it retained outside counsel to perform a Company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("FCPA"), 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. The baseline review, which has been completed, has revealed that some business practices may not comply with Tyco and FCPA requirements, and in February 2010, the Company initiated discussions with the DOJ and SEC aimed at resolving these matters. While these discussions are ongoing, the Company cannot predict their outcome and cannot estimate the range of potential loss or the form of penalty, that may result from an adverse resolution. It is possible that the Company may be required to pay material fines, consent to injunctions on future conduct, or suffer other criminal or civil penalties or adverse impacts, each of which may have a material adverse effect on the Company's financial position, results of operations or cash flows.

        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 and 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, which is ongoing. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10.    Commitments and Contingencies (Continued)

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, $13.2 million of which has been cumulatively paid through June 25, 2010. 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.

BHS Contingency

        On May 14, 2010, the Company acquired BHS, which is a business that was formerly owned by The Brink's Company. Under the Coal Industry Retiree Health Benefit Act of 1992, as amended (the "Coal Act"), The Brink's Company and its majority-owned subsidiaries at July 20, 1992 (including certain legal entities acquired in the BHS acquisition) are jointly and severally liable with certain of The Brink's Company's other current and former subsidiaries for health care coverage obligations provided for by the Coal Act. A Voluntary Employees' Beneficiary Associate trust has been established by The Brink's Company to pay for these liabilities, although the trust may have insufficient funds to satisfy all future obligations. At the time of its spin-off from The Brink's Company, BHS entered into an agreement in which The Brink's Company agreed to indemnify BHS for any and all liabilities and expenses related to The Brink's Company's former coal operations, including any health care coverage obligations. The Brink's Company has agreed that this indemnification survives the Company's acquisition of BHS. The Company has evaluated its potential liability under the Coal Act as a contingency in light of all known facts, including the funding of the Voluntary Employees' Beneficiary Association ("VEBA"), and indemnification provided by The Brink's Company. The Company has concluded that no accrual is necessary due to the existence of the indemnification and its belief that The Brink's Company and the VEBA will be able to satisfy all future obligations under the Coal Act.

Other Matters

        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

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10.    Commitments and Contingencies (Continued)


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. In February 2010, the Court granted a directed verdict in ADT's favor dismissing a number of the plaintiffs' key claims. The plaintiffs have appealed this verdict. 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, the Company believes 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 the Company's financial condition, results of operations or cash flows beyond amounts recorded for such matters.

11.    Retirement Plans

        Defined Benefit Pension Plans—The Company adopted the measurement date provisions of the authoritative guidance for the employers' accounting for defined benefit pension and other postretirement plans 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 (deficit) and accumulated other comprehensive income (loss) 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 (deficit) of $5 million, net of an income tax benefit of $2 million, and a net increase to accumulated other comprehensive income (loss) of $61 million, net of income taxes of $28 million.

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11.    Retirement Plans (Continued)

        The Company sponsors a number of pension plans. The following disclosures exclude the impact of plans which are immaterial individually and in the aggregate. The net periodic benefit cost for the Company's material U.S. and non-U.S. defined benefit pension plans is as follows ($ in millions):

 
  U.S. Plans  
 
  For the
Quarters Ended
  For the Nine
Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Service cost

  $ 3   $ 2   $ 7   $ 7  

Interest cost

    12     12     34     37  

Expected return on plan assets

    (12 )   (12 )   (36 )   (37 )

Amortization of prior service cost

        1     1     1  

Amortization of net actuarial loss

    6     2     20     7  
                   

Net periodic benefit cost

  $ 9   $ 5   $ 26   $ 15  
                   

 

 
  Non-U.S. Plans  
 
  For the
Quarters Ended
  For the Nine
Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Service cost

  $ 5   $ 9   $ 19   $ 26  

Interest cost

    19     20     56     61  

Expected return on plan assets

    (18 )   (18 )   (52 )   (54 )

Amortization of prior service cost

        (1 )   (1 )   (2 )

Amortization of net actuarial loss

    6     5     20     14  

Plan settlements and curtailments termination benefits

    (22 )       (22 )   (1 )
                   

Net periodic benefit cost

  $ (10 ) $ 15   $ 20   $ 44  
                   

        During the quarter ended June 25, 2010, the Company adopted plan amendments that froze pension plan benefits for certain of its defined benefit arrangements in the United Kingdom, which resulted in the Company recognizing a curtailment gain of approximately $22 million in selling, general and administrative expenses within the Consolidated Statement of Operations.

        The estimated net loss and prior service cost for U.S. pension benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the current fiscal year are expected to be $26 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 (loss) into net periodic benefit cost over the current fiscal year are expected to be $27 million and $2 million, respectively.

        The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which it operates and to make discretionary voluntary contributions from time-to-time. The Company anticipates that it will contribute at least the minimum required to its pension plans in fiscal year 2010 of $4 million for U.S. plans and $76 million for non-U.S. plans.

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11.    Retirement Plans (Continued)


During the nine months ended June 25, 2010 the Company contributed $3 million to its U.S. pension plans and $60 million to its non-U.S. pension plans, respectively.

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

12.    Shareholders' Equity

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 are also expected to be made free of Swiss withholding taxes.

        On March 10, 2010, the Company's shareholders approved an annual dividend on the Company's common shares of CHF 0.90 per share, which will be paid in the form of a return on capital in four installments of CHF 0.22, CHF 0.22, CHF 0.23 and CHF 0.23. The first installment of CHF 0.22 was paid on May 26, 2010 to shareholders of record on May 14, 2010. While certain administrative steps need to occur to effectuate the dividend payment, approval of the dividend by the shareholders establishes the dividend under Swiss law. As a result, the Company recorded an accrued dividend of CHF 428 million as of March 10, 2010, which approximated $399 million based on the exchange rate in effect on that date. The accrued dividend was recorded in accrued and other current liabilities in the Company's Consolidated Balance Sheet as of March 26, 2010. On the Company's Consolidated Balance Sheet, this amount was recorded as a reduction of common shares, which reduces the par value of the Company's common shares from CHF 7.60 to CHF 6.70. The installments will be paid in U.S. dollars converted from Swiss Francs at the USD/CHF exchange rate in effect shortly before the payment dates.

        On May 14, 2010, the Company acquired all of the outstanding equity of BHS. BHS shareholders who received Tyco common stock as consideration in the merger were included in the first installment of dividend payments that were paid on May 26, 2010. As a result, the Company recorded an accrued dividend of CHF 32 million as of May 14, 2010, which is approximately $28 million based on the exchange rate in effect on that date.

        On March 12, 2009, the Company's shareholders approved an annual dividend on the Company's common shares of CHF 0.93 per share, which was paid in the form of a return on capital in four installments of CHF 0.23, CHF 0.23, CHF 0.23 and CHF 0.24 to shareholders of record on April 30, 2009, July 31, 2009, October 30, 2009 and January 29, 2010, respectively. The Company recorded an accrued dividend of CHF 440 as of March 12, 2009, which approximated $377 million based on the exchange rate in effect on that date. On the Company's Consolidated Balance Sheet, this amount was recorded as a reduction of common shares, which reduced the par value of the Company's common shares from CHF 8.53 to CHF 7.60. The installments were paid in U.S. dollars converted from Swiss Francs at the USD/CHF exchange rate in effect shortly before the payment dates.

        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

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12.    Shareholders' Equity (Continued)


February 2, 2009 to shareholders of record on January 5, 2009. This amount was recorded as a reduction of accumulated earnings.

Common Stock

        As of June 25, 2010, the Company's share capital amounted to CHF 3,796,649,494.38, or 514,451,151 registered common shares with a par value of CHF 7.38 per share. Until March 12, 2011, the Board of Directors may increase the Company's share capital by a maximum amount of CHF 1,509,147,270 by issuing a maximum of 204,491,500 shares. In addition, until March 12, 2011, (i) the share capital of the Company may be increased by an amount not exceeding CHF 353,719,784 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 353,719,784 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.

Change in Domicile

        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 and pursuant to the laws of Switzerland, 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 of the Company 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.

Share Repurchase Program

        On July 10, 2008, Tyco's Board of Directors approved a $1.0 billion share repurchase program. During the third quarter of 2010, the Company repurchased approximately 7.5 million shares for $276 million under this program. As of June 25, 2010, the 2008 share repurchase program had approximately $624 million of authorized capacity remaining available.

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13.    Share Plans

        On May 14, 2010, Tyco acquired BHS. In connection with the acquisition, the Company agreed to replace outstanding BHS share-based payment awards with approximately 2 million Tyco share-based payment awards. See Note 4. The Tyco share-based payment awards were issued from shares available under the Tyco International Ltd. 2004 Stock and Incentive Plan (the "2004 Plan"). As of June 25, 2010, there were approximately 21 million shares available for future grants under the 2004 Plan.

        During the quarter ended December 25, 2009, the Company issued its annual share-based compensation grants. The total number of awards issued was approximately 6 million, of which 4 million were share options, 1 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 $9.17, $33.75 and $40.19, respectively. The weighted-average assumptions used in the Black-Scholes option pricing model included an expected stock price volatility of 34%, a risk free interest rate of 2.47%, an expected annual dividend per share of $0.80 and an expected option life of 5.4 years.

        During the quarter ended December 26, 2008, 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.

14.    Consolidated Segment Data

        The Company, from time to time, may realign businesses and management responsibility within its operating segments based on considerations such as opportunity for market or operating synergies and/or to more fully leverage existing capabilities and enhance development for future products and services. During the first quarter of fiscal 2010, the manufacturing operations which support the ADT retail business, historically included in the Safety Products segment, were transferred to the ADT Worldwide segment. In addition, certain smaller businesses were transferred between segments; from the Company's Safety Products segment to the Company's Fire Protection Services segment in Asia Pacific; from the Company's Fire Protection Services segment to the Company's ADT Worldwide segment in EMEA and Latin America. Further, certain overhead costs were transferred from Corporate and Other to the Company's ADT Worldwide segment. During the third quarter of fiscal 2010 the Company reclassified certain businesses which have satisfied the criteria to be presented as discontinued operations to income from discontinued operations in the Consolidated Statement of Operations and assets and liabilities held for sale within the Consolidated Balance Sheets. See Note 2. As a result of the realignment of these business activities and the reclassification of businesses, the

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14.    Consolidated Segment Data (Continued)


revenue and operating income for the quarter and nine months ending June 26, 2009 have been recast to reflect the above. Selected information by segment is presented in the following tables ($ in millions):

 
  For the
Quarters Ended
  For the Nine
Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Net revenue(1):

                         
 

ADT Worldwide

  $ 1,824   $ 1,741   $ 5,426   $ 5,257  
 

Flow Control

    849     866     2,505     2,584  
 

Fire Protection Services

    822     855     2,462     2,507  
 

Electrical and Metal Products

    390     320     1,023     1,066  
 

Safety Products

    389     370     1,107     1,146  
                   
 

Net revenue

  $ 4,274   $ 4,152   $ 12,523   $ 12,560  
                   

(1)
Revenue by operating segment excludes intercompany transactions.

 
  For the
Quarters Ended
  For the Nine
Months Ended
 
 
  June 25,
2010
  June 26,
2009
  June 25,
2010
  June 26,
2009
 

Operating income (loss):

                         
 

ADT Worldwide

  $ 222   $ 220   $ 786   $ (420 )
 

Flow Control

    113     115     306     376  
 

Fire Protection Services

    80     69     206     4  
 

Electrical and Metal Products

    40     (16 )   87     (950 )
 

Safety Products

    63     43     164     (414 )
 

Corporate and Other

    (143 )   (97 )   (344 )   (411 )
                   
 

Operating income (loss)

  $ 375   $ 334   $ 1,205   $ (1,815 )
                   

15.    Inventory

        Inventories consisted of the following ($ in millions):

 
  June 25,
2010
  September 25,
2009
 

Purchased materials and manufactured parts

  $ 524   $ 482  

Work in process

    184     194  

Finished goods

    709     694  
           
 

Inventories

  $ 1,417   $ 1,370  
           

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

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16.    Property, Plant and Equipment

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

 
  June 25,
2010
  September 25,
2009
 

Land

  $ 144   $ 144  

Buildings

    773     745  

Subscriber systems

    6,063     5,309  

Machinery and equipment

    2,360     2,324  

Property under capital leases(1)

    62     62  

Construction in progress

    173     164  

Accumulated depreciation(2)

    (5,485 )   (5,311 )
           
 

Property, Plant and Equipment, net

  $ 4,090   $ 3,437  
           

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

(2)
Accumulated amortization of capital lease assets was $33 million and $28 million as of June 25, 2010 and September 25, 2009, 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 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 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. As of June 25, 2010 and September 25, 2009, the Company maintained a liability of $554 million, which reflected the fair value of the guarantees and indemnification under the Tax Sharing Agreement and was recorded in other liabilities on the Company's Consolidated Balance Sheets. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. See Note 5.

        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

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17.    Guarantees (Continued)


the Separation date, Tyco assumed primary liability on any remaining such support. The Company's obligations were $4 million, which were included in other liabilities on the Company's Consolidated Balance Sheets as of June 25, 2010 and September 25, 2009, respectively, 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.

        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 changes in the carrying amount of the Company's warranty accrual from September 25, 2009 to June 25, 2010 were as follows ($ in millions):

Balance as of September 25, 2009

  $ 79  

Warranties issued

    21  

Changes in estimates

    (9 )

Settlements

    (32 )

Currency translation

    (4 )
       

Balance as of June 25, 2010

  $ 55  
       

        Warranty accruals for businesses that have met the held for sale criteria are included in liabilities held for sale on the Consolidated Balance Sheets and excluded from the table above. See Note 2.

        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 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. Settlements during the quarter and nine months ended June 25, 2010 include cash expenditures of $1 million and $8 million respectively, related to the VRP. The Company believes the remaining recorded liability is sufficient to cover the cost required to complete the VRP as of June 25, 2010, which is not material.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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. The following tables present condensed consolidating financial information for Tyco, TIFSA and all other subsidiaries. Condensed financial information for Tyco and TIFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Quarter Ended June 25, 2010

($ in millions)

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

Net revenue

  $   $   $ 4,274   $   $ 4,274  

Cost of product sales and services

            2,693         2,693  

Selling, general and administrative expenses

    2     3     1,158         1,163  

Restructuring, asset impairment and divestiture charges, net

            43         43  
                       
 

Operating (loss) income

    (2 )   (3 )   380         375  

Interest income

            7         7  

Interest expense

        (70 )   (1 )       (71 )

Other (expense) income, net

        (87 )   2         (85 )

Equity in net income of subsidiaries

    595     301         (896 )    

Intercompany interest and fees

    (343 )   86     257          
                       
 

Income from continuing operations before income taxes

    250     227     645     (896 )   226  

Income tax benefit

        22     4         26  
                       
 

Income from continuing operations

    250     249     649     (896 )   252  

Income from discontinued operations, net of income taxes

    4     4     4     (8 )   4  
                       
 

Net income

    254     253     653     (904 )   256  

Less: noncontrolling interest in subsidiaries net income

            2         2  
                       
 

Net income attributable to Tyco common shareholders

  $ 254   $ 253   $ 651   $ (904 ) $ 254  
                       

49


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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 Quarter Ended June 26, 2009

($ in millions)

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

Net revenue

  $   $   $ 4,152   $   $ 4,152  

Cost of product sales and services

            2,677         2,677  

Selling, general and administrative expenses

    8     (1 )   1,103         1,110  

Restructuring, asset impairment and divestiture charges, net

            31         31  
                       
 

Operating (loss) income

    (8 )   1     341         334  

Interest income

            9         9  

Interest expense

        (73 )   (1 )       (74 )

Other income (expense), net

    1         (1 )        

Equity in net income of subsidiaries

    592     283         (875 )    

Intercompany interest and fees

    (341 )   33     308          
                       
 

Income from continuing operations before income taxes

    244     244     656     (875 )   269  

Income tax benefit (expense)

        15     (39 )       (24 )
                       
 

Income from continuing operations

    244     259     617     (875 )   245  

Income from discontinued operations, net of income taxes

    43     42     43     (85 )   43  
                       
 

Net income

    287     301     660     (960 )   288  

Less: noncontrolling interest in subsidiaries net income

            1         1  
                       
 

Net income attributable to Tyco common shareholders

  $ 287   $ 301   $ 659   $ (960 ) $ 287  
                       

50


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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 25, 2010

($ in millions)

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

Net revenue

  $   $   $ 12,523   $   $ 12,523  

Cost of product sales and services

            7,912         7,912  

Selling, general and administrative expenses

    11     6     3,363         3,380  

Restructuring, asset impairment and divestiture charges, net

            26         26  
                       
 

Operating (loss) income

    (11 )   (6 )   1,222         1,205  

Interest income

            24         24  

Interest expense

        (217 )   (4 )       (221 )

Other income (expense), net

    12     (87 )   2         (73 )

Equity in net income of subsidiaries

    1,874     873         (2,747 )    

Intercompany interest and fees

    (1,023 )   256     767          
                       
 

Income from continuing operations before income taxes

    852     819     2,011     (2,747 )   935  

Income tax benefit (expense)

        18     (96 )       (78 )
                       
 

Income from continuing operations

    852     837     1,915     (2,747 )   857  

Income from discontinued operations, net of income taxes

    14     14     14     (28 )   14  
                       
 

Net income

    866     851     1,929     (2,775 )   871  

Less: noncontrolling interest in subsidiaries net income

            5         5  
                       
 

Net income attributable to Tyco common shareholders

  $ 866   $ 851   $ 1,924   $ (2,775 ) $ 866  
                       

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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

  $   $   $ 12,560   $   $ 12,560  

Cost of product sales and services

            8,129         8,129  

Selling, general and administrative expenses

    144     4     3,274         3,422  

Goodwill and intangible asset impairments

            2,705         2,705  

Restructuring, asset impairment and divestiture charges, net

    2         117         119  
                       
 

Operating loss

    (146 )   (4 )   (1,665 )       (1,815 )

Interest income

        1     31         32  

Interest expense

        (219 )   (6 )       (225 )

Other income, net

    6     2     3         11  

Equity in net loss of subsidiaries

    (856 )   (1,750 )       2,606      

Intercompany interest and fees

    (1,050 )   102     948          
                       
 

Loss from continuing operations before income taxes

    (2,046 )   (1,868 )   (689 )   2,606     (1,997 )

Income tax benefit (expense)

        49     (96 )       (47 )
                       
 

Loss from continuing operations

    (2,046 )   (1,819 )   (785 )   2,606     (2,044 )

Income from discontinued operations, net of income taxes

    43     37     43     (80 )   43  
                       
 

Net loss

    (2,003 )   (1,782 )   (742 )   2,526     (2,001 )

Less: noncontrolling interest in subsidiaries net income

            2         2  
                       
 

Net loss attributable to Tyco common shareholders

  $ (2,003 ) $ (1,782 ) $ (744 ) $ 2,526   $ (2,003 )
                       

52


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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

As of June 25, 2010

($ in millions)

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

Assets

                               

Current Assets:

                               
 

Cash and cash equivalents

  $ 15   $ 1   $ 1,807   $   $ 1,823  
 

Accounts receivable, net

            2,416         2,416  
 

Inventories

            1,417         1,417  
 

Intercompany receivables

    1,085     74     15,061     (16,220 )    
 

Prepaid expenses and other current assets

    97     1     851         949  
 

Deferred income taxes

            414         414  
 

Assets held for sale

    213     213     310     (426 )   310  
                       
 

Total current assets

    1,410     289     22,276     (16,646 )   7,329  

Property, plant and equipment, net

            4,090         4,090  

Goodwill

            9,388         9,388  

Intangible assets, net

            3,417         3,417  

Investment in subsidiaries

    44,789     15,958         (60,747 )    

Intercompany loans receivable

    591     11,299     20,386     (32,276 )    

Other assets

    114     297     2,273         2,684  
                       
   

Total Assets

  $ 46,904   $ 27,843   $ 61,830   $ (109,669 ) $ 26,908  
                       

Liabilities and Equity

                               

Current Liabilities:

                               
 

Loans payable and current maturities of long-term debt

  $   $ 517   $ 18   $   $ 535  
 

Accounts payable

    14         1,199         1,213  
 

Accrued and other current liabilities

    422     66     1,982         2,470  
 

Deferred revenue

            644         644  
 

Intercompany payables

    10,487     4,589     1,144     (16,220 )    
 

Liabilities held for sale

            97         97  
                       
   

Total current liabilities

    10,923     5,172     5,084     (16,220 )   4,959  

Long-term debt

        3,574     59         3,633  

Intercompany loans payable

    21,290     1,912     9,074     (32,276 )    

Deferred revenue

            1,101         1,101  

Other liabilities

    566         2,508         3,074  
                       
   

Total Liabilities

    32,779     10,658     17,826     (48,496 )   12,767  
                       

Tyco Shareholders' Equity:

                               
 

Preference shares

            2,500     (2,500 )    
 

Common shares

    2,940                 2,940  
 

Common shares held in treasury

    (250 )       (143 )       (393 )
 

Other shareholders' equity

    11,435     17,185     41,631     (58,673 )   11,578  
                       
   

Total Tyco Shareholders' Equity

    14,125     17,185     43,988     (61,173 )   14,125  
 

Noncontrolling interest

            16         16  
                       
   

Total Equity

    14,125     17,185     44,004     (61,173 )   14,141  
                       
   

Total Liabilities and Equity

  $ 46,904   $ 27,843   $ 61,830   $ (109,669 ) $ 26,908  
                       

53


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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

As of September 25, 2009

($ in millions)

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

Assets

                               

Current Assets:

                               
 

Cash and cash equivalents

  $   $   $ 2,354   $   $ 2,354  
 

Accounts receivable, net

            2,544         2,544  
 

Inventories

            1,370         1,370  
 

Intercompany receivables

    1,069     29     14,646     (15,744 )    
 

Prepaid expenses and other current assets

    114         849         963  
 

Deferred income taxes

            405         405  
 

Assets held for sale

    127     127     404     (254 )   404  
                       
 

Total current assets

    1,310     156     22,572     (15,998 )   8,040  

Property, plant and equipment, net

            3,437         3,437  

Goodwill

            8,791         8,791  

Intangible assets, net

            2,643         2,643  

Investment in subsidiaries

    43,358     15,939         (59,297 )    

Intercompany loans receivable

        9,765     18,695     (28,460 )    

Other assets

    96     303     2,243         2,642  
                       
   

Total Assets

  $ 44,764   $