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Tyco International 10-K 2011
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UNITED STATES
FORM 10-K
(Commission File Number) 001-13836
TYCO INTERNATIONAL LTD.
Freier Platz 10, CH-8200 Schaffhausen, Switzerland 41-52-633-02-44 Securities registered pursuant to Section 12 (b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý The aggregate market value of voting common shares held by non-affiliates of the registrant as of March 25, 2011 was approximately $20,425,732,224 The number of common shares outstanding as of November 7, 2011 was 461,979,698 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with the registrant's 2012 annual general meeting of shareholders are incorporated by reference into Part III of this Form 10-K. See page 69 to 72 for the exhibit index.
Table of Contents
i General Tyco International Ltd. (hereinafter referred to as "we," the "Company" or "Tyco") is a diversified, global company that provides products and services to customers in various countries throughout the world. Tyco is a leading provider of security products and services, fire protection and detection products and services, valves and controls, and other industrial products. We operate and report financial and operating information in the following three segments:
We also provide general corporate services to our segments and these costs are reported as Corporate and Other. Net revenue by segment for 2011 is as follows ($ in billions):
Unless otherwise indicated, references in this Annual Report to 2011, 2010 and 2009 are to Tyco's fiscal years ended September 30, 2011, September 24, 2010 and September 25, 2009, respectively. The Company has a 52 or 53-week fiscal year that ends on the last Friday in September. Fiscal 2011 is a 53-week year. Fiscal years 2010 and 2009 were both 52-week years. History and Development Tyco International Ltd. Tyco International Ltd. is a Company organized under the laws of Switzerland. The Company was created as a result of the July 1997 acquisition of Tyco International Ltd., a Massachusetts corporation, by ADT Limited, a public company organized under the laws of Bermuda, at which time ADT Limited changed its name to Tyco International Ltd. Effective March 17, 2009, following shareholder and Board of Director approval on March 12, 2009, the Company ceased to exist as a Bermuda corporation and 1 continued its existence as a Swiss corporation under articles 620 et seq. of the Swiss Code of Obligations (the "Change of Domicile"). Effective June 29, 2007, Tyco International Ltd. completed the spin-offs of Covidien and TE Connectivity, formerly our Healthcare and Electronics businesses, respectively, into separate, publicly traded companies (the "2007 Separation") in the form of a distribution to Tyco shareholders. On May 14, 2010, we acquired all of the outstanding equity of Brink's Home Security Holdings, Inc. ("BHS" or "Broadview Security") in a cash-and-stock transaction valued at approximately $2.0 billion. Broadview Security has been integrated into our Tyco Security Solutions segment. See Note 5 to the Consolidated Financial Statements. On December 22, 2010, we sold a majority interest in our Electrical and Metal Products business. See Note 3 to the Consolidated Financial Statements. On September 19, 2011, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies consisting of the Company's North American residential security business, its flow control business and its commercial fire and security business (the "2012 Separation"). The 2012 Separation is expected to be completed by the end of the third calendar quarter of 2012 through a tax-free pro rata distribution of all of the equity interests in the flow control and North American residential security businesses. Completion of the 2012 Separation is subject to certain conditions, including final approval by the Tyco Board of Directors and shareholders, receipt of tax opinions and rulings and the filing and effectiveness of registration statements with the Securities and Exchange Commission ("SEC"). The Separation will also be subject to the completion of any necessary financing. See Note 2 to the Consolidated Financial Statements. Tyco's registered and principal office is located at Freier Platz 10, CH-8200 Schaffhausen, Switzerland. Its management office in the United States is located at 9 Roszel Road, Princeton, New Jersey 08540. Segments Certain prior period amounts have been reclassified to conform to the current period presentation. During the first quarter of fiscal 2011, we realigned our Safety Products segment between our ADT Worldwide and Fire Protection segments to create two new segments: Tyco Security Solutions and Tyco Fire Protection. Tyco Security Solutions consists of the former ADT Worldwide segment as well as the portion of the former Safety Products segment that manufactures security products including intrusion, security, access control and video management systems. Tyco Fire Protection consists of the former Fire Protection Services segment as well as a number of businesses from the former Safety Products segment including the fire suppression and life safety products business. In addition, various businesses were realigned between Tyco Security Solutions and Tyco Fire Protection. See Note 21 to the Consolidated Financial Statements. As discussed above, we sold a majority interest in our Electrical and Metal Products business which contributed $0.4 billion, $1.4 billion and $1.4 billion of revenue in the years ended September 30, 2011, September 24, 2010 and September 25, 2009, respectively. On September 30, 2010, we sold our water business in Europe, which was part of our Tyco Flow Control Segment. The business met the held for sale criteria and discontinued operations criteria and has been included in discontinued operations for all periods presented. See Note 3 to the Consolidated Financial Statements. 2 Tyco Security Solutions Our Tyco Security Solutions segment designs, sells, installs, services and monitors electronic security systems for residential, commercial, educational, governmental and industrial customers around the world primarily operating under the ADT brand name. In addition, Tyco Security Solutions designs, manufactures and sells security products including intrusion, access control and video management systems and is one of the world's largest providers of electronic security systems and services. Tyco Security Solutions has a significant market presence in North and South America, Europe and the Asia-Pacific region. With 2011 net revenue of $8.6 billion, our Tyco Security Solutions segment comprises 49% of our consolidated net revenue. In 2010 and 2009, net revenue totaled $7.7 billion, or 45%, of our consolidated net revenue and $7.4 billion, or 44%, of our consolidated net revenue, respectively. On May 14, 2010, we acquired all of the outstanding equity of Broadview Security in a cash-and-stock transaction valued at approximately $2.0 billion, with $585 million in cash being used to fund the acquisition. Broadview Security's core business was to provide security alarm monitoring services for residential and commercial properties in North America, and it has been integrated into our Tyco Security Solutions segment. In connection with the integration, the Broadview Security brand has been discontinued. See Note 5 to the Consolidated Financial Statements. Services and Products Tyco Security Solutions supplies and installs electronic security systems to the residential, commercial, educational, governmental and industrial markets. It also provides electronic security services, including monitoring of burglar alarms, fire alarms and other life safety conditions as well as maintenance of electronic security systems. Our electronic security systems business involves the installation and use of security systems designed to detect intrusion, control access and react to movement, fire, smoke, flooding, environmental conditions, industrial processes and other hazards. These electronic security systems include detection devices that are usually connected to a monitoring center that receives and records alarm signals where skilled security monitoring specialists verify alarm conditions and initiate a range of response scenarios. For most systems, control panels identify the nature of the alarm and the areas where a sensor was triggered. Our other solutions include: access control systems for sensitive areas such as government facilities and banks; video surveillance systems designed to deter theft and fraud and help protect employees and customers; and asset protection and security management systems designed to monitor and protect physical assets as well as proprietary electronic data. Our offerings also include anti-theft systems utilizing acousto magnetic and radio frequency identification tags and labels in the retail industry. Many of the world's leading retailers use our Sensormatic anti-theft systems to help protect against shoplifting and employee theft. Purchasers of our intrusion systems typically contract for ongoing security system monitoring and maintenance at the time of initial equipment installation. Systems installed at customers' premises may be either owned by Tyco Security Solutions or by our customers. Monitoring center personnel may respond to alarms by relaying appropriate information to local fire or police departments, notifying the customer or taking other appropriate action. In certain markets, Tyco Security Solutions directly provides the alarm response services with highly trained and professionally equipped employees. In some instances, alarm systems are connected directly to local fire or police departments. Recently, Tyco Security Solutions launched Pulse Interactive Solutions ("Pulse") for residential and small business customers. Pulse includes home automation features in addition to interactive remote security capability for customers. Depending on the plan that is purchased, customers can remotely access information regarding the security of their home or business, arm and disarm their security system, adjust lighting or thermostat levels, or view real-time video from cameras covering different 3 areas of their premises, all via secure access from web-enabled devices. Pulse also allows customers to create customized schedules for turning lights, thermostats and appliances on or off, and can be programmed to perform certain functions, such as recording video and sending text messages, based on triggering events. Many of our residential customers may purchase security systems as a result of prompting by their insurance carriers, which may offer lower insurance premium rates if a security system is installed or require that a system be installed as a condition of coverage. Tyco Security Solutions also designs and manufactures electronic security products, including integrated video surveillance and access control systems to enable businesses to manage their security and enhance business performance. Its global access control solutions include: integrated security management systems for enterprise applications, access control solutions applications, alarm management panels, door controllers, readers, keypads and cards. Its global video system solutions include: digital video management systems, matrix switchers and controllers, digital multiplexers, programmable cameras, monitors and liquid crystal displays. Its intrusion security products provide advanced security products for homes and businesses ranging from burglar alarms to a full range of security systems including alarm control panels, keypads, sensors and central station receiving equipment used in security monitoring centers. Customers Tyco Security Solutions sells to residential, commercial, educational, governmental and industrial customers. Our residential customers typically include owners of single-family homes or renters in multi-family apartment complexes. Our commercial customers include, among others, retail businesses, financial institutions, commercial/industrial facilities and health care facilities. Our government customers include federal, state and local governments, defense installations, schools and universities and mass transportation providers. In addition to advertising, direct mailings and the internet, we market our electronic security systems and services to these customers through a direct sales force and, with respect to certain residential customers, through an authorized dealer network. A separate sales force services large commercial and governmental customers and focuses on key vertical markets such as retail and banking. Competition The electronic security services business is highly competitive and fragmented with a number of major firms and thousands of smaller regional and local companies. Competition is based primarily on price in relation to quality of service. Rather than compete purely on price, we emphasize the quality of our electronic security service, the reputation of our brands and our knowledge of our customers' security needs. For large commercial, educational, governmental and industrial customers the comprehensive national and/or global coverage offered by Tyco Security Solutions can also provide a competitive advantage. We also have significantly expanded our systems integration capabilities, which allow Tyco Security Solutions to offer comprehensive solutions to commercial customers that fully integrate security and fire offerings into comprehensive IT networks, business operations and management tools, and process automation and control systems. Competition for the manufacture and sale of our security products is based on specialized product capacity, breadth of product line, price, training and support and delivery. The principal competitors are specialty products manufacturing companies based in the United States, with other smaller competitors in Europe and Asia. 4 Tyco Fire Protection Our Tyco Fire Protection segment designs, manufactures, sells, installs and services fire detection and fire suppression systems and building and life safety products for commercial enterprises, governmental entities, airports, commercial shipping companies, transportation systems, healthcare facility operators, petrochemical facilities and homeowners. We believe we are one of the largest providers of these systems and services. With 2011 net revenue of $4.8 billion, our Tyco Fire Protection segment comprises 28% of our consolidated net revenue. In 2010 and 2009, net revenue totaled $4.5 billion, or 27%, of our consolidated net revenue and $4.6 billion, or 27%, of our consolidated net revenue, respectively. Services and Products Tyco Fire Protection designs, manufactures, sells, installs and services fire alarm and fire detection systems, automatic fire sprinkler systems and special hazard suppression systems. Tyco Fire Protection operates under various leading trade names, including SimplexGrinnell, Wormald, Dong Bang, Zettler, Ansul, Grinnell, Total Walther and Tyco. Tyco Fire Protection offers a wide range of fire alarm and fire detection systems. These alarm and detection systems include fire alarm control panels, advanced fire alarm monitoring systems, smoke, heat and carbon monoxide detectors and voice evacuation systems. Tyco Fire Protection also offers a wide range of water-based sprinkler systems. In addition, Tyco Fire Protection provides custom designed special hazard suppression systems, which incorporate specialized extinguishing agents such as foams, dry chemicals and gases. These systems are often especially suited to fire suppression in certain manufacturing, power generation, petrochemical, offshore oil exploration, transportation, data processing, telecommunications, commercial food preparation, mining and marine applications. Tyco Fire Protection installs fire detection and fire suppression systems in both new and existing buildings. These systems typically are purchased by owners, construction engineers and electrical contractors as well as mechanical or general contractors. In recent years, retrofitting of existing buildings has grown as a result of legislation mandating the installation of fire detection and fire suppression systems, especially in hotels, healthcare facilities and educational establishments. In September 2008, the International Residential Code Council, a non-profit association that develops model codes that are the predominant building and fire safety regulations used by state and local jurisdictions in the United States, adopted a proposal advanced by firefighters and other life-safety advocates to require sprinkler systems in new one and two family dwellings effective in January 2011. This national code is not binding on state and local jurisdictions and must be adopted locally before it becomes mandatory for new homes being built in these areas. The timing of adoption, if at all, will vary by jurisdiction. Tyco Fire Protection also continues to focus on system maintenance and inspection and other services, which have become increasingly significant parts of its business. Tyco Fire Protection also manufactures life safety products, including self-contained breathing apparatus designed for firefighter, industrial and military use, supplied air respirators, air-purifying respirators, thermal imaging cameras, gas detection equipment and gas masks. Tyco Fire Protection's breathing apparatus are used by the military forces of several countries and many U.S. firefighters rely on the Scott Air-Pak brand of self-contained breathing apparatus. Customers Tyco Fire Protection's customers include commercial enterprises, governmental entities, airports, commercial shipping companies, transportation systems, healthcare facility operators, petrochemical facilities and homeowners. We market our fire detection and fire suppression systems to the majority of these customers through a direct sales force. Customers for our fire sprinkler, fire detection and fire suppression products include distributors, commercial builders and contractors that install and service 5 fire suppression and detection systems. Residential builders, contractors and developers are emerging customers for our sprinkler products given changing regulatory dynamics. Our customers for our breathing apparatus include fire departments, municipal and state governments and military forces as well as major companies in the industrial sector. Competition Competition in the fire detection and fire suppression business varies by region. In North America, we compete with hundreds of smaller contractors on a regional or local basis for the installation of fire detection and fire suppression systems. In Europe, we compete with many regional or local contractors on a country-by-country basis. In Asia, Australia and New Zealand, we compete with a few large fire detection and fire suppression contractors, as well as with many smaller regional and local companies. We compete for fire detection and fire suppression systems contracts primarily on the basis of service, product attributes, quality and price. Competition for the manufacture and sale of our products is based on specialized product capacity, breadth of product line, price, training and support and delivery. The principal competitors are specialty products manufacturing companies based in the United States, with other smaller competitors in Europe and Asia. Tyco Flow Control Our Tyco Flow Control segment designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for process, oil and gas, power and mining markets as well as the water and wastewater market. We believe we are the world's leading manufacturer of flow control products. With 2011 net revenue of $3.6 billion, our Tyco Flow Control segment comprises 21% of our consolidated net revenue. In 2010 and 2009, net revenue totaled $3.4 billion, or 20%, of our consolidated net revenue and $3.5 billion, or 21%, of our consolidated net revenue, respectively. Tyco Flow Control is a global business with 31% of its sales in Europe, Middle East and Africa ("EMEA"), 31% from the Americas, 23% from the Pacific region and 15% from Asia. On September 30, 2010 we sold our water business in Europe. This business met the held for sale and discontinued operations criteria and has been included in discontinued operations for all periods presented. Services and Products Tyco Flow Control designs, manufactures and services a wide variety of valves, actuators, controls, pipes, fittings and heat tracing products. Valve products include a broad range of industrial valves, including on-off valves, safety relief valves and other specialty valves. Actuation products include pneumatic, hydraulic and electric actuators. Control products include limit switches, solenoid valves, valve positioners, network systems and accessories. For the water market, Tyco Flow Control offers a wide variety of pipes and valves for water transmission applications. Tyco Flow Control is also a global provider of heat tracing services and products. In addition to these products, Tyco Flow Control makes a variety of specialty products for environmental (emissions monitoring, water flow and quality monitoring, dust filter cleaning systems), instrumentation (manifolds, enclosures, isolation valves) and other applications. We manufacture these products in facilities located throughout the world. Tyco Flow Control products are used in many applications including power generation, chemical, petrochemical, oil and gas, wastewater, pulp and paper, commercial irrigation, mining and food and beverage. Tyco Flow Control also provides engineering, design, inspection, maintenance and repair services for its valves and related products. Tyco Flow Control products are sold under many trade names, including Anderson Greenwood, Biffi, Crosby, Keystone, KTM, Raychem, Sempell, Tracer and Vanessa. Tyco Flow Control sells its services 6 and products in most geographic regions directly through its internal sales force and in some cases through a network of independent distributors and manufacturers' representatives. Customers Tyco Flow Control's customers include businesses engaged in a wide range of industries, including power generation, chemical and petrochemical, pharmaceutical, oil and gas exploration, production and refining, mining, water, food and beverage, marine and shipbuilding and other process industries. Customers include end users as well as engineering, procurement and construction companies, contractors, original equipment manufacturers and distributors. Tyco Flow Control operates an extensive network of sales, service and distribution centers to serve a wide range of global customers. Competition The flow control industry is highly fragmented, consisting of many local and regional companies and a few global competitors. We compete against a number of international, national and local manufacturers of industrial valves as well as against specialized manufacturers on the basis of product capability, product quality, breadth of product line, delivery, service capability and price. Our major competitors vary by region. Backlog See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for information relating to our backlog. Intellectual Property Patents, trademarks, copyrights and other proprietary rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including trademarks, patents and patent applications, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and misappropriation of our proprietary rights, and monitor the intellectual property claims of others. We own a portfolio of patents that principally relates to: electronic security systems; fire protection products and systems, including fire detection and fire suppression with chemical, gas, foam and water agents, piping, couplings, fittings for fluid systems; personal protective products and systems for fire and other hazards; integrated systems for surveillance and control of public transportation and other public works; heat tracing and floor heating systems; and flow control products, including valves, actuators and controllers and airflow control and sensing products. We also own a portfolio of trademarks and are a licensee of various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks. While we consider our patents to be valuable assets, we do not believe that our overall competitive position is dependent on patent protection or that our overall operations are dependent upon any single patent or group of related patents. Research and Development We are engaged in research and development in an effort to introduce new products, to enhance the effectiveness, ease of use, safety and reliability of our existing products and to expand the 7 applications for which the uses of our products are appropriate. We continually evaluate developing technologies in areas that we believe will enhance our business for possible investment. Our research and development expense was $147 million in 2011, $131 million in 2010 and $116 million in 2009. Raw and Other Purchased Materials We are a large buyer of metals and other commodities, including gasoline. Materials are purchased from a large number of independent sources around the world. There have been no shortages in materials that have had a material adverse effect on our businesses. We enter into long-term supply contracts, using fixed or variable pricing to manage our exposure to potential supply disruptions. Significant changes in certain raw material costs may have an adverse impact on costs and operating margins. Governmental Regulation and Supervision Our operations are subject to numerous federal, state and local laws and regulations, both within and outside the United States, in areas such as: consumer protection, government contracts, international trade, environmental protection, labor and employment, tax, licensing and others. For example, most U.S. states in which we operate have licensing laws directed specifically toward the alarm and fire suppression industries. Our Tyco Security Solutions business currently relies extensively upon the use of wireline and wireless telephone service to communicate signals, and wireline and wireless telephone companies in the United States are regulated by the federal and state governments. Another example is our Tyco Flow Control business, which is subject to strict regulations governing the import and export of goods and technologies across international borders, particularly with respect to "dual use" products, which are products that may have both civil and military applications or may otherwise be involved in weapons proliferation. In addition, government regulation of fire safety codes can impact our Tyco Fire Protection business. These and other laws and regulations impact the manner in which we conduct our business, and changes in legislation or government policies can affect our worldwide operations, both positively and negatively. For a more detailed description of the various laws and regulations that affect our business, see Item 1A. Risk Factors—Risks Related to Legal, Regulatory and Compliance Matters and Item 3. Legal Proceedings. Environmental Matters We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things, the generation, storage, use and transportation of hazardous materials; emissions or discharges of substances into the environment; and the health and safety of our employees. Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances or pursuant to indemnifications provided by us in connection with asset disposals. We have received notification from the U.S. Environmental Protection Agency and from state environmental agencies that conditions at a number of sites where we and others disposed of hazardous substances require cleanup and other possible remedial action and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and/or for natural resource damages. We have projects underway at a number of current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations. 8 Given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods, the ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict. Based upon our experience, current information regarding known contingencies and applicable laws, we concluded that it is probable that we would incur remedial costs in the range of approximately $38 million to $86 million as of September 30, 2011. As of September 30, 2011, we concluded that the best estimate within this range is approximately $60 million, of which $18 million is included in accrued and other current liabilities and $42 million is included in other liabilities in the Consolidated Balance Sheet. In view of our financial position and reserves for environmental matters, we believe that any potential payment of such estimated amounts will not have a material adverse effect on our financial position, results of operations or cash flows. Employees As of September 30, 2011, we employed approximately 102,000 people worldwide, of which approximately 39,000 are employed in the United States and 63,000 are outside the United States. Approximately 22,000 employees are covered by collective bargaining agreements or works councils and we believe that our relations with the labor unions are generally good. Available Information Tyco is required to file annual, quarterly and special reports, proxy statements and other information with the SEC. Investors may read and copy any document that Tyco files, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Tyco's SEC filings. Our Internet website is www.tyco.com. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the exchange act as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. As a Swiss company, we prepare Swiss statutory financial statements, including Swiss consolidated financial statements, on an annual basis. A copy of the Swiss statutory financial statements is distributed along with our annual report to shareholders, and all of the aforementioned reports will be made available to our shareholders upon their request. In addition, we have posted the charters for our Audit Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee, as well as our Board Governance Principles and Guide to Ethical Conduct, on our website under the heading "Corporate Citizenship—Governance." The annual report to shareholders, charters and principles are not incorporated in this report by reference. We will also provide a copy of these documents free of charge to shareholders upon request. You should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as technological obsolescence, labor relations, geopolitical events, climate change and international operations. 9 Risks Relating to Our Businesses General economic and cyclical industry conditions may adversely affect our financial condition, results of operations or cash flows. Our operating results have been and may in the future be adversely affected by general economic conditions and the cyclical pattern of certain industries in which we operate. For example, demand for our services and products is significantly affected by the level of commercial construction, the amount of discretionary consumer and business spending, and the performance of the housing market, each of which historically has displayed significant cyclicality. Economic weakness in some end markets has adversely affected certain of our businesses. Events or conditions that adversely impact the health of the U.S. or global economies, or in the industries in which we operate, could have a material negative impact on our financial condition, results of operations or cash flows. We face intense competition in each of our businesses, and competitive challenges from lower cost manufacturers. If we cannot successfully compete in an increasingly global market-place, our operating results may be adversely affected. We operate in competitive domestic and international markets and compete with many highly competitive manufacturers and service providers, both domestically and on a global basis. Our manufacturing businesses face competition from lower cost manufacturers in Asia and elsewhere and our service businesses face competition from alternative service providers around the world. Key components of our competitive position are our ability to adapt to changing competitive environments and to manage expenses successfully. This requires continuous management focus on reducing costs, maintaining our competitive position and improving efficiency through cost controls, productivity enhancements and regular appraisal of our asset portfolio. If we are unable to achieve appropriate levels of scalability or cost-effectiveness, or if we are otherwise unable to manage and react to changes in the global marketplace, our financial condition, results of operations or cash flows may be adversely affected. Our future growth is largely dependent upon our ability to successfully compete with new and existing competitors by developing or acquiring new technologies that achieve market acceptance with acceptable margins. Our businesses operate in global markets that are characterized by rapidly changing technologies, evolving industry standards and potential new entrants in our markets. For example, a number of cable and other telecommunications companies have introduced security services offerings, including interactive security services, that are competitive with the products and services offered through our Tyco Security Solutions business. If these services are aggressively marketed and gain market acceptance, our ability to grow our Tyco Security Solutions business, in particular our Pulse offering, could be materially adversely affected. Accordingly, our future success depends upon a number of factors, including our ability to: identify emerging technological trends in our target end-markets; develop, acquire and maintain competitive products and services; enhance our products and services by adding innovative features that differentiate our products and services from those of our competitors; and develop or acquire, manufacture and bring products and services to market quickly and cost-effectively. Our ability to develop or acquire new products and services based on technological innovation can affect our competitive position and requires the investment of significant resources. These acquisitions and development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new technologies, products or services on a timely basis. Moreover, as we introduce new products such as Pulse, we may be unable to detect and correct defects in the product or in its installation, which could result in loss of sales or delays in market acceptance. Even after introduction, new or enhanced products may not satisfy consumer preferences and product failures may cause consumers to reject our products. As a result, these 10 products may not achieve market acceptance and our brand images could suffer. In addition, our competitors may introduce superior designs or business strategies, impairing our brands and the desirability of our products and services, which may cause consumers to defer or forego purchases of our products and services. In addition, the markets for our products and services may not develop or grow as we anticipate. As a result, the failure of our technology, products or services to gain market acceptance, the potential for product defects or the obsolescence of our products and services could significantly reduce our revenues, increase our operating costs or otherwise adversely affect our financial condition, results of operations or cash flows. Our Tyco Security Solutions business may experience higher rates of customer attrition, which may reduce our future revenue and cause us to change the estimated useful lives of assets related to our security monitoring customers, increasing our depreciation and amortization expense. If customers in our Tyco Security Solutions business segment are dissatisfied with our products or services and switch to competitive products or services, or disconnect for other reasons, our attrition rates may increase. In periods of increasing attrition rates, Tyco Security Solutions' recurring revenue and results of operations may be materially adversely affected. The risk is more pronounced in times of economic uncertainty, as customers may reduce amounts spent on the products and services we provide. Tyco amortizes the costs of ADT's acquired contracts and related customer relationships based on the estimated life of the customer relationships. Internally generated residential and commercial pools are similarly depreciated. If attrition rates were to rise significantly, we may be required to accelerate the depreciation and amortization of subscriber system assets and intangible assets, which could cause a material adverse effect on our financial condition or results of operations. We have significant operations outside of the United States, which are subject to political, economic and other risks inherent in operating outside of the United States. We generated 52% of our net revenue outside of the United States in 2011. We expect net revenue generated outside of the United States to continue to represent a significant portion of total net revenue. Business operations outside of the United States are subject to political, economic and other risks inherent in operating in certain countries, such as:
11 Changes in the political or economic environments in the countries in which we operate could have a material adverse effect on our financial condition, results of operations or cash flows. Volatility in currency exchange rates, commodity prices and interest rates may adversely affect our financial condition, result of operations or cash flows. We are exposed to a variety of market risks, including the effects of changes in currency exchange rates, commodity prices and interest rates. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Our net revenue derived from sales in non-U.S. markets for 2011 was 52% of our total net revenue, and we expect revenue from non-U.S. markets to continue to represent a significant portion of our total net revenue. Therefore, if the U.S. dollar has strengthened in relation to the principle foreign currencies where we derive revenue as compared to a prior period, our U.S. dollar reported revenue and income will decrease, and vice-versa. Changes in the relative values of currencies occur regularly and in some instances, may have a significant effect on our results of operations. Our financial statements reflect translation of items denominated in non-U.S. currencies to U.S. dollars, our functional currency (using year-end exchange rates for balance sheet data and average exchange rates for statement of operations data). In addition, we are a large buyer of metals and other commodities, including fossil fuels for our manufacturing operations and our vehicle fleet, the prices of which have fluctuated significantly in recent years. Increases in the prices of some of these commodities could increase the costs of manufacturing our products and providing our services. We may not be able to pass on these costs to our customers or otherwise effectively manage price volatility and this could have a material adverse effect on our financial condition, results of operations or cash flows. Further, in a declining price environment, our operating margins may contract because we account for inventory using the first-in, first-out method. We monitor these exposures as an integral part of our overall risk management program. In some cases, we enter into hedge contracts to insulate our results of operations from these fluctuations. These hedges are subject to the risk that our counterparty may not perform. As a result, changes in currency exchange rates, commodity prices and interest rates may have a material adverse effect on our financial condition, results of operations or cash flows. Failure to maintain the security of our information and technology networks, including personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of the Company's privacy and security policies with respect to such information, could adversely affect us. We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and, in the normal course of our business, we collect and retain significant volumes of certain types of personally identifiable and other information pertaining to our customers, stockholders and employees. The legal, regulatory and contractual environment surrounding information security and privacy is constantly evolving and companies that collect and retain such information are under increasing attack by cyber-criminals around the world. A significant actual or potential theft, loss, fraudulent use or misuse of customer, stockholder, employee or our data by cybercrime or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in significant costs, fines, litigation or regulatory action against us. In addition, we depend on our information technology infrastructure for business-to-business and business-to-consumer electronic commerce. Security breaches of this infrastructure can create system disruptions and shutdowns that could result in disruptions to our 12 operations. Increasingly, our security products and services are accessed through the Internet, and security breaches in connection with the delivery of our services via the Internet may affect us and could be detrimental to our reputation, business, operating results and financial condition. We cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography or other developments will not compromise or breach the technology protecting the networks that access our products and services. If we cannot obtain sufficient quantities of materials, components and equipment required for our manufacturing activities at competitive prices and quality and on a timely basis, or if our manufacturing capacity does not meet demand, our financial condition, results of operations or cash flows may suffer. We purchase materials, components and equipment from unrelated parties for use in our manufacturing operations. If we cannot obtain sufficient quantities of these items at competitive prices and quality and on a timely basis, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed or our material or manufacturing costs may increase. In addition, because we cannot always immediately adapt our cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements. Any of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our financial condition, results of operations or cash flows. Failure to retain or attract qualified personnel could adversely affect our business. Our culture and guiding principles focus on continuously training, motivating and developing employees, and in particular we strive to attract, motivate and retain qualified managers to handle the day-to-day operations of a highly diversified organization. If we fail to retain and attract qualified personnel, our operations could be adversely affected. In addition, excessive turnover in personnel could cause manufacturing inefficiencies in certain of our businesses. The demand for experienced management in certain geographic areas also makes it difficult to retain qualified employees. High turnover could result in additional training and inefficiencies that could adversely impact our financial condition, results of operations or cash flows. We have recognized substantial impairment charges in the past and may be required to recognize additional impairment charges in the future. Pursuant to accounting principles generally accepted in the United States, we are required to periodically assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines may result in material charges for goodwill and other asset impairments. For example, during the second fiscal quarter of 2009, we recognized aggregate goodwill and intangible asset impairments of $2.7 billion. We maintain significant goodwill and intangible assets on our balance sheet, and we believe that as of September 30, 2011 these balances are recoverable. However, fair value determinations require considerable judgment and are sensitive to change. Additional impairments to one or more of our reporting units could occur in future periods whether or not connected to the annual impairment analysis. Future impairment charges could materially affect our reported earnings in the periods of such charges and could adversely affect our financial condition and results of operations. Divestitures of some of our businesses or product lines may materially adversely affect our financial condition, results of operations or cash flows. We continually evaluate the performance of all of our businesses and may sell businesses or product lines. Divestitures involve risks, including difficulties in the separation of operations, services, 13 products and personnel, the diversion of management's attention from other business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain environmental or other contingent liabilities related to the divested business. In addition, divestitures may result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line. We may acquire companies and make investments in order to complement existing businesses. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results. Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our financial condition, results of operations and cash flows. Acquisitions involve numerous other risks, including:
It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our current business operations. Any acquisitions or investments may ultimately harm our business or financial condition, as such acquisitions may not be successful and may ultimately result in impairment charges. Risks Related to the 2012 Separation The proposed spin-offs of our North American residential security business and our flow control business are contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management, may not achieve the intended results, and may present difficulties that could have an adverse effect on us. The proposed spin-offs of our North American residential security business and our flow control business are complex in nature, subject to various conditions, and may be affected by unanticipated developments or changes in market conditions. We expect to file Registration Statements on Form 10 with the SEC that will contain detailed information regarding the businesses proposed to be spun-off. Completion of these spin-off transactions will be contingent upon a number of factors, including the approval of our shareholders, favorable rulings from tax authorities, including the Internal Revenue Service ("IRS"), the effectiveness of each of the Registration Statements, favorable capital market conditions and other conditions. For these and other reasons, the spin-off transactions may not be completed as expected by the end of the third calendar quarter of 2012, if at all. Additionally, execution of the proposed spinoff transactions will require significant time and attention from management, which may distract management from the operation of our businesses and the execution of our other initiatives. Our employees may also be distracted due to uncertainty about their future roles with each of the separate companies pending the completion of the spin-off transactions. Further, if the spin-off transactions are completed, each of these transactions may not achieve the intended results and may result in costs that exceed management's estimated amount of $700 million. Any such 14 difficulties could have a material adverse effect on our financial condition, results of operations or cash flows. If the distributions or certain internal transactions undertaken in anticipation of the spin-offs are determined to be taxable for U.S. federal income tax purposes, we or our shareholders could incur significant U.S. federal income tax liabilities. We will request a private letter ruling from the IRS substantially to the effect that, for U.S. federal income tax purposes, (i) the distributions of our North American residential security and flow control common shares to our shareholders, except for cash, if any, received in lieu of fractional shares, will qualify as tax-free under Sections 355 and/or 361 of the Internal Revenue Code of 1986, as amended ("the Code") and (ii) certain internal transactions undertaken in anticipation of the distributions will quality for favorable treatment under the Code. Our receipt of the private letter ruling is critical to the completion of the spin-offs. The private letter ruling will be based on certain facts, assumptions, representations and covenants provided by us regarding the past and future conduct of our respective businesses and other matters. If any of the facts, assumptions, representations or covenants provided in connection with the private letter ruling is inaccurate or incomplete or is violated in any respect, then we might not be able to rely on the ruling. Furthermore, the IRS will not rule on whether the spin-offs satisfy certain requirements necessary for tax-free treatment under Section 355 of the Code. Rather, the private letter ruling will be based on representations provided by us that those requirements have been or will be satisfied, and any inaccuracy in those representations could invalidate the ruling. The 2012 Separation will also be conditioned on our receipt of an opinion of outside counsel, in form and substance satisfactory to us, that confirms the tax-free status of the distributions. The opinion will rely on, among other things, the continuing validity of the private letter ruling and certain facts, assumptions, representations and covenants provided by us which, if inaccurate or incomplete in any respect, could jeopardize the conclusions reached by such counsel in its opinion. The opinion will not be binding on the IRS or the courts, and there can be no assurance that the IRS will not challenge the conclusions stated in the opinion or that any such challenge would not prevail. If, notwithstanding receipt of the private letter ruling and opinion, the spin-offs are determined to be taxable for U.S. federal income tax purposes, each U.S. holder of our common stock who is subject to U.S. federal income tax who receives shares of our North American residential security and flow control businesses would generally be treated as receiving taxable distributions of property in an amount equal to the fair market value of the shares received. Those distributions would be taxable to each such stockholder as a dividend to the extent of our current and accumulated earnings and profits. For each such stockholder, any amount that exceeded our earnings and profits would be treated first as a non-taxable return of capital to the extent of such stockholder's tax basis in our shares of common stock with any remaining amount being taxed as a capital gain. In addition, internal transactions undertaken in anticipation of the spin-offs are ultimately determined to be taxable, we could incur significant U.S. federal income tax liabilities. The tax sharing agreement that we will enter into with the North American residential security and flow control businesses prior to the completion of the spin-offs will allocate for any taxes that arise if the spin-offs or certain internal transactions are determined to be taxable. If the 2012 Separation is determined to be taxable for Swiss withholding tax purposes, we could incur significant Swiss withholding tax liabilities. Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our shareholders, regardless of the place of residency of the shareholder. Beginning on January 1, 2011, distributions to shareholders out of contributed surplus accumulated on or after January 1, 1997 are exempt from Swiss withholding tax. Accordingly, based on the Swiss Federal Withholding Tax Act, the Distribution should not be subject to Swiss federal withholding tax. Prior to the completion of the 15 proposed spin-offs, we intend to obtain tax rulings from the Swiss Federal Tax Administration confirming that the distributions will not be subject to Swiss federal withholding tax. These rulings will rely on certain facts and assumptions, and certain representations and undertakings, from Tyco regarding the past conduct of its businesses and other matters. Notwithstanding the tax rulings, the Swiss Federal Tax Administration could determine that the Distribution should be treated as a taxable transaction for withholding tax purposes if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated. If the Distribution ultimately is determined to be taxable for withholding tax purposes, we and Tyco could incur material Swiss withholding tax liabilities that could significantly detract from, or eliminate, the benefits of the spin-off. If the 2012 Separation is completed, our operational and financial profile will change and we will be a smaller, less diversified company. If completed, the 2012 Separation will result in Tyco being a smaller, less diversified company focused on our commercial fire and security businesses, which represents a narrower business focus than we currently have. We will have a more limited business with greater concentration in the commercial market and may be more vulnerable to changing market conditions, which could materially and adversely affect our business, financial condition and results of operations. In addition, the diversification of revenues, costs, and cash flows will diminish. As a result, it is possible that our results of operations, cash flows, working capital and financing requirements may be subject to increased volatility and it may be difficult or more expensive for us to obtain financing. Our operations may also be impacted by a limited ability to attract new employees in a timely manner. If the 2012 Separation is completed, there may be substantial changes in our stockholder base, which may cause the price of our common stock to fluctuate following the proposed spin-offs. Investors holding our common stock may hold our common stock because of a decision to invest in a company that is large and operates in multiple markets with a diversified product and services portfolio. If the proposed spin-off transactions are completed, shares of our common stock will represent an investment in a smaller company with its business concentrated in the commercial fire and security industry. These changes may not match some holders' investment strategies or meet minimum criteria for inclusion in stock market indices or portfolios, which could cause investors to sell their shares of our common stock. Excessive selling pressure could cause the market price of our common stock to decrease following the completion of the proposed spinoff. Risks Related to Legal, Regulatory and Compliance Matters We are subject to a variety of claims and litigation that could cause a material adverse effect on our financial condition, results of operations or cash flows. We are subject to a significant number of claims and are named as a defendant in numerous lawsuits, including claims for damages arising out of the use or installation of our products or services, litigation alleging the infringement of intellectual property rights, litigation alleging anti-competitive behavior, litigation related to environmental matters, product liability litigation (including asbestos-related claims), and litigation related to employee matters and commercial disputes. In certain circumstances, patent infringement and anti-trust laws permit successful plaintiffs to recover treble damages. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our financial condition, results of operations or cash flows. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against potential loss exposures. 16 Legislative action by the U.S. Congress could materially adversely affect us. Legislative action could be taken by the U.S. Congress which, if ultimately enacted, could override tax treaties or regulations upon which we rely, which would adversely affect our effective corporate tax rate. We cannot predict the outcome of any specific legislative proposals. However, if proposals were enacted that had the effect of disregarding our incorporation in Switzerland or limiting our ability as a Swiss company to take advantage of the tax treaties between Switzerland and the United States, we could be subjected to increased taxation. Also, various U.S. federal and state legislative proposals have been introduced in recent years that deny, or would deny, government contracts to U.S. companies that move their locations abroad. We cannot provide assurance that such legislation, if enacted, would not apply to us. In addition, there continues to be negative publicity regarding, and criticism of, companies that conduct substantial business in the U.S. but are domiciled abroad. We cannot provide assurance that we will not be subject to such criticism as a result of our domicile in Switzerland. Changes in legislation or governmental regulations or policies can have a significant impact on our financial condition, results of operations or cash flows. We operate in regulated industries. Our U.S. operations are subject to regulation by a number of federal, state and local governmental agencies with respect to safety of operations and equipment, labor and employment matters and financial responsibility. Intrastate operations in the United States are subject to regulation by state regulatory authorities, and our international operations are regulated by the countries in which they operate and by extra-territorial laws. We and our employees are subject to various U.S. federal, state and local laws and regulations, as well as non-U.S. laws and regulations, including many related to consumer protection. Most states in which we operate have licensing laws covering the monitored security services industry and the construction industry. Our Tyco Security Solutions segment relies heavily upon both wireline and wireless telephone service to communicate signals, and these technologies are regulated by both the federal and state governments. Changes in laws or regulations could require us to change the way we operate, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of our operating permits and licenses. If laws and regulations changed or we failed to comply, our financial condition, results of operations or cash flows could be materially and adversely affected. We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside the United States. The U.S. Foreign Corrupt Practices Act (the "FCPA") and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice ("DOJ") and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental and commercial corruption to some degree and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third party intermediaries. Furthermore, we are subject to investigations by the DOJ and the SEC related to allegations that improper payments have been made by our subsidiaries and third party intermediaries in recent years in violation of the FCPA. We have continued to report to the DOJ and the SEC the remedial measures that we have taken in response to the allegations and our own 17 internal investigations, and in February 2010, we initiated discussions with the DOJ and SEC aimed at resolving these matters, which remain ongoing. Although we have recorded our best estimate of potential loss related to these or other similar matters, it is possible that this estimate may differ from the ultimate loss determined in connection with the resolution of this matter, as we may be required to pay material fines, consent to injunctions on future conduct, consent to the imposition of a compliance monitor, or suffer other criminal or civil penalties or adverse impacts, including being subject to lawsuits brought by private litigants, each of which may have a material adverse effect on our financial position, results of operations or cash flows. Our failure to satisfy international trade compliance regulations may adversely affect us. Our global operations require importing and exporting goods and technology across international borders on a regular basis. Certain of the products we manufacture are "dual use" products, which are products that may have both civil and military applications, or may otherwise be involved in weapons proliferation, and are often subject to more stringent export controls. From time to time, we obtain or receive information alleging improper activity in connection with imports or exports. Our policy mandates strict compliance with U.S. and international trade laws. When we receive information alleging improper activity, our policy is to investigate that information and respond appropriately, including, if warranted, reporting our findings to relevant governmental authorities. Nonetheless, we cannot provide assurance that our policies and procedures will always protect us from actions that would violate U.S. and/or foreign laws. Such improper actions could subject the Company to civil or criminal penalties, including material monetary fines, or other adverse actions including denial of import or export privileges, and could damage our reputation and our business prospects. We continue to be responsible for a portion of our contingent and other corporate liabilities following the 2007 Separation of our electronics and healthcare businesses, primarily those relating to pre-separation income tax liabilities. Under agreements entered in connection with the 2007 Separation of our electronics ("TE Connectivity") and healthcare ("Covidien") businesses, we, Covidien and TE Connectivity have agreed to assume and be responsible for 27%, 42% and 31%, respectively, of certain of our contingent and other corporate liabilities, subject to certain exceptions. All costs and expenses associated with the management of these contingent and other corporate liabilities are generally shared equally among the parties. These contingent and other corporate liabilities primarily relate to pre-2007 Separation income tax liabilities. Liabilities that are specifically related to one of the three separated companies are not allocated. If any party responsible for such liabilities were to default in its payment, when due, of any of these assumed obligations, each non-defaulting party would be required to pay equally with any other non-defaulting party the amounts in default. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of the assumed obligations related to such contingent and other corporate liabilities including associated costs and expenses. We are subject to product liability claims relating to products we manufacture or install. These claims could result in significant costs and liabilities and reduce our profitability. We face exposure to product liability claims in the event that any of our products results in personal injury or property damage. In addition, if any of our products prove to be defective, we may be required to recall or redesign such products, which could result in significant unexpected costs. Any insurance we maintain may not be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Any claim or product recall could result in adverse publicity against us, which could adversely affect our financial condition, results of operations or cash flows. 18 In addition, we could face liability for failure to respond adequately to alarm activations or failure of our fire protection systems to operate as expected. The nature of the services we provide exposes us to the risks that we may be held liable for employee acts or omissions or system failures. In an attempt to reduce this risk, our alarm monitoring agreements and other contracts contain provisions limiting our liability in such circumstances. We cannot provide assurance, however, that these limitations will be enforced. Losses from such litigation could be material to our financial condition, results of operations or cash flows. We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows. We, along with numerous other companies, are named as defendants in a substantial number of 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. We have observed an increase in the number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-related claims. Our 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. We cannot predict the extent to which we will be successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against the Company. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business, financial condition, results of operations and cash flows. We record an estimated liability related to pending claims and claims estimated to be received over the next seven years, including related defense costs, based on a number of key assumptions and estimation methodologies. These assumptions are derived from claims experience over the past five years and reflect our expectations about future claim activities over the next seven years. These assumptions about the future may or may not prove accurate, and accordingly, we may incur additional liabilities in the future. A change in one or more of the inputs used to estimate the asbestos liability could materially change the estimated liability and associated cash flows for pending and future claims. Although it is possible that the Company will incur additional costs for asbestos claims filed beyond the next seven years, we do not believe there is a reasonable basis for estimating those costs at this time. We also record an asset that represents our best estimate of probable recoveries from insurers or other responsible parties for the estimated asbestos liabilities. There are significant assumptions made in developing estimates of asbestos-related recoveries, such as policy triggers, policy or contract interpretation, success in litigation in certain cases, the methodology for allocating claims to policies, and the continued solvency of the insurers or other responsible parties. The assumptions underlying the recorded asset may not prove accurate, and as a result, actual performance by our insurers and other responsible parties could result in lower receivables or cash flows expected to reduce our asbestos costs. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims that may be filed beyond the next seven years, it is not possible to predict the ultimate outcome of the cost, nor potential recoveries, of resolving the pending and all unasserted asbestos claims. Additionally, we believe it is possible that the cost of asbestos claims filed beyond the next seven years, net of expected recoveries, could have a material adverse effect on our financial position, results of operations or cash flows. 19 Our operations expose us to the risk of material environmental liabilities, litigation and violations. We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:
We cannot assure you that we have been or will be at all times in compliance with environmental and health and safety laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators. Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notification from the United States Environmental Protection Agency and from state environmental agencies, that conditions at a number of sites where we and others disposed of hazardous substances require cleanup and other possible remedial action and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and/or for natural resource damages. We have projects underway at a number of current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations. These projects relate to a variety of activities, including:
These projects involve both remediation expenses and capital improvements. In addition, we remain responsible for certain environmental issues at manufacturing locations previously sold by us. The ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon our experience, current information regarding known contingencies and applicable laws, we concluded that it is probable that we would incur remedial costs in the range of approximately $38 million to $86 million as of September 30, 2011. As of September 30, 2011, we concluded that the best estimate within this range is approximately $60 million, of which $18 million is included in accrued and other current liabilities and $42 million is included in other liabilities in the Consolidated Balance. Environmental laws are complex, change frequently and have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with such laws, we cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or materially adversely affect our financial condition, results of operations or cash flows. We may also be subject to material liabilities for additional environmental claims for personal injury or cleanup in the future based on our past, present or future business activities or for existing environmental conditions of which we are not presently aware. 20 Risks Related to Our Liquidity Disruptions in the financial markets could have adverse effects on us, our customers and our suppliers, as access to liquidity may be negatively impacted by disruptions in the credit markets, leading to increased funding costs or unavailability of credit. In the normal course of our business, we may access credit markets for general corporate purposes, which may include repayment of indebtedness, acquisitions, additions to working capital, repurchase of common shares, capital expenditures and investments in the Company's subsidiaries. Although we believe we have sufficient liquidity to meet our foreseeable needs, our access to and the cost of capital could be negatively impacted by disruptions in the credit markets. In 2009 and 2010, credit markets experienced significant dislocations and liquidity disruptions, and similar disruptions in the credit markets could make financing terms for borrowers unattractive or unavailable. These factors may make it more difficult or expensive for us to access credit markets if the need arises. In addition, these factors may make it more difficult for our suppliers to meet demand for their products or for prospective customers to commence new projects, as customers and suppliers may experience increased costs of debt financing or difficulties in obtaining debt financing. Disruptions in the financial markets have had adverse effects on other areas of the economy and have led to a slowdown in general economic activity that may continue to adversely affect our businesses. These disruptions may have other unknown adverse affects. Based on these conditions, our profitability and our ability to execute our business strategy may be adversely affected. Covenants in our debt instruments may adversely affect us. Our bank credit agreements contain financial covenants, including a limit on the ratio of debt to earnings before interest, taxes, depreciation, and amortization and limits on incurrence of liens and subsidiary debt. Our indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. Although we believe none of these covenants are restrictive to our operations, our ability to meet the financial covenants can be affected by events beyond our control, and we cannot provide assurance that we will meet those tests. A breach of any of these covenants could result in a default under our credit agreements or indentures. Upon the occurrence of an event of default under any of our credit facilities or indentures, the lenders or trustees could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient assets to repay our credit facilities and our other indebtedness. Furthermore, acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations, which could have a material adverse affect on our financial condition. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness. We estimate that our available cash, our cash flow from operations and amounts available to us under our credit facilities will be adequate to fund our operations and service our debt for the foreseeable future. However, material adverse legal judgments, fines, penalties or settlements arising from litigation and similar contingencies could require additional funding. If such developments require us to obtain additional funding, we cannot provide assurance that we will be able to obtain the additional funding that we need on commercially reasonable terms or at all, which could have a material adverse effect on our financial condition, results of operations or cash flows. 21 Such an outcome could have important consequences to you. For example, it could:
Risks Relating to Tax Matters We share responsibility for certain of our, Covidien's and TE Connectivity's income tax liabilities for tax periods prior to and including June 29, 2007. Under the Tax Sharing Agreement entered in connections with the 2007 Separation, we share responsibility for certain of our, Covidien's and TE Connectivity's income tax liabilities that result in cash payments, based on a sharing formula for periods prior to and including June 29, 2007. More specifically, we, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to our, Covidien's and TE Connectivity's U.S. and certain non-U.S. income tax returns, certain income tax liabilities arising from adjustments made by tax authorities to intercompany transactions or similar adjustments, and certain taxes attributable to internal transactions undertaken in anticipation of the 2007 Separation. Costs and expenses associated with the management of these shared tax liabilities will generally be shared equally among the parties. We are responsible for all of our own taxes that are not shared pursuant to the Tax Sharing Agreement's sharing formula. In addition, Covidien and TE Connectivity are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula. In connection with the execution of the Tax Sharing Agreement, we established receivables from Covidien and TE Connectivity representing the amount we expected to receive for pre-Separation uncertain tax positions. We also established liabilities representing the fair market value of our share of their estimated obligations under the Tax Sharing Agreement. As of September 30, 2011, we had recorded $73 million in other assets and $16 million in prepaid expenses and other current assets representing the receivables from Covidien and TE Connectivity. We had also recorded $387 million in other liabilities and $49 million in accrued and other current liabilities representing our estimated obligations to Covidien and TE Connectivity under the Tax Sharing Agreement. If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-upon share of our, Covidien's and TE Connectivity's tax liabilities. 22 Examinations and audits by tax authorities, including the Internal Revenue Service, could result in additional tax payments for prior periods. The Company and its subsidiaries' income tax returns periodically are examined by various tax authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments, in particular, with respect to tax years preceding the 2007 Separation. We are reviewing and contesting certain of the proposed tax adjustments. Although we expect to resolve a substantial number of the proposed tax adjustments with the IRS, a few significant items are expected to remain open with respect to the audit of the 1997 through 2004 years. As of the date hereof, it is unlikely that we will be able to resolve these open items, which primarily involve the treatment of certain intercompany transactions during the period related to the audits, through the IRS appeals process. As a result, we may be required to litigate these matters. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional income taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and circumstances. We have assessed our obligations under the Tax Sharing Agreement and determined that the recorded liability is sufficient to cover the indemnifications made by us under such agreement. However, such amount could differ materially from amounts that are actually determined to be due, and any such difference could materially adversely affect our financial position, results of operations or cash flows. If the distribution of Covidien and TE Connectivity common shares to our shareholders or certain internal transactions undertaken in connection with the 2007 Separation are determined to be taxable for U.S. federal income tax purposes, we could incur significant U.S. federal income tax liabilities. We have received private letter rulings from the IRS regarding the U.S. federal income tax consequences of the distribution of Covidien and TE Connectivity common shares to our shareholders substantially to the effect that the distribution of such shares, except for cash received in lieu of fractional shares, will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Code. The private letter rulings also provided that certain internal transactions undertaken in anticipation of the 2007 Separation would qualify for favorable treatment under the Code. The private letter rulings relied on certain facts and assumptions, and certain representations and undertakings, from Tyco, Covidien and TE Connectivity regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the private letter rulings and the opinions, the IRS could determine on audit that the distribution or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or that the distributions should be taxable for other reasons, including as a result of significant changes in stock or asset ownership after the distribution. If the distribution ultimately is determined to be taxable, we would recognize a gain in an amount equal to the excess of the fair market value of the Covidien and TE Connectivity common shares distributed to our shareholders on June 29, 2007 over our tax basis in such common shares, but such gain, if recognized, generally would not be subject to U.S. federal income tax. However, we would incur significant U.S. federal income tax liabilities if it ultimately is determined that certain internal transactions undertaken in connection with the 2007 Separation should be treated as taxable transactions. 23 Risks Relating to Our Jurisdiction of Incorporation in Switzerland Swiss laws differ from the laws in effect in the United States and may afford less protection to holders of Tyco's securities. Because of differences between Swiss law and U.S. state and federal laws and differences between the governing documents of Swiss companies and those incorporated in the U.S., it may not be possible to enforce in Switzerland, court judgments obtained in the United States against Tyco based on the civil liability provisions of the federal or state securities laws of the United States. As a result, in a lawsuit based on the civil liability provisions of the U.S. federal or state securities laws, U.S. investors may find it difficult to:
Switzerland and the United States do not have a treaty providing for reciprocal recognition of and enforcement of judgments in civil and commercial matters. The recognition and enforcement of a judgment of the courts of the United States in Switzerland is governed by the principles set forth in the Swiss Federal Act on Private International Law. This statute provides in principle that a judgment rendered by a non-Swiss court may be enforced in Switzerland only if:
As a result of our change of domicile from Bermuda to Switzerland and the increase in the par value of our shares, we may have less flexibility with respect to certain aspects of capital management. In connection with our change of domicile from Bermuda to Switzerland, we significantly increased the par value of our shares. Currently the par value of our shares is CHF 6.70 (or approximately $7.44 based on the exchange rate in effect on November 7, 2011). Under Swiss law, we generally may not issue registered shares for an amount below par value. As of November 7, 2011 the closing price of our ordinary shares on the New York Stock Exchange ("NYSE") was $46.47. In the event there is a need to raise common equity capital at a time when the trading price of our registered shares is below our par value, we would need to obtain approval of our shareholders to decrease the par value of our registered shares. We cannot provide assurance that we would be able to obtain such shareholder approval in a timely manner. Obtaining shareholder approval would require filing a preliminary proxy statement with the SEC and convening a meeting of shareholders which would delay any capital raising plans. If we were to receive shareholder approval to reduce the par value of our registered shares, the 24 reduction would decrease our ability to pay dividends as a repayment of share capital, which may subject shareholders to Swiss withholding tax.
Item 1B. Unresolved Staff Comments None. Our operations are conducted in facilities throughout the world aggregating approximately 28 million square feet of floor space, of which approximately 9 million square feet are owned and approximately 19 million square feet are leased. These facilities house manufacturing, distribution and warehousing operations, as well as sales and marketing, engineering and administrative offices. Tyco Security Solutions operates through a network of offices, service and manufacturing facilities and warehouse and distribution centers located in North America, Central America, South America, Europe, the Middle East, the Asia-Pacific region and South Africa. The group occupies approximately 8 million square feet, of which 2 million square feet are owned and 6 million square feet are leased. Tyco Fire Protection operates through a network of offices, manufacturing facilities and warehouse and distribution centers located in North America, Central America, South America, Europe and the Asia-Pacific region. The group occupies approximately 9 million square feet, of which 2 million square feet are owned and 7 million square feet are leased. Tyco Flow Control has manufacturing facilities, warehouses and distribution centers throughout North America, South America, Europe, the Middle East and the Asia-Pacific region. The group occupies approximately 11 million square feet, of which 5 million square feet are owned and 6 million square feet are leased. In the opinion of management, our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. See Note 15 to our Consolidated Financial Statements for a description of our lease obligations. During the fiscal quarter ended December 24, 2010, certain contingencies related to the previously disclosed settlement of the Stumpf v. Tyco International Ltd. class action lawsuit elapsed. This matter, which was subject to the liability sharing provisions of the Separation and Distribution Agreement with Covidien and TE Connectivity had previously received final court approval for its settlement. As a result of the lapsing of time periods for certain class members to state a claim against the Company, the Company adjusted its remaining reserve for this and other legacy securities matters and recognized a net gain of $7 million during the quarter ended December 24, 2010. Since June 2007, the Company has resolved substantially all of the legacy claims related to securities fraud and similar matters, with the exception of the claims related to former management and Mr. Frank Walsh Jr., a former director, described below. 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, Mr. Kozlowski, through counterclaims, and Mr. Swartz, through demand letters, are seeking an aggregate of approximately $138 million allegedly due in connection with their compensation and retention arrangements and under ERISA. 25 With respect to Mr. Kozlowski, on December 1, 2010, the U.S. District Court for the Southern District of New York ruled in favor of several of the Company's affirmative claims against him before trial, while dismissing all of Mr. Kozlowski's counterclaims for pay and benefits after 1995. With respect to Mr. Swartz, on March 3, 2011, the same Court granted the Company's motion for summary judgment. The Court further ruled that issues related to damages will need to be resolved at trial. No trial date has been set. The Company expects Mr. Kozlowski and Mr. Swartz to contest these decisions. As a result, the Company has and will continue to maintain the reserve recorded in its Consolidated Balance Sheet for the amounts allegedly due under their compensation and retention arrangements and under ERISA until the appeals process is complete. Although the ultimate resolution of these matters could differ materially from these estimates, the Company does not believe such resolution would have a material adverse effect on its financial position, results of operations or cash flows. Tyco has also brought an action against Mr. Walsh in connection with the damages suffered by Tyco arising from Mr. Walsh's breach of his fiduciary duties to Tyco. In October 2010, the U.S. District Court for the Southern District of New York denied Tyco's affirmative claims for recovery of damages against Mr. Walsh. Tyco is pursuing an appeal. This affirmative matter, and the affirmative matters against Messrs. Kozlowski and Swartz, are not subject to the liability sharing provisions of the Separation and Distribution Agreement. Separately, Mr. Walsh is pursuing a New York state court claim against the Company asserting his entitlement to indemnification. This action is subject to the liability sharing provisions of the Separation and Distribution Agreement. Environmental Matters Tyco is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of September 30, 2011, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $38 million to $86 million. As of September 30, 2011, Tyco concluded that the best estimate within this range is approximately $60 million, of which $18 million is included in accrued and other current liabilities and $42 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 along with numerous other companies 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. As of September 30, 2011, there were approximately 4,500 lawsuits pending against the Company, its subsidiaries or entities for which the Company has assumed responsibility. Each lawsuit typically includes several claims, and the Company has determined that there were approximately 5,600 claims outstanding as of 26 September 30, 2011, which reflects the Company's current estimate of the number of viable claims made against it, its affiliates or entities for which it has assumed responsibility in connection with acquisitions or divestitures. This amount includes adjustments for claims that are not actively being prosecuted, identify incorrect defendants or are duplicative of other actions. For a detailed discussion of asbestos-related matters, see Note 15 of the Consolidated Financial Statements. Income Tax Matters In connection with the 2007 spin-offs of Covidien and TE Connectivity from Tyco, Tyco entered into a Tax Sharing Agreement that governs the rights and obligations of each party with respect to certain pre-2007 Separation income tax liabilities. More specifically, Tyco, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of shared income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and TE Connectivity's U.S. and certain non-U.S. income tax returns. Costs and expenses associated with the management of these shared tax liabilities are generally shared equally among the parties. Consistent with the sharing provisions of the Tax Sharing Agreement, Tyco had a net receivable from Covidien and TE Connectivity of $89 million and $114 million as of September 30, 2011 and September 24, 2010, respectively. In addition, as of September 30, 2011 and September 24, 2010, the Company had recorded $387 million and $398 million, respectively, in other liabilities, and $49 million and $156 million, respectively, in accrued and other current liabilities. During 2011, the Company made a net cash payment of $113 million to Covidien and TE Connectivity related to the resolution of certain audit and pre-Separation tax matters. Tyco and its subsidiaries' income tax returns periodically are examined by various tax authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other tax contingencies and related interest have been assessed as uncertain income tax positions and recorded as appropriate. For a detailed discussion of contingencies related to Tyco's income taxes, see Note 7 to the Consolidated Financial Statements. 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. During the fourth quarter of 2011, the Company's subsidiaries were acquitted of these charges. The Company reported to the DOJ and the SEC the investigative steps and remedial measures that it has taken in response to these and other 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 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, which remain ongoing. Although the Company has recorded its best estimate of potential loss related to this matter, it is 27 possible that this estimate may differ from the ultimate loss determined in connection with the resolution of this matter, as the Company may be required to pay material fines, consent to injunctions on future conduct, consent to the imposition of a compliance monitor, or suffer other criminal or civil penalties or adverse impacts, including being subject to lawsuits brought by private litigants, each of which may have a material adverse effect on the Company's financial position, results of operations or cash flows. Covidien and TE Connectivity agreed, in connection with the 2007 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 investigation 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 TE Connectivity, 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 TE Connectivity. As previously disclosed, in early 2007 certain former subsidiaries in the Company's Flow Control business were charged, prior to their divestiture, by the German Federal Cartel Office ("FCO") with engaging 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 competition law. The Company is cooperating with the FCO in its ongoing investigation of this violation. The Company has recorded its best estimate of potential loss related to this matter. However, it is possible that this estimate may differ from the ultimate loss determined in connection with the resolution of this matter, as the Company may be required to pay material fines, suffer penalties or incur settlements in amounts that may have a material adverse effect on its financial position, results of operations or cash flows. During the fourth quarter of 2011, the Company has concluded that its best estimate of probable loss for these compliance matters is $34 million in the aggregate, which the Company recorded as a liability in accrued and other current liabilities in the Consolidated Balance Sheet for the year ended September 30, 2011. Due to the sharing provisions in the Separation and Distribution Agreement, the Company has also recorded receivables from Covidien and TE Connectivity related to these compliance matters in other current assets in the Company's Consolidated Balance Sheet as of September 30, 2011. 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, $18.7 million of which has been cumulatively paid through September 30, 2011. While the ultimate outcome is uncertain, SimplexGrinnell believes that it has strong arguments that no withdrawal liability is owed to the Fund, 28 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. Broadview Security Contingency On May 14, 2010, the Company acquired Broadview Security, 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 Broadview Security 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 ("VEBA") 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, Broadview Security entered into an agreement in which The Brink's Company agreed to indemnify it 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 Broadview Security. 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 VEBA, and indemnification provided by The Brinks 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 VEBA will be able to satisfy all future obligations under the Coal Act. ADT Dealer Litigation As previously reported, in 2002, the SEC's Division of Enforcement conducted an investigation related to past accounting practices for dealer connect fees that ADT had charged to its authorized dealers upon purchasing customer accounts. The investigation related to accounting practices employed by the Company's former management, which were discontinued in 2003. Although the Company settled with the SEC in 2006, a number of former dealers and related parties have filed lawsuits against the Company in the United States and in other countries, 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. Upon appeal, the Colorado Court of Appeals affirmed the verdict in ADT's favor in October 2011. While it is not possible at this time to predict the final outcome of the Colorado lawsuit or other lawsuits stemming from dealer terminations, 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. Other Matters 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. None. 29 PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The number of registered holders of Tyco's common shares as of November 7, 2011 was 25,945. Tyco common shares are listed and traded on the NYSE under the symbol "TYC." The following table sets forth the high and low closing sales prices of Tyco common shares as reported by the NYSE, and the dividends declared on Tyco common shares, for the quarterly periods presented below.
Dividend Policy Prior to May 2011, the Company paid dividends in the form of a return of share capital from the Company's registered share capital. These payments were made free of Swiss withholding taxes. The Company now makes dividend payments from its contributed surplus equity position in its Swiss statutory accounts. These payments are also made free of Swiss withholding taxes. Unlike payments made in the form of a reduction to registered share capital, which are required to be denominated in Swiss francs and converted to U.S. dollars at the time of payment, payments from the contributed surplus account may effectively be denominated in U.S. dollars. Under Swiss law, the authority to declare dividends is vested in the Company's shareholders. We expect to obtain shareholder approval of the annual dividend amount out of contributed surplus each year at our annual general meeting, and we expect to distribute the approved dividend amount in four quarterly installments, on dates determined by our Board of Directors. The timing, declaration and payment of future dividends to holders of our common shares will depend upon many factors, including our financial condition and results of operations, the capital requirements of our businesses, industry practice and any other relevant factors. Future dividends will be proposed by our Board of Directors and will require shareholder approval. 30 Performance Graph Set forth below is a graph comparing the cumulative total shareholder return on Tyco's common shares against the cumulative return on the S&P 500 Index and the S&P 500 Industrials Index, assuming investment of $100 on September 29, 2006, including the reinvestment of dividends. The graph shows the cumulative total return as of the fiscal years ended September 28, 2007, September 26, 2008, September 25, 2009, September 24, 2010 and September 30, 2011.
31 Equity Compensation Plan Information The following table provides information as of September 30, 2011 with respect to Tyco's common shares issuable under its equity compensation plans:
32 employees under the LTIP or the LTIP II. LTIP II allowed for the grant of stock options and other equity or equity-based grants to employees who are not officers of Tyco. Under this plan, non-officer employees or former employees of Tyco or a subsidiary could receive: (i) options to purchase Tyco common shares; (ii) stock appreciation rights; (iii) awards payable in cash, common shares, other securities or other property, based on the achievement of performance goals; (iv) dividend equivalents, consisting of a right to receive payments equivalent to dividends declared on Tyco common shares; and (v) other stock-based awards as determined by the Compensation and Human Resources Committee ("Committee"). The exercise price of options and stock appreciation rights would generally be fair market value on the date of grant, but could be lower in certain circumstances. No individual could receive awards for more than 12,000,000 shares (or 3,000,000 shares on a post-reverse stock split basis) in any calendar year. Terms and conditions of awards were determined by the Committee. Awards could be deferred, and could be payable in any form the Committee determined, including cash, Tyco common shares, other securities or other property. The Committee may modify awards in recognition of unusual or nonrecurring events, including a change of control. The shares granted under the LTIP II will be issued at vesting under the 2004 Stock and Incentive Plan.
33 Issuer Purchases of Equity Securities
The transactions described in the table above represent shares acquired by the Company from certain employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares during the quarter ended September 30, 2011. The average price paid per share is calculated by dividing the total cash paid for the shares by the total number of shares repurchased. During the quarter ended September 30, 2011, there were no common shares repurchased under the $1.0 billion share repurchase program approved by the Board of Directors in April 2011 ("2011 Share Repurchase Program"). Approximately $700 million remained outstanding under the 2011 Share Repurchase Program as of September 30, 2011. 34
Item 6. Selected Financial Data The following table sets forth selected consolidated financial data of Tyco. This data is derived from Tyco's Consolidated Financial Statements for the years ended September 30, 2011, September 24, 2010, September 25, 2009, September 26, 2008 and September 28, 2007, respectively. Tyco has a 52 or 53-week fiscal year that ends on the last Friday in September. Fiscal years 2010, 2009, 2008 and 2007 were all 52-week years, while fiscal 2011 was a 53-week year. During the third quarter of fiscal 2010, we entered into an agreement to sell our European water business. The business met the held for sale and discontinued operations criteria and therefore has been included in discontinued operations in all periods presented below. In the third quarter of fiscal 2007, we completed the spin-offs of Covidien and TE Connectivity, formerly our Healthcare and Electronics businesses, respectively. These businesses are classified as discontinued operations in fiscal 2007. This selected financial data should be read in conjunction with Tyco's Consolidated Financial Statements and related Notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the Company's financial condition and results of operations should be read together with the Selected Financial Data and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the headings "Risk Factors" and "Forward-Looking Information." Introduction The Consolidated Financial Statements include the consolidated results of Tyco International Ltd., a company organized under the laws of Switzerland, and its subsidiaries (hereinafter collectively referred to as "we", the "Company" or "Tyco"). The financial statements have been prepared in United States dollars ("USD"), in accordance with accounting principles generally accepted in the United States ("GAAP"). During the first quarter of fiscal 2011, we realigned our Safety Products segment between our ADT Worldwide and Fire Protection segments to create two new segments: Tyco Security Solutions and Tyco Fire Protection. Tyco Security Solutions consists of the former ADT Worldwide segment as well as the portion of the former Safety Products segment that manufactures security products including intrusion, security, access control and video management systems. Tyco Fire Protection consists of the former Fire Protection Services segment as well as a number of businesses from the former Safety Products segment including the fire suppression, fire detection and life safety products businesses. In addition, various businesses were realigned between Tyco Security Solutions and Tyco Fire Protection. As a result of this realignment, as well as the sale of a majority interest in our Electrical and Metal Products business further described below, we began operating in the following business segments:
We also provide general corporate services to our segments and these costs are reported as Corporate and Other. Overview Net revenue for the year ended September 30, 2011 increased by $339 million, or 2.0%, to $17.4 billion as compared to the year ended September 24, 2010. Net revenue increased in fiscal 2011 despite the sale of our majority interest in the Electrical and Metal Products business, which contributed $1.4 billion of revenue during the year ended September 24, 2010 and $347 million during the year 36 ended September 30, 2011. Net revenue increased across all of our segments mainly attributable to strength in our Tyco Security Solutions and Tyco Fire Protection segments and to a lesser extent our Tyco Flow Control segment. Favorable changes in foreign currency exchange rates also impacted net revenue by $503 million, or 3.0%. In addition, because the Company's fiscal year ends on the last Friday in September, fiscal 2011 consisted of 53 weeks, as compared to 52 weeks in fiscal 2010 and 2009. As a result, fiscal year 2011 includes an estimated $143 million, or 0.8%, of revenue from the additional week. Service revenue, which is primarily recurring in nature, represented approximately 45% of our overall revenue for the year ended September 30, 2011 as compared to 41% and 40% for 2010 and 2009, respectively. Service revenue as a percentage of net revenue increased due to the divestiture of our Electrical and Metal Products business, which did not have a significant service component as well as due to strength in our Tyco Security Solutions and Tyco Fire Protection businesses. Service revenues are principally derived from our Tyco Security Solutions and Tyco Fire Protection businesses, and represent a consistent source of revenue from monitoring and maintenance services under contractual agreements. Recurring revenue in our Tyco Security Solutions business grew to approximately 57% of Tyco Security Solutions' total revenue for the year ended September 30, 2011 which is primarily due to the integration of Broadview Security, compared to approximately 56% for the year ended September 24, 2010, and 52% for the year ended September 25, 2009. In the Tyco Fire Protection business, service revenue remained steady as a percentage of Tyco Fire Protection's total revenue at 38% in 2011 and 2010, as compared to 36% in 2009. For the year ended September 30, 2011, non-service revenue in Tyco Security Solutions and Tyco Fire Protection improved slightly compared to the prior annual periods, due to strength in systems installation and related products and product sales in Tyco Security Solutions and product sales in Tyco Fire Protection. These improvements were partially offset by continued weakness in our Tyco Flow Control segment's Water and Environmental Systems business. Operating income for the year ended September 30, 2011 increased $521 million, or 33%, to $2.1 billion, as compared to operating income of $1.6 billion for the year ended September 24, 2010. Operating income for the year ended September 30, 2011 includes a net gain on divestitures of $230 million primarily related to the sale of a majority interest in our Electrical and Metal products business compared to a net gain on divestitures of $40 million for the year ended September 24, 2010. Operating income was also favorably impacted by changes in foreign currency exchange rates of $60 million, or 3.8%. The increase in operating income in 2011 also reflects strong growth in our Tyco Security Solutions business. Operating income was favorably impacted for the year ended September 30, 2011 due to lower restructuring and asset impairment charges of $87 million as compared to $145 million for the year ended September 24, 2010. Operating income for the year ended September 30, 2011 included acquisition and integration costs of $39 million as compared to $35 million for the year ended September 24, 2010. Our cash balance was $1.4 billion and $1.8 billion as of September 30, 2011 and September 24, 2010, respectively. We generated approximately $2.4 billion of cash from operating activities and utilized $1.3 billion of cash in investing activities and $1.5 billion of cash in financing activities during the year ended September 30, 2011. During the year ended September 30, 2011, approximately $1.0 billion of cash was generated from divestitures, primarily related to $713 million for the sale of the majority interest in our Electrical and Metal Products business and $264 million for the sale of our European water business, which was presented in net cash provided by (used in) discontinued investing activities in our Consolidated Statement of Cash Flows. During the year ended September 30, 2011, uses of cash primarily included $1.3 billion to repurchase our common shares, $788 million of capital expenditures, $656 million for acquisitions, net of cash acquired, $614 million to purchase customer contracts in our Tyco Security Solutions segment and $458 million to pay cash dividends. 37 Recent Transactions On September 19, 2011, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies consisting of the Company's North American residential security business, its flow control business, and its commercial fire and security business. The 2012 Separation is expected to be completed by the end of the third calendar quarter of 2012 through a tax-free pro rata distribution of all of the equity interest in the flow control and North American residential security business. Completion of the proposed separation is subject to certain conditions, including final approval by the Tyco Board of Directors and shareholders, receipt of tax opinions and rulings and the filing and effectiveness of registration statements with the SEC. The separation will also be subject to the completion of any necessary financing. During fiscal 2011, we made a number of strategic investments within our three core businesses. On April 29, 2011, our Tyco Security Solutions segment completed the acquisition of Signature Security Group for $184 million, net of cash acquired of $2 million. Signature Security Group is an electronic security company operating in Australia and New Zealand primarily in small business and residential markets. On June 29, 2011, the Company's Flow Control segment finalized the acquisition of a 75% equity interest in privately-held KEF Holdings Ltd. ("KEF"), a vertically integrated valve manufacturer in the Middle East, for approximately $295 million, net of cash acquired of $1 million. Additionally, in connection with the acquisition we acquired $64 million of debt which was substantially paid as of September 30, 2011. On September 1, 2011, our Fire Protection segment completed the acquisition of Chemguard Inc. ("Chemguard") for approximately $130 million, net of cash acquired of $1 million. Chemguard is a provider of firefighting foam concentrates and equipment, foam systems, services and specialty chemicals. On September 15, 2011, the Company reached an agreement to acquire Visonic Ltd. ("Visonic"), a global developer and manufacturer of electronic security systems and components, for approximately $100 million in cash. The transaction is expected to close during the first quarter of fiscal 2012. Following the close of the transaction, the Company intends to combine Visonic with the Company's Tyco Security Solutions segment. See Note 5 to the Consolidated Financial Statements On November 9, 2010, we announced that we entered into an investment agreement (the "Agreement") to sell a majority interest in our Electrical and Metal Products business to an affiliate of the private equity firm Clayton, Dubilier & Rice, LLC (the "Investor"). We formed a newly incorporated holding company, Atkore International Group Inc. ("Atkore"), to hold our Electrical and Metal Products business. On December 22, 2010, the transaction closed and the Investor acquired shares of a newly-created class of cumulative convertible preferred stock of Atkore (the "Preferred Stock"). The Preferred Stock initially represented 51% of the outstanding capital stock (on an as-converted basis) of Atkore. In connection with the closing, we received cash proceeds of approximately $713 million and recorded a gain of $259 million during the first quarter of 2011. During the year ended September 30, 2011, we recorded working capital adjustments of $11 million that reduced the gain on disposal. The gain on disposal is recorded within restructuring, asset impairments and divestiture (gains) charges, net in our Consolidated Statement of Operations. On September 30, 2010, we sold our water business in Europe, which was part of our Tyco Flow Control segment. The business met the discontinued operations criteria and has been included in discontinued operations for all periods presented. The sale was completed for approximately $264 million in cash proceeds, net of $7 million of cash divested on sale, and a pre-tax gain of $172 million, which was largely exempt from tax. The gain was recorded in income from discontinued operations, net of income taxes in the Company's Consolidated Statement of Operations. References to the segment data are to the Company's continuing operations. As discussed above, the Company realigned certain business operations during the first quarter of fiscal 2011 and 38 accordingly has recast prior period segment amounts. See Note 21 to the Consolidated Financial Statements. Operating Results
Segment Results The segment discussions that follow describe the significant factors contributing to the changes in results for each of our segments included in continuing operations. 39 Tyco Security Solutions Net Revenue Net revenue for Tyco Security Solutions for the years ended September 30, 2011, September 24, 2010 and September 25, 2009 were as follows ($ in millions):
Net revenue for Tyco Security Solutions of $8.6 billion increased by $892 million, or 11.5%, during the year ended September 30, 2011 as compared to the year ended September 24, 2010. Net revenue was favorably impacted by the estimated net impact of acquisitions and divestitures of $235 million, or 3.0%, substantially all of which was related to the acquisition of Broadview Security in May 2010, and to a lesser extent, Signature Security Group in April 2011, offset by divested revenue from our French Security business which was sold in March 2010. Changes in foreign currency exchange rates also favorably impacted net revenue by $192 million, or 2.5%. In addition, an estimated $38 million, or 0.5%, of revenue is attributable to the additional week in fiscal 2011, all of which is non-recurring. The remaining increase in net revenue was primarily due to incremental account growth, net of attrition, in the recurring revenue businesses in North America and Rest of World ("ROW"), and strength in our non-recurring businesses related to construction project activity and security system upgrades in North America and retail store expansion activity in ROW. Net revenue for Tyco Security Solutions of $7.7 billion increased by $359 million, or 4.9%, during the year ended September 24, 2010 as compared to September 25, 2009. Net revenue was favorably impacted by changes in foreign currency exchange rates of $239 million, or 3.2%. Net revenue was also favorably impacted by the net impact of acquisitions and divestitures of $72 million, or 1.0%, which was primarily the result of $193 million in net revenue estimated to be contributed by the Broadview Security acquisition partially offset by $109 million of divested revenue relating to our French security business. 40 Recurring Net Revenue Recurring revenue is generated from contractual monitoring and maintenance agreements that are long-term in nature, and is primarily driven by the addition or loss of customer accounts and increases or decreases in average revenue per customer.
Recurring revenue increased by $612 million, or 14.2%, to approximately $4.9 billion during the year ended September 30, 2011 as compared to the year ended September 24, 2010. Recurring net revenue was favorably impacted by the estimated impact of acquisitions and divestitures of $322 million, or 7.5%, relating to our acquisition of Broadview Security in May 2010, and to a lesser extent the acquisition of Signature Security Group in April 2011. Changes in foreign currency exchange rates also favorably impacted recurring revenue by $84 million, or 2.0%. Customer accounts grew during the year ended September 30, 2011 by approximately 0.1 million, or 1.1%, to a total of 9.0 million accounts. The increase in average monthly revenue per customer of $0.73 from the year ended September 24, 2010 to the year ended September 30, 2011 was partially due to favorable foreign exchange rates along with incremental account growth, net of attrition, in the North America and ROW regions. Recurring revenue increased by $434 million, or 11.2%, to approximately $4.3 billion, during the year ended September 24, 2010 as compared to the year ended September 25, 2009, as a result of growth in customer accounts of approximately 1.5 million, or 20.3%, to a total of approximately 8.9 million accounts as of September 24, 2010. Approximately 1.4 million customer accounts were acquired on May 14, 2010 in connection with the Broadview Security acquisition. The net impact of acquisitions and divestitures and changes in foreign currency exchange rates favorably impacted recurring revenue by $149 million, or 3.9%, and $116 million, or 3.0%, respectively, in 2010. Non-Recurring Net Revenue Non-recurring revenue is generated from product sales (including sales and installation of electronic security and products related to retailer anti-theft systems, as well as other life safety systems) and from services such as the provisioning of armored guards and one-time repair, security system upgrades or inspection jobs. Non-recurring net revenue increased by $280 million, or 8.1%, to $3.7 billion for the year ended September 30, 2011 as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted non-recurring net revenue by $108 million, or 3.1%. In addition, an estimated $38 million, or 1.1%, of non-recurring revenue is attributable to the additional week in fiscal 2011. These increases were partially offset by an unfavorable net impact of acquisitions and divestitures of $89 million or 2.6%, primarily relating to the sale of our French Security business in March 2010. The remaining increase was primarily due to strength in commercial end markets with new retail store expansion activity in ROW and increased demand within North America for construction projects and security systems upgrades. 41 Non-recurring revenue declined by $75 million, or 2.1%, to approximately $3.4 billion during the year ended September 24, 2010, as compared to the year ended September 25, 2009, due to lower sales volume primarily as the result of weakness in the commercial end market, which declined at a slower rate than the same period in the prior year. Changes in foreign currency exchange rates favorably impacted systems installation, product sales and other service revenue by $122 million, or 3.5%, while the net impact of acquisitions and divestitures resulted in an unfavorable impact of $76 million, or 2.2%. Revenue by Geography North American revenue consists of residential and small business, primarily a recurring revenue business, and commercial, primarily a non-recurring revenue business. Europe, Middle East and Africa ("EMEA") and ROW revenue are primarily commercial. Net revenue by geography for Tyco Security Solutions was as follows ($in millions):
North America Net revenue in North America increased by $666 million, or 15.0%, for the year ended September 30, 2011 as compared to the year ended September 24, 2010, primarily as a result of the acquisition of Broadview Security. Changes in foreign currency exchange rates favorably impacted North American revenue by $25 million, or 0.6%. Residential and small business net revenue increased by 19.9% compared to the year ended September 24, 2010, primarily due to the acquisition of Broadview Security. Commercial net revenue increased by 8.2%, as compared to the year ended September 24, 2010, primarily as a result of an increase in construction projects and security system upgrades in the commercial end markets which was partially offset by softness in the retail market. Net revenue in North America increased by $251 million, or 6.0%, for the year ended September 24, 2010 as compared to the year ended September 25, 2009, primarily as the result of the net impact of acquisitions and divestitures, which favorably impacted net revenue by an estimated $193 million, or 4.6%, as the result of the acquisition of Broadview Security. Changes in foreign currency exchange rates also favorably impacted net revenue by $48 million, or 1.1%. Residential and small business net revenue increased by 15.3% compared to the year ended September 25, 2010, primarily due to the acquisition of Broadview Security. Commercial net revenue decreased by 4.8% due to the decline in systems installation and product sales as the result of weakness in the commercial market, although the rate of decline was slower than the same period in the prior year. Europe, Middle East, and Africa Net revenue in EMEA decreased by $12 million, or 0.7%, for the year ended September 30, 2011 as compared to the year ended September 24, 2010, primarily due to the unfavorable net impact of acquisitions and divestitures of $138 million, or 7.9%, resulting from the sale of certain businesses, including the French security business in March 2010, and several smaller businesses in Europe over the course of fiscal 2010. The decrease was partially offset by favorable changes in foreign currency 42 exchange rates of $70 million, or 4.0%. Stronger systems installation across Continental Europe also favorably increased net revenue. Net revenue in EMEA decreased by $137 million, or 7.3%, for the year ended September 24, 2010 as compared to the year ended September 25, 2009, as favorable changes in foreign currency exchange rates of $60 million, or 3.2%, were more than offset by a decline in systems installation and other service revenue as a result of weakness in the commercial end market, although the rate of decline was slower than the same period in the prior year. Additionally, EMEA net revenue was unfavorably impacted by $120 million, or 6.4%, due to the impact of divestitures. Rest of World Net revenue in ROW increased by $185 million, or 15.3%, for the year ended September 30, 2011 as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted net revenue by $83 million, or 6.9%. The remaining increase in net revenue in ROW was primarily attributable to retail store expansion, increases in the customer account bases and increased systems installation activity in the Asia Pacific and Latin America regions. Net revenue in ROW increased by $200 million, or 19.9%, for the year ended September 24, 2010 as compared to the year ended September 25, 2009, primarily due to recurring revenue growth in both Latin American and Asia Pacific regions resulting from customer account growth. The Asia-Pacific region experienced an increase in system installation, products sales and other service revenue which was partially offset by a decrease in the Latin American region due to a slowdown in commercial and retailer end markets. Net revenue in the Rest of World geographies was also favorably impacted by changes in foreign currency exchange rates of $111 million, or 11.0%. Tyco Security Products Net revenue in Tyco Security Products increased by $53 million, or 15.0%, for the year ended September 30, 2011 as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted net revenue by $14 million, or 4.0%. The remaining increase in net revenue was primarily due to growth across multiple product lines globally. Net revenue in Tyco Security Products increased by $45 million, or 14.6%, for the year ended September 24, 2010 as compared to the year ended September 25, 2009. Changes in foreign currency exchange rates favorably impacted net revenue by $20 million, or 6.5%. Additionally, net revenue increased due to higher volume primarily related to the introduction of several new products. Operating Income and Operating Margin Operating income and operating margin for Tyco Security Solutions were as follows ($ in millions):
43 Operating income of $1.4 billion increased by $271 million, or 24.9%, in the year ended September 30, 2011 as compared to the year ended September 24, 2010. Operating income and operating margin for the year ended September 30, 2011 continued to be favorably impacted by higher sales volume, efficiencies gained through restructuring actions taken in prior years and other cost containment activities. Changes in foreign currency exchange rates favorably impacted operating income by $23 million, or 2.1%. Included in operating income for the year ended September 30, 2011 was $25 million of restructuring charges, net as compared to $62 million of restructuring charges, net for the year ended September 24, 2010. In addition, included in operating income for the year ended September 30, 2011 is $33 million of acquisition and integration costs primarily related to the acquisition of Broadview Security and Signature Security Group, as compared to $32 million of acquisition and integration costs during the year ended September 24, 2010. Included in the operating income for the prior year comparable period is a $45 million gain on divestitures, net primarily related to the sale of our French security business and a curtailment gain of $12 million, which was recognized upon the freezing of certain defined benefit plans in the United Kingdom, as compared to the absence of similar charges for the year ended September 30, 2011. Operating income of $1.1 billion increased by $1.6 billion in the year ended September 24, 2010 as compared to the year ended September 25, 2009. Operating income for the year ended September 25, 2009 was negatively affected by goodwill impairment charges of $1.3 billion recorded at our ADT EMEA, Access Controls and Video Systems ("ACVS") and Sensormatic Retail Solutions reporting units and intangible asset impairment charges of $64 million. Operating income for the year ended September 24, 2010 was positively impacted by the shift to higher margin recurring revenue. Additionally, 2010 operating income was favorably impacted by the net impact of savings realized through previous restructuring and cost containment actions, and a curtailment gain of $12 million recognized when certain defined benefit pension plans were frozen in the United Kingdom. These increases were partially offset by an increase in the amortization of intangible assets primarily relating to the Broadview Security acquisition. During the year ended September 24, 2010, $62 million of net restructuring charges were incurred, of which $14 million related to restructuring actions associated with the acquisition of Broadview Security, as compared to $118 million of restructuring charges, net during the year ended September 25, 2009. Additionally, management estimated that $2 million of additional charges resulting from restructuring actions was incurred during the year ended September 25, 2009. Fiscal 2010 also included a $45 million gain on divestitures, net primarily related to the sale of our French security business, and $32 million of acquisition and integration costs related to the acquisition of Broadview Security, as compared to a $6 million loss on divestitures and nil of acquisition costs during fiscal 2009. Changes in foreign currency exchange rates favorably impacted operating income by $33 million, or 6.4%. 44 Tyco Fire Protection Net Revenue Net revenue for Tyco Fire Protection for the years ended September 30, 2011, September 24, 2010 and September 25, 2009 were as follows ($ in millions):
Net revenue for Tyco Fire Protection of $4.7 billion increased by $233 million, or 5.2%, during the year ended September 30, 2011, as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted net revenue by $126 million, or 2.8%. In addition, an estimated $60 million, or 1.3% of revenue is attributable to the additional week in fiscal 2011, while the deconsolidation of a joint venture in our Fire Protection services business as a result of adopting a new accounting standard unfavorably impacted net revenue by $72 million, or 1.6%. The remaining increase in revenue was primarily driven by increased volume in product sales as a result of generally improved end-market demand, implementation of pricing actions to offset commodity inflationary pressures, increased services revenue as a result of continued focus on driving recurring revenue and continued emerging markets expansion, partially offset by a decline in systems installation revenue as a result of project selectivity across all regions. Net revenue for Tyco Fire Protection decreased $110 million, or 2.4%, during the year ended September 24, 2010 compared to the year ended September 25, 2009. Net revenue was unfavorably impacted by acquisitions and divestitures of $37 million, or 0.8%. Net revenue was favorably impacted by changes in foreign currency exchange rates of $130 million, or 2.8%. The remaining decrease was primarily due to weakness in commercial markets and project selectivity resulting from a focus on higher margin projects. 45 Revenue from product sales Systems installation and related products Revenue from product sales includes sales and installation of fire protection and other systems. Revenue from systems installation decreased by $4 million, or 0.2%, during the year ended September 30, 2011, as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted systems installation revenue by $45 million, or 2.8%, while the deconsolidation of a joint venture discussed above unfavorably impacted systems installation by $51 million, or 3.1%. Revenue from systems installation was also unfavorably impacted by project selectivity resulting from a focus on higher margin projects across all regions. Revenue from systems installation decreased by $123 million, or 7.1%, during the year ended September 24, 2010, as compared to the year ended September 25, 2009. Changes in foreign currency exchange rates favorably impacted systems installation revenue by $56 million, or 3.2%. Despite the favorable impact of foreign currency, revenue decreased due to decreased upgrade activity from customers, and project selectivity resulting from a focus on higher margin project across all regions. Product sales Revenue from product sales increased by $164 million, or 14.2%, during the year ended September 30, 2011, as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted product revenue by $24 million, or 2.1%. The remaining increase in net revenue was driven by increased volumes due to improved end-market demand and implementation of pricing actions to offset commodity inflationary pressures. Revenue from product sales decreased by $50 million, or 4.1%, during the year ended September 24, 2010, as compared to the year ended September 25, 2009. Product revenue was unfavorably impacted by the estimated impact of $32 million, or 2.7% of divestitures. This decrease was partially offset by changes in foreign currency exchange rates which favorably impacted product revenue by $13 million, or 1.1%. The remaining decrease was due to weakness in end-market demand. Service revenue Service revenue consists of inspection, maintenance, monitoring and repair of fire detection, suppression and other life safety systems. Service revenue increased by $73 million, or 4.2%, during the year ended September 30, 2011, as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted service revenue by $56 million, or 3.2%, while the deconsolidation of a joint venture discussed above unfavorably impacted service revenue by $21 million, or 1.2%. The remaining increase in service revenue was as a result of management's continued focus on expanding our recurring service revenue across all regions. Service revenue increased by $63 million, or 3.8%, during the year ended September 24, 2010, as compared to the year ended September 25, 2009. Changes in foreign currency exchange rates favorably impacted service revenue by $61 million, or 3.7%. Despite the favorable impact of foreign currency, service revenue was flat due primarily to weakness in the European markets. Operating Income and Operating Margin Operating income and operating margin for Tyco Fire Protection were as follows ($ in millions):
46 Operating income of $534 million increased $74 million, or 16.1%, for the year ended September 30, 2011 as compared to the year ended September 24, 2010. Changes in foreign currency exchange rates favorably impacted operating income by $15 million, or 3.3%. Other factors that contributed to the net increase in operating income and operating margin were increased sales volume, implementation of pricing actions to offset commodity inflationary pressures in the products business, project selectivity in the systems installation business, and cost-containment initiatives. These increases were partially offset by additional environmental remediation costs of $11 million, net of recoveries related to an isolated site, and a $5 million decrease to operating income related to the deconsolidation of a joint venture. Included in operating income for the prior year comparable period is a curtailment gain of $8 million, which was recognized upon the freezing of certain defined benefit plans in the United Kingdom. Included in operating income for the year ended September 30, 2011 was $38 million of restructuring charges, net as compared to $42 million of restructuring charges, net for the year ended September 24, 2010. Included in operating income for the year ended September 30, 2011 was $29 million of losses on divestitures as compared to $2 million of losses on divestitures for the year ended September 24, 2010. Operating income increased $440 million during the year ended September 24, 2010 as compared to the year ended September 25, 2009. Operating income during the year ended September 25, 2009 was negatively affected by a goodwill impairment charge of $420 million recorded at the EMEA Fire and Life Safety reporting units. Additionally, operating income in 2010 was favorably impacted by savings realized through cost containment actions, $14 million of favorable changes in foreign currency exchange rates, and to a lesser extent, a curtailment gain of approximately $8 million recognized when certain defined benefit pension plans were frozen in the United Kingdom. There were $42 million of restructuring charges, net and a loss on divestiture of $2 million during the year ended September 24, 2010, compared with $62 million of restructuring charges, net and nil of divestiture charges incurred in 2009. Additionally, management estimates that $7 million of additional charges resulting from restructuring actions were incurred during 2009. Operating income in 2009 was also unfavorably affected by the decreased sales volume discussed above. Tyco Flow Control Net Revenue Net revenue for Tyco Flow Control for the years ended September 30, 2011, September 24, 2010, and September 25, 2009 were as follows ($ in millions):
Net revenue for Tyco Flow Control of $3.6 billion increased by $266 million, or 7.9%, during the year ended September 30, 2011 as compared to the year ended September 24, 2010. The increase in revenue was primarily due to favorable impacts from changes in foreign currency exchange rates of $183 million, or 5.4%. In addition, an estimated $45 million, or 1.3%, of revenue is attributable to the additional week in fiscal 2011. Net revenue was favorably impacted by the estimated net impact of acquisitions and divestitures of $7 million, or 0.2%. The remaining increase was primarily due to continued strength in end-market demand in our Valves and Controls and Thermal Controls businesses partially offset by weakness in our Water and Environmental Systems business. The decreased revenue in our Water and Environmental Systems business was primarily due to the completion of a large desalinization project in Australia that commenced during the second quarter of fiscal 2010, and was completed at the beginning of the second quarter fiscal 2011. 47 Net revenue for Tyco Flow Control of $3.4 billion decreased by $122 million, or 3.5%, during the year ended year ended September 24, 2010 as compared to the year ended September 25, 2009. Net revenue was favorably impacted by changes in foreign currency exchange rates of $218 million, or 6.2%, as well as the net impact of acquisitions and divestitures of $10 million, or 0.3%. This was more than offset by decreased revenues due to reduced volume in the Valves and Controls business driven by decreased demand in end markets. Operating Income and Operating Margin Operating income and operating margin for Tyco Flow Control for the years ended September 30, 2011, September 24, 2010, and September 25, 2009 were as follows ($ in millions):
Operating income of $413 million increased by $3 million, or 0.7%, in the year ended September 30, 2011 as compared to the year ended September 24, 2010. Operating income was favorably impacted by changes in foreign currency exchange rates of $22 million, or 5.4%. The increase in operating income was primarily due to continued strength in the Valves and Controls and Thermal Controls businesses, which was more than offset by weakness in our Water and Environmental Systems business. Restructuring charges, net were $11 million during the year ended September 30, 2011 as compared to $25 million in the prior year. The year ended September 30, 2011 included a $6 million gain on divestiture, compared to a $1 million gain on divestiture for the year ended September 24, 2010. Operating income of $410 million decreased by $86 million, or 17.3%, during the year ended September 24, 2010 as compared to the year ended September 25, 2009, primarily due to decreased volume in our valves business and an expected loss related to completion of a long-term construction project of approximately $18 million. These declines were partially offset by favorable changes in foreign currency exchange rates of $31 million, or 6.3%. The decline in operating income was also partially offset by savings realized through cost containment and restructuring actions. Operating income was unfavorably impacted by $24 million of restructuring and divestiture charges, net during both fiscal 2010 and fiscal 2009. Additionally, management estimated that $5 million of additional charges resulting from restructuring actions were incurred during the year ended September 25, 2009. Corporate expense decreased $266 million, or 57.6%, to $196 million for the year ended September 30, 2011 as compared to an expense of $462 million for the year ended September 24, 2010. The decrease in corporate expense during the year ended September 30, 2011 is related to a $253 million net gain on divestitures, primarily related to the divestiture of our Electrical and Metal Products business, compared to a $4 million net loss on divestitures during the year ended September 24, 2010. Corporate expense was also favorably impacted by cost containment initiatives during the year ended September 30, 2011, as well as a lower net asbestos charge of $11 million recorded in connection with the Company's valuation of its asbestos-related liabilities during the year ended September 30, 2011 compared to a $52 million, net asbestos charge recorded during the year ended September 24, 2010. Corporate also recorded a $20 million charge in relation to a legacy legal matter during the year ended September 30, 2011 as compared to nil during the year ended September 24, 2010. Additionally, net restructuring charges and acquisition charges for the year ended September 30, 2011 were $12 million and $1 million respectively, while the year ended September 24, 2010 included restructuring charges and acquisition charges of $1 million and $3 million, respectively. The year ended September 30, 2011 included $24 million of separation costs primarily related to 48 professional fees and banking services. See Note 2 to our Consolidated Financial Statements for further information. Corporate expense decreased $108 million, or 18.9%, to $462 million for year ended September 24, 2010 as compared to $570 million for the year ended September 25, 2009. Corporate expense during 2009 was negatively affected by approximately $125 million of charges related to legacy securities matters partially offset by a $16 million benefit related to a settlement reached with a former executive. Restructuring charges decreased to $1 million for the year ended September 24, 2010 as compared to $10 million in the year ended September 25, 2009. Corporate expense was also favorably impacted by savings realized through cost containment and restructuring charges. These decreases in Corporate expenses were partially offset by a $52 million net asbestos charge recorded during the third quarter of 2010 as compared to a $37 million net asbestos charge in 2009, both of which were recorded in conjunction with the valuation of our asbestos-related liabilities and insurance assets. In addition, $4 million of divestiture charges, net, and $3 million of acquisition costs were recorded during the year ended September 24, 2010 as compared to $6 million of divestiture charges, net, and nil of acquisition costs for the year ended September 25, 2009. Interest income was $34 million in 2011, as compared to $31 million and $44 million in 2010 and 2009, respectively. Interest income increased in 2011 primarily due to increased investment yields compared to 2010, while investment yields continue to be lower than those experienced in 2009. Interest expense was $244 million in 2011, as compared to $284 million and $301 million in 2010 and in 2009, respectively. The weighted-average interest rate on total debt outstanding as of September 30, 2011, September 24, 2010, September 25, 2009 was 5.9%, 6.3% and 6.6%, respectively. The decreases in interest expense and weighted-average interest rate are primarily related to savings realized from the replacement of higher coupon notes with lower coupon notes over the past year, including the redemption of 6.375% notes due 2011 and issuance of 3.375% notes due 2015 during the third quarter of 2010 and the maturity of 6.75% notes due 2011 and issuances of the 3.75% notes due 2018 and 4.625% notes due 2023 during the second quarter of 2011. Other expense, net of $16 million in 2011, primarily relates to our share of Atkore's net loss of $9 million, which is accounted for under the equity method of accounting, and a decrease in the receivables due from Covidien and TE Connectivity under the Tax Sharing Agreement of $7 million. See Note 7 to the Consolidated Financial Statements. Other expense, net of $75 million in 2010, primarily related to a charge of $87 million as a loss on extinguishment of debt on the redemption of our 6.375% public notes due 2011, 7% notes due 2028 and 6.875% notes due 2029. See Note 12 to the Consolidated Financial Statements. This loss was partially offset by an $8 million gain recorded as a result of an increase in the receivables due from Covidien and TE Connectivity under the Tax Sharing Agreement. Other expense, net of $7 million in 2009, primarily related to a $14 million charge recorded as a result of a decrease in the receivables due from Covidien and TE Connectivity under the Tax Sharing Agreement, which was partially offset by income of $5 million relating to a gain on derivative contracts used to economically hedge the foreign currency risk related to the Swiss franc denominated dividends. Our effective income tax rate was 17.2% and 10.9% during the years ended September 30, 2011 and September 24, 2010, respectively. The increase in our effective income tax rate was primarily 49 related to the tax charge recorded in conjunction with the sale of a majority interest in our Electrical and Metal Products business during the first quarter of 2011, a non-recurring transaction generating a tax benefit in 2010 and a release of a deferred tax valuation allowance in 2010. The effective income tax rate was positively impacted by favorable audit resolutions in multiple jurisdictions during 2011. The rate can vary from quarter to quarter due to discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors, such as the geographic mix of income before taxes. The effective income tax rate for 2009 is not meaningful primarily as a result of the loss driven by goodwill impairment charges of $2.6 billion for which almost no tax benefit was available. Additionally, taxes for 2009 were positively impacted by increased profitability in lower tax rate jurisdictions and release of contingency reserves partially offset by enacted tax law changes and changes in foreign exchange rates that negatively impacted the non-U.S. deferred tax assets. The valuation allowance for deferred tax assets of $1,400 million and $1,379 million as of September 30, 2011 and September 24, 2010, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. The valuation allowance was calculated and recorded when the Company determined that it was more-likely-than-not that all or a portion of our deferred tax assets would not be realized. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on the Company's Consolidated Balance Sheets. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Substantially all of these potential tax liabilities are recorded in other liabilities in the Consolidated Balance Sheets as payment is not expected within one year. 2009 Goodwill and Intangible Asset Impairments Annually in the fiscal fourth quarter, and more frequently if triggering events occur, we test goodwill and indefinite-lived intangible assets for impairment by comparing the fair value of each reporting unit or indefinite-lived intangible assets with its carrying amount. We began to experience a decline in revenue during the first quarter of 2009 in our Tyco Security Solutions and Tyco Fire Protection 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 our Electrical Metal Products segments. Although we considered and concluded that these factors did not constitute triggering events during the first quarter of 2009, the continued existence of these conditions during the second quarter of 2009, along with downward revisions to forecasted results, restructuring actions and weaker industry outlooks, caused us to conclude that sufficient indicators of impairment existed. Reporting units within our Tyco Security Solutions and Tyco Fire Protection segments continued to be negatively impacted as a result of a slowdown in the commercial markets including the retailer end market. Additionally, our Electrical Metal Products reporting unit continued to be negatively impacted by a decline in sales volume due to the downturn in the non-residential construction market. We determined that these underlying events and circumstances constituted triggering events for six reporting units where such events would more likely than not reduce the fair value below their respective carrying amounts. Specifically, we concluded that our EMEA Security, ACVS and Sensormatic Retail Solutions ("SRS") reporting units within the Tyco Security Solutions segment the EMEA Fire and Life Safety reporting units within the Tyco Fire Protection segment and our Electrical and Metal Products reporting unit 50 within the Electrical and Metal Products segment experienced triggering events such that the carrying values of these reporting units likely exceeded their fair values. Furthermore, we determined that certain indefinite-lived intangible assets required impairment testing based on the underlying events and circumstances described as well as the continued deterioration of the business environment related to the retailer end market of our Tyco Security Solutions segments. As a result of the triggering events, we performed long-lived asset, goodwill and intangible asset impairment tests for these reporting units and certain of our trade names and franchise rights. Fair value of each reporting unit was determined utilizing a discounted cash flow analysis based on forecast cash flows (including underlying revenue and operating income growth rates) discounted using an estimated weighted-average cost of capital of market participants. In determining fair value, management relied on and considered a number of factors, including operating results, business plans, economic projections including the timing for an economic recovery, cash flow forecasts, market data, and our overall market capitalization. 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 economic uncertainty, the estimates of future cash flows used in the second quarter of 2009 discounted cash flow analyses were revised downward from our most recent test conducted during the fiscal fourth quarter of 2008. Furthermore, the range of the weighted-average cost of capital utilized was increased to reflect increased risk due to economic volatility and uncertainties related to demand for our products and services. The results of the goodwill impairment tests indicated that the implied goodwill amount was less than the carrying amount of goodwill for each of the aforementioned reporting units. We recorded an aggregate non-cash impairment charge of $2.6 billion ($2.6 billion after-tax) during the second quarter of 2009. The non-cash impairment charge was recorded in goodwill and intangible asset impairments in our Consolidated Statements of Operations for the quarter ended March 27, 2009. Indefinite-lived intangible assets consisting primarily of trade names and franchise rights were tested for impairment using either a relief from royalty method or excess earnings method, which include the selection of appropriate discount rates, royalty rates and terminal year growth rate assumptions and estimates of the amount and timing of future cash flows attributable to the underlying intangible assets. Also, during the second quarter of 2009, our estimates of future cash flows used in determining the fair value of our Tyco Security Solutions segment Sensormatic tradename as well as certain Tyco Security Solutions segment franchise rights were revised downward relative to the estimates used in our tests during the fourth quarter of 2008. The results of the impairment test indicated that the Tyco Security Solutions Sensormatic tradename and Tyco Security Solutions franchise rights estimated fair values were less than their respective carrying amounts. As a result, we recorded an aggregate non-cash impairment charge of $64 million ($40 million after-tax) during the second quarter of 2009. The non-cash impairment charge was recorded in goodwill and intangible asset impairments in our Consolidated Statements of Operations for the quarter ended March 27, 2009.
The preparation of the Consolidated Financial Statements in conformity with US GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period. Depreciation and Amortization Methods for Security Monitoring-Related Assets—Tyco considers assets related to the acquisition of new customers in its electronic security business in three asset categories: internally generated residential subscriber systems, internally generated commercial subscriber systems (collectively referred to as subscriber system assets) and customer accounts acquired through the ADT dealer program (referred to as dealer intangibles). Subscriber system assets include installed property, 51 plant and equipment for which Tyco retains ownership and deferred costs directly related to the customer acquisition and system installation. Subscriber system assets and any deferred revenue resulting from the customer acquisition are accounted for over the expected life of the subscriber. In certain geographical areas where the Company has a large number of customers that behave in a similar manner over time, the Company accounts for subscriber system assets and related deferred revenue using pools, with separate pools for the components of subscriber system assets and any related deferred revenue based on the month and year of acquisition. The Company depreciates its pooled subscriber system assets (primarily in North America) and related deferred revenue using an accelerated method with lives up to 15 years. The accelerated method utilizes declining balance rates based on geographical area ranging from 160% to 265% for residential subscriber pools and 135% to 360% for commercial subscriber pools and converts to a straight line methodology when the resulting depreciation charge is greater than that from the accelerated method. The Company uses a straight-line method with a 14-year life for non-pooled subscriber system assets (primarily in Europe and Asia) and related deferred revenue, with remaining balances written off upon customer termination. Revenue Recognition—Contract sales for the installation of fire protection systems, large security intruder systems and other construction-related projects are recorded primarily under the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related total cost of the project at completion. The risk of this methodology is its dependence upon estimates of costs at completion, which are subject to the uncertainties inherent in long-term contracts. Provisions for anticipated losses are made in the period in which they become determinable. Sales of security monitoring systems may have multiple elements, including equipment, installation, monitoring services and maintenance agreements. We assess our revenue arrangements to determine the appropriate units of accounting. When ownership of the system is transferred to the customer, each deliverable provided under the arrangement is considered a separate unit of accounting. Revenues associated with sale of equipment and related installations are recognized once delivery, installation and customer acceptance is completed, while the revenue for monitoring and maintenance services are recognized as services are rendered. Amounts assigned to each unit of accounting are based on an allocation of total arrangement consideration using a hierarchy of estimated selling price for the deliverables. The selling price used for each deliverable will be based on Vendor Specific Objective Evidence ("VSOE") if available, Third Party Evidence ("TPE") if VSOE is not available, or estimated selling price if neither VSOE or TPE is available. Revenue recognized for equipment and installation is limited to the lesser of their allocated amounts under the estimated selling price hierarchy or the non-contingent up-front consideration received at the time of installation, since collection of future amounts under the arrangement with the customer is contingent upon the delivery of monitoring and maintenance services. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants. Rebates are estimated based on sales terms, historical experience and trend analysis. Loss Contingencies—Accruals are recorded for various contingencies including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. Additionally, the Company records receivables from third party insurers when recovery has been determined to be probable. Asbestos-Related Contingencies and Insurance Receivables—We and certain of our subsidiaries along with numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. We estimate the liability and corresponding insurance recovery for pending and future claims and defense costs predominantly based on claim experience 52 over the past five years, and a projection which covers claims expected to be filed, including related defense costs, over the next seven years on an undiscounted basis. Due to the high degree of uncertainty regarding the pattern and length of time over which claims will be made and then settled or litigated, we use multiple estimation methodologies based on varying scenarios of potential outcomes to estimate the range of loss. We have concluded that estimating the liability beyond the seven year period will not provide a reasonable estimate, as these uncertainties increase significantly as the projection period lengthens. In connection with the recognition of liabilities for asbestos-related matters, we record asbestos-related insurance recoveries that are probable. The estimate of asbestos-related insurance recoveries represents estimated amounts due to us for previously paid and settled claims and the probable reimbursements relating to estimated liability for pending and future claims. In determining the amount of insurance recoverable, we consider available insurance, allocation methodologies, solvency and creditworthiness of the insurers. Annually, we perform a detailed analysis with the assistance of outside legal counsel and other experts to review and update as appropriate the underlying assumptions used in the estimated asbestos-related assets and liabilities. On a quarterly basis, we re-evaluate the assumptions used to perform the annual analysis and record an expense as necessary to reflect changes in the estimated liability and related insurance asset. See Note 15 to the Consolidated Financial Statements for a discussion of management's judgments applied in the recognition and measurement of asbestos-related assets and liabilities. Income Taxes—In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. We currently have recorded valuation allowances that we will maintain until it is more-likely-than-not the deferred tax assets will be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the affect of a tax rate or law change on the Company's deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company's financial condition, results of operations or cash flows. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and 53 other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. Goodwill and Indefinite-Lived Intangible Asset Impairments—Goodwill and indefinite-lived intangible assets are assessed for impairment annually and more frequently if triggering events occur. In performing these assessments, management relies on various factors, including operating results, business plans, economic projections including expectations and assumptions regarding the timing and degree of any economic recovery, anticipated future cash flows, comparable market transactions (to the extent available) and other market data. We elected to make the first day of the fourth quarter the annual impairment assessment date for all goodwill and indefinite-lived intangible assets. In the first step of the goodwill impairment test, we compare the fair value of a reporting unit with its carrying amount. Fair value for the goodwill impairment test is 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 for 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), is used 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 and further tests are performed to measure the amount of impairment loss. In the second step of the goodwill impairment test, we compare the implied fair value of a reporting unit's goodwill with the carrying amount of the reporting unit's goodwill. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities represents the implied fair value of goodwill. We recorded no goodwill impairments in conjunction with our annual goodwill impairment assessment performed during the fourth quarter of fiscal 2011. Additionally, we determined as part of the assessment that our Water and Environmental Systems reporting unit within our Flow Control segment had limited recoverability of goodwill. The fair value of the reporting unit exceeded its carrying value by 6.9%. As of September 30, 2011, the Water and Environmental Systems goodwill balance was $298 million. 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 an impairment charge would result or if such a charge would be material. The Company will continue to monitor the recoverability of its goodwill. 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. Examples of events or circumstances that could reasonably be expected to negatively affect the 54 underlying key assumptions and ultimately impact the estimated fair value of the aforementioned reporting units may include such items as follows:
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 an impairment charge would result or if such a charge would be material. Long-Lived Assets—Asset groups held and used by the Company, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset group may not be fully recoverable. Tyco performs undiscounted operating cash flow analyses to determine if impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Tyco groups assets and liabilities at the lowest level for which cash flows are separately identified. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairments to long-lived assets to be disposed of are recorded based upon the fair value less cost to sell of the applicable assets. The calculation of the fair value of long-lived assets is based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated. Pension and Postretirement Benefits—Our pension expense and obligations are developed from actuarial valuations. Two critical assumptions in determining pension expense and obligations are the discount rate and expected long-term return on plan assets. We evaluate these assumptions at least annually. Other assumptions reflect demographic factors such as retirement, mortality and turnover and are evaluated periodically and updated to reflect our actual experience. Actual results may differ from actuarial assumptions resulting in actuarial gains and losses. For active plans, such actuarial gains and losses will be amortized over the average expected service period of the participants and in the case of inactive plans over the average remaining life expectancy of participants. The discount rate represents the market rate for high-quality fixed income investments and is used to calculate the present value of the expected future cash flows for benefit obligations under our pension plans. A decrease in the discount rate increases the present value of pension benefit obligations. A 25 basis point decrease in the discount rate would increase the present value of pension obligations by approximately $75 million and increase our annual pension expense by approximately $2 million. We consider the relative weighting of plan assets by class, historical performance of asset classes over long-term periods, asset class performance expectations as well as current and future economic conditions in determining the expected long-term return on plan assets. A 25 basis point decrease in the expected long-term return on plan assets would increase our annual pension expense by approximately $4 million. 55
A fundamental objective of the Company is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of its core businesses around the world. The primary source of funds to finance our operations and capital expenditures is cash generated by operations. In addition, we maintain a commercial paper program, have access to committed revolving credit facilities and have access to equity and debt capital from public and private sources. We continue to balance our operating, investing and financing uses of cash through investments and acquisitions in our core businesses, dividends and share repurchases. In addition, we currently estimate that we will incur approximately $700 million in costs related to the 2012 Separation. We believe our cash position, amounts available under our credit facilities and cash provided by operating activities will be adequate to cover our operational and business needs in the foreseeable future. We had $1.4 billion and $1.8 billion of cash and cash equivalents as of September 30, 2011 and September 24, 2010, respectively. Cash generated by operating activities decreased to $2.4 billion for the year ended September 30, 2011 compared to $2.6 billion for the year ended September 24, 2010. Cash used in investing activities was $1.3 billion for the year ended September 30, 2011 compared to $1.8 billion for the year ended September 24, 2010. Cash used in financing activities was $1.5 billion for the year ended September 30, 2011 compared to $1.4 billion for the year ended September 24, 2010. As of September 30, 2011, our shareholder's equity was $14.2 billion and our total debt was $4.1 billion. In addition, we had lines of credit totaling approximately $1.5 billion, none of which were drawn. Our ratio of total debt to total capital (the sum of our short- and long-term debt and shareholders' equity) was 23% as of both September 30, 2011 and September 24, 2010, respectively. This ratio is a measure of our long-term liquidity and is an indicator of financial flexibility. On January 12, 2011, TIFSA, our finance subsidiary, issued $250 million aggregate principal amount of 3.75% notes due on January 15, 2018 and $250 million aggregate principal amount of 4.625% notes due on January 15, 2023, which are fully and unconditionally guaranteed by the Company. TIFSA received net cash proceeds of approximately $494 million. The net proceeds, along with other available funds, were used to fund the repayment of all of our outstanding 6.75% notes due in February 2011 with a principal amount of $516 million. On March 24, 2011, TIFSA, as the Borrower, and the Company as the Guarantor, entered into a Four-Year Senior Unsecured Credit Agreement, providing for revolving credit commitments in the aggregate amount of $750 million (the "Credit Agreement"). In connection with entering into the Credit Agreement, TIFSA and the Company terminated the existing Three-Year Senior Unsecured Credit Agreement, dated June 24, 2008, which provided for revolving credit commitments in the aggregate amount of $500 million, and which was scheduled to expire in June 2011. At the same time, TIFSA also reduced the lenders' commitments under its existing Five-Year Senior Unsecured Credit Agreement, dated April 25, 2007, from an aggregate of $1.19 billion to $750 million, and which is scheduled to expire in April 2012. 56 Cash flow from operating activities The sources of our cash flow from operating activities and the use of a portion of that cash in our operations for the years ended September 30, 2011, September 24, 2010 and September 25, 2009 are as follows ($ in millions):
The net change in working capital decreased operating cash flow by $584 million in 2011. The significant changes in working capital included a $271 million decrease in accrued and other liabilities, a $187 million increase in accounts receivable and a $137 million increase in inventories. The net change in working capital increased operating cash flow by $106 million in 2010. The significant changes in working capital included a $119 million increase in accounts payable and an $88 million decrease in prepaid and other current assets which were partially offset by a $108 million increase in inventories. The net change in working capital increased operating cash flow by $128 million in 2009. The significant changes in working capital included a $346 million decrease in inventory, a $191 million decrease in accounts receivable, a $106 million net decrease in contracts in progress, partially offset by a $337 million decrease in accounts payable and a $138 million decrease in income taxes, net. During 2011, 2010 and 2009, we paid approximately $114 million, $160 million (inclusive of $2 million relating to the French security business being classified as held for sale) and $152 million, respectively, in cash related to restructuring activities. See Note 4 to our Consolidated Financial Statements for further information regarding our restructuring activities. During the years ended September 30, 2011, September 24, 2010 and September 25, 2009 we made required contributions of $78 million, $82 million and $60 million, respectively to our U.S. and 57 non-U.S. pension plans. We also made voluntary contributions of approximately $15 million, nil and $22 million to our U.S. plans during the years ended September 30, 2011, September 24, 2010 and September 25, 2009. We anticipate contributing at least the minimum required to our pension plans in fiscal year 2012 of $44 million for our U.S. plans and $60 million for our non-U.S. plans. Income taxes paid, net of refunds, related to continuing operations were $196 million, $255 million, and $281 million in 2011, 2010 and 2009, respectively. Net interest paid, related to continuing operations were $195 million, $234 million, and $249 million in 2011, 2010 and 2009, respectively. Cash flow from investing activities We made capital expenditures of $788 million, $718 million, and $702 million during 2011, 2010 and 2009, respectively. The level of capital expenditures in fiscal year 2012 is expected to exceed the spending levels in fiscal year 2011 and is also expected to exceed depreciation expense. During 2011, 2010 and 2009, we paid approximately $614 million, $559 million, and $543 million of cash, respectively, to acquire approximately 565,000, 501,000 and 512,000 customer contracts for electronic security services within our Tyco Security Solutions segment. During 2011, we paid cash for acquisitions included in continuing operations totaling $656 million, net of cash acquired of $4 million, which primarily related to the acquisitions of Signature Security Group within our Tyco Security Solutions segment, KEF Holdings Ltd. within our Tyco Flow Control segment and Chemguard within our Tyco Fire Protection segment. During 2010, cash paid for acquisitions included in continuing operations totaled $600 million, net of cash acquired of $137 million, which primarily related to the acquisition of Broadview Security within our Tyco Security Solutions segment and Hiter within our Tyco Flow Control segment. During 2011, we received cash proceeds, net of cash divested of approximately $1 billion for divestitures. The cash proceeds primarily related to the sale of a majority interest in our Electrical and Metal Products business of $713 million, which is presented in continuing operations and $264 million for the sale of our European water business which is presented in discontinued operations. See Note 3 to our Consolidated Financial Statements for further information. Cash flow from financing activities On January 12, 2011, TIFSA, our finance subsidiary, issued $250 million aggregate principal amount of 3.75% notes due on January 15, 2018 and $250 million aggregate principal amount of 4.625% notes due on January 15, 2023, which are fully and unconditionally guaranteed by the Company. TIFSA received net cash proceeds of approximately $494 million after deducting debt issuance costs and a debt discount. The net proceeds, along with other available funds, were used to fund the repayment of all of our outstanding 6.75% notes due in February 2011 with a principal amount of $516 million. In connection with the acquisition of KEF during the year ended September 30, 2011, the Company acquired $64 million of debt which was substantially paid as of September 30, 2011. During the second half of fiscal 2011, TIFSA issued 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 September 30, 2011, TIFSA had no commercial paper outstanding. During the first quarter of fiscal 2010, TIFSA had made payments of $200 million to extinguish all of its commercial paper outstanding. On May 5, 2010, TIFSA issued $500 million aggregate principal amount of 3.375% notes due, which are fully and unconditionally guaranteed by the Company. TIFSA received net proceeds of 58 approximately $495 million after deducting debt issuance costs and a debt discount. On May 28, 2010, the Company used the net proceeds of the aforementioned offering and additional cash on hand to redeem all of its 6.375% public notes due 2011, 7% notes due 2028 and 6.875% notes due 2029, outstanding at that time, which aggregated $878 million in principal amount. On October 5, 2009, TIFSA issued $500 million aggregate principle amount of 4.125% notes due 2014, which are fully and unconditionally guaranteed by the Company. TIFSA received net proceeds of approximately $495 million after deducting debt issuance costs and a debt discount. 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. TIFSA received net proceeds of approximately $745 million after underwriting discounts and offering expenses. 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. Pursuant to our share repurchase program, we may repurchase Tyco shares from time to time in open market purchases at prevailing market prices, in negotiated transactions off the market, or pursuant to an approved 10b5-1 trading plan in accordance with applicable regulations. During the year ended September 30, 2011, we repurchased approximately 30 million common shares for approximately $1.3 billion under the 2011, 2010 and 2008 share repurchase programs, which completed both the 2010 and 2008 programs. During the year ended September 24, 2010, we repurchased approximately 24 million common shares for approximately $900 million under the 2008 share repurchase program. On March 9, 2011, our shareholders approved an annual dividend on our common shares of $1.00 per share, to be paid from contributed surplus in four installments of $0.25 per share. During the 2011, 2010 and 2009 fiscal years, we paid cash dividends of approximately $458 million, $416 million and $388 million, respectively. See Note 17 to our Consolidated Financial Statements for further information. Management believes that cash generated by or available to us should be sufficient to fund our capital and operational business needs for the foreseeable future, including capital expenditures, quarterly dividend payments, share repurchases and separation-related expenses. Commitments and Contingencies For a detailed discussion of contingencies related to tax and litigation matters and governmental investigations, see Notes 7 and 15 to our Consolidated Financial Statements. Contractual Obligations Contractual obligations and commitments for debt, minimum lease payment obligations under non-cancellable operating leases and obligations as of September 30, 2011 are as follows ($ in millions):
59
As of September 30, 2011, we recorded gross unrecognized tax benefits of $270 million and gross interest and penalties of $60 million. We are unable to make a reasonably reliable estimate of the timing for the remaining payments in future years; therefore, such amounts have been excluded from the above contractual obligation table. However, based on the current status of our income tax audits, we believe that is reasonably possible that between nil and $60 million in unrecognized tax benefits may be resolved in the next twelve months. As of September 30, 2011, we had total commitments of $1.5 billion under our revolving credit facilities, $750 million of which expires on March 24, 2015 and $750 million of which expires on April 25, 2012. As of September 30, 2011, there were no amounts drawn under these revolving credit facilities. TIFSA's bank credit agreements contain customary terms and conditions, and financial covenants that limit the ratio of our debt to earnings before interest, taxes, depreciation, and amortization and that limit our ability to incur subsidiary debt or grant liens on our property. Our indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants are considered restrictive to our business. During the second half of fiscal 2011, TIFSA, the Company's finance subsidiary, issued 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 September 30, 2011 and September 24, 2010, TIFSA had no commercial paper outstanding. In the normal course of business, we are liable for contract completion and product performance. In the opinion of management, such obligations will not significantly affect our financial position, results of operations or cash flows. In connection with the 2007 Separation, we entered into a liability sharing agreement regarding certain actions that were pending against Tyco prior to the 2007 Separation. Under the Separation and Distribution Agreement and Tax Sharing Agreement, we have assumed 27%, Covidien has assumed 42% and TE Connectivity has assumed 31% of certain Tyco pre-Separation contingent and other corporate liabilities, which, as of September 30, 2011, primarily relate to tax contingencies and potential actions with respect to the spin-offs or the distributions made or brought by any third party. Backlog We had a backlog of unfilled orders of $9.7 billion and $9.5 billion as of September 30, 2011 and September 24, 2010, respectively. We expect that approximately 88% of our backlog as of 60 September 30, 2011 will be filled during the next 12 months. Backlog by segment was as follows ($ in millions):
Backlog increased $175 million, or 1.8%, to $9.7 billion as of September 30, 2011. The net increase in backlog was primarily related to an increase in recurring revenue-in-force in our Tyco Security Solutions segment and increased bookings in our Tyco Flow Control segment. These increases were partially offset by a decrease in bookings in our Tyco Fire Protection segment. Tyco Security Solutions' backlog includes recurring revenue-in-force and long-term deferred revenue for upfront fees paid by customers for Tyco Security Solutions' owned security systems. Revenue-in-force represents 12 months' revenue associated with monitoring and maintenance services under contract in the security business. Tyco Security Solutions' backlog of $6.8 billion and $6.6 billion as of September 30, 2011 and September 24, 2010, respectively, consists primarily of $4.9 billion and $4.8 billion of recurring revenue-in-force as of September 30, 2011 and September 24, 2010, respectively, and $1.1 billion of deferred revenue for both September 30, 2011 and September 24, 2010. Tyco Security Solutions' backlog increased $166 million, or 2.5%. The net increase was primarily due to an increase in revenue-in-force, partially offset by unfavorable changes in foreign currency exchange rates by $36 million, or 0.5%. Tyco Flow Controls' backlog increased by $262 million, or 17.7%. The net increase was primarily due to increased bookings for several large projects within our Valves and Controls and Thermal Controls businesses. Changes in foreign currency exchange rates favorably impacted Tyco Flow Controls' backlog by $7 million, or 0.5%. These increases were partially offset by a decline in bookings in our Water and Environmental Systems business. Tyco Fire Protections' backlog decreased by $165 million, or 12.7%. Tyco Fire Protections' backlog was unfavorably impacted by the deconsolidation of a joint venture as a result of adopting a new accounting standard. In addition, backlog decreased in EMEA as a result of project selectivity resulting from a focus on higher margin projects. These decreases were partially offset by increases in our North American and global Fire Safety Products businesses. Changes in foreign currency exchange rates also favorably impacted Tyco Fire Protections' backlog by $17 million, or 1.3%.
Sale of Accounts Receivable Certain of our international businesses utilize the sale of accounts receivable as short-term financing mechanisms. The aggregate amount outstanding under our international accounts receivable programs was not material as of September 30, 2011 or September 24, 2010. Guarantees Certain of our 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 our financial position, results of operations or cash flows. 61 There are certain guarantees or indemnifications extended among Tyco, Covidien and TE Connectivity 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 2007 Separation, we recorded a liability necessary to recognize the fair value of such guarantees and indemnifications. See Note 7 to the Consolidated Financial Statements for further discussion of the Tax Sharing Agreement. In addition, prior to the 2007 Separation we provided support in the form of financial and/or performance guarantees to various Covidien and TE Connectivity operating entities. To the extent these guarantees were not assigned in connection with the 2007 Separation, we assumed primary liability on any remaining such support. These obligations were not material to us as of September 30, 2011. In disposing of assets or businesses, we often provide 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. We have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows. We have recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 15 to the Consolidated Financial Statements for a discussion of these liabilities. In the normal course of business, we are liable for contract completion and product performance. We record estimated product warranty costs at the time of sale. In the opinion of management, such obligations will not significantly affect our financial position, results of operations or cash flows. As of September 30, 2011, we had total outstanding letters of credit and bank guarantees of approximately $724 million. For a detailed discussion of guarantees and indemnifications, see Note 13 to the Consolidated Financial Statements. See Note 1 to the Consolidated Financial Statements for Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements. Certain statements in this report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "project" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the SEC, or in Tyco's communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating and tax efficiencies, product expansion, backlog, the consummation and benefits of acquisitions and divestitures, as well as financings and repurchases of debt or equity securities, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performances or achievements. Factors that might affect such forward-looking statements include, among other things:
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk In the normal course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These risks include fluctuations in foreign currency exchange rates, interest rates and commodity prices. Accordingly, we have established a comprehensive risk management process to monitor, evaluate and manage the principal exposures to which we believe we are subject. We seek to manage these risks through the use of financial derivative instruments. Our portfolio of derivative financial instruments may, from time to time, include forward foreign currency exchange contracts, foreign currency options, interest rate swaps, commodity swaps and forward commodity contracts. Derivative financial instruments related to interest rate sensitivity of debt obligations, intercompany cross border transactions and anticipated non-functional currency cash flows are used with the goal of mitigating a significant portion of these exposures when it is cost effective to do so. We do not execute transactions or utilize derivative financial instruments for trading or speculative purposes. Further, to reduce the risk that a counterparty will be unable to honor its contractual obligations to us, we only enter into contracts with counterparties having at least an A-/A3 long-term debt rating. These counterparties are generally financial institutions and there is no significant concentration of exposure with any one party. Foreign Currency Exposures We hedge our exposure to fluctuations in foreign currency exchange rates through the use of forward foreign currency exchange contracts. During 2011, our largest exposures to foreign exchange rates existed primarily with the Swiss franc, British pound, Euro, Australian dollar and Canadian dollar against the U.S. dollar. The market risk related to the forward foreign currency exchange contracts is measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The rates used to perform this analysis were based on the market rates in effect on September 30, 2011. A 10% appreciation of the U.S. dollar relative to the local currency exchange rates would result in a $32 million net decrease in the fair value of the contracts. Conversely, a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would result in a $39 million net increase in the fair value of the contracts. However, gains or losses on these derivative instruments are economically offset by the gains or losses on the underlying transactions. During the third quarter of 2010, Tyco International Finance, S.A. ("TIFSA"), the Company's finance subsidiary, entered into foreign currency exchange forward contracts to hedge its Euro denominated net investment. The aggregate notional amount of these hedges was approximately $224 million and $255 million as of September 30, 2011, and September 24, 2010, respectively. The potential impact from a 10% appreciation of the U.S. dollar relative to the Euro would result in a $19 million net increase in other comprehensive income. Conversely, a 10% depreciation of the U.S. dollar relative to the Euro would result in a $24 million net decrease in other comprehensive income. As of September 30, 2011, and September 24, 2010, $2.9 billion and $3.0 billion, respectively, of intercompany loans have been designated as permanent in nature. For the fiscal years ended September 30, 2011, September 24, 2010 and September 25, 2009, we recorded $16 million of cumulative transaction gain, $24 million of cumulative translation loss and nil, respectively, through accumulated other comprehensive loss related to these loans. 64 Interest Rate Exposures Our long-term debt portfolio primarily consists of fixed-rate instruments. The Company manages its interest rate risk through the use of interest rate swap transactions with financial institutions acting as principal counterparties, which were designated as fair value hedges for accounting purposes. These interest rate swap transactions manage the exposure to interest rate risk by converting interest rates of fixed-rate debt to variable rates. During the second quarter of 2011, TIFSA also entered into interest rate swaps contracts to hedge $155 million notional amount of the 4.125% public notes due 2014. In these contracts, TIFSA 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 maturity of the 6.75% public notes during the second quarter of 2011, TIFSA settled the corresponding interest rate swaps. As of September 30, 2011 and September 24, 2010, the total gross notional amount of the Company's interest rate swap contracts was $1.2 billion and $1.5 billion, respectively. A 100 basis point increase in interest rates relative to interest rates as of September 30, 2011 would result in a $29 million net decrease in the fair value of the contracts. Conversely, a 100 basis point decrease in interest rates relative to interest rates as of September 30, 2011 would result in a $30 million net increase in the fair value of the contracts. Commodity Exposures We are exposed to volatility in the prices of raw materials used in some of our products and may, in limited circumstances, enter into hedging contracts to manage those exposures. These exposures are monitored as an integral part of our risk management program. During 2011 and 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. Additionally, a 100 basis point increase or decrease in the price of copper as of September 30, 2011 would not have a material impact on the Company's financial position, results of operations or cash flows. 65
Item 8. Financial Statements and Supplementary Data The following consolidated financial statements and schedule specified by this Item, together with the report thereon of Deloitte & Touche LLP, are presented following Item 15 of this report:
All other financial statements and schedules have been omitted since the information required to be submitted has been included in the Consolidated Financial Statements and related Notes or because they are either not applicable or not required under the rules of Regulation S-X. Information on quarterly results of operations is set forth in Note 25 to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Item 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as and when required. 66 There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, these internal controls. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Based on our assessment and those criteria, management believes that the Company maintained effective internal controls over financial reporting as of September 30, 2011. Our internal control over financial reporting as of September 30, 2011, has been audited by Deloitte & Touche LLP, the independent registered public accounting firm that audited and reported on the Consolidated Financial Statements included in this Form 10-K, and their report is also included in this Form 10-K. None. 67
Item 10. Directors, Executive Officers and Corporate Governance Information concerning Directors and Executive Officers may be found under the proposal regarding the election of directors and under the captions "—Committees of the Board of Directors," and "—Executive Officers" in our definitive proxy statement for our 2012 Annual General Meeting of Shareholders (the "2012 Proxy Statement"), which will be filed with the Commission within 120 days after the close of our fiscal year. Such information is incorporated herein by reference. The information in the 2012 Proxy Statement set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. Information regarding shareholder communications with our Board of Directors may be found under the caption "Governance of the Company" in our 2012 Proxy Statement and is incorporated herein by reference. Code of Ethics We have adopted the Tyco Guide to Ethical Conduct, which applies to all employees, officers and directors of Tyco. Our Guide to Ethical Conduct meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K and applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as well as all other employees. Our Guide to Ethical Conduct also meets the requirements of a code of business conduct and ethics under the listing standards of the New York Stock Exchange, Inc. Our Guide to Ethical Conduct is posted on our website at www.tyco.com under the heading "Corporate Citizenship—Governance." We will also provide a copy of our Guide to Ethical Conduct to shareholders upon request. We disclose any amendments to our Guide to Ethical Conduct, as well as any waivers for executive officers or directors, on our website.
Item 11. Executive Compensation Information concerning executive compensation may be found under the captions "Executive Officer Compensation," "Compensation of Non-Employee Directors," and "Governance of the Company" of our 2012 Proxy Statement. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information in our 2012 Proxy Statement set forth under the captions "Executive Officer Compensation" and "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence The information in our 2012 Proxy Statement set forth under the captions "Governance of the Company" and "Committees of the Board" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services The information in our 2012 Proxy Statement set forth under the proposal related to the election of auditors is incorporated herein by reference. 68
Item 15. Exhibits and Financial Statement Schedules
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72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 16, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on November 16, 2011 in the capacities indicated below.
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75 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Discussion of Management's Responsibility We are responsible for the preparation, integrity and fair presentation of the Consolidated Financial Statements and related information appearing in this report. We take these responsibilities very seriously and are committed to being recognized as a leader in governance, controls, clarity and transparency of financial statements. We are committed to making honesty, integrity and transparency the hallmarks of how we run Tyco. We believe that to succeed in today's environment requires more than just compliance with laws and regulations—it requires a culture based upon the highest levels of integrity and ethical values. Expected behavior starts with our Board of Directors and our senior team leading by example and includes every one of Tyco's global employees, as well as our customers, suppliers and business partners. One of our most crucial objectives is continuing to maintain and build on the public, employee and shareholder confidence that has been restored in Tyco. We believe this is being accomplished; first, by issuing financial information and related disclosures that are accurate, complete and transparent so investors are well informed; second, by supporting a leadership culture based on an ethic of uncompromising integrity and accountability; and third, by recruiting, training and retaining high-performance individuals who have the highest ethical standards. We take full responsibility for meeting this objective. We maintain appropriate accounting standards and disclosure controls and devote our full commitment and the necessary resources to these items. Dedication to Governance, Controls and Financial Reporting Throughout 2011, we continued to maintain and enhance internal controls over financial reporting, disclosures and corporate governance practices. We believe that a strong control environment is a dynamic process. Therefore, we intend to continue to devote the necessary resources to maintain and improve our internal controls and corporate governance. Our Audit Committee meets regularly and separately with management, Deloitte & Touche LLP, our independent auditors, and our internal auditors to discuss financial reports, controls and auditing. We, our Board and our Audit Committee are all committed to excellence in governance, financial reporting and controls.
76 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To
the Board of Directors and Shareholders of We have audited the accompanying consolidated balance sheets of Tyco International Ltd. and subsidiaries (the "Company") as of September 30, 2011 and September 24, 2010, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended September 30, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Tyco International Ltd. and subsidiaries as of September 30, 2011 and September 24, 2010, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 16, 2011 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP New
York, New York 77 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To
the Board of Directors and Shareholders of We have audited the internal control over financial reporting of Tyco International Ltd. and subsidiaries (the "Company") as of September 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended September 30, 2011 of the Company and our report dated November 16, 2011 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ DELOITTE & TOUCHE LLP New
York, New York 78
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended September 30, 2011, September 24, 2010 and September 25, 2009 (in millions, except per share data)
See Notes to Consolidated Financial Statements. 79
CONSOLIDATED BALANCE SHEETS As of September 30, 2011 and September 24, 2010 (in millions, except per share data)
See Notes to Consolidated Financial Statements. 80
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended September 30, 2011, September 24, 2010 and September 25, 2009 (in millions)
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