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Tyco International 10-Q 2006

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


FORM 10-Q


ý

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

For the Quarterly Period Ended March 31, 2006

or

o

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

001-13836
(Commission File Number)


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

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

Second Floor, 90 Pitts Bay Road, Pembroke, HM 08, Bermuda
(Address of Registrant's principal executive offices)

441-292-8674
(Registrant's telephone number)

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

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

        Large accelerated filer ý Accelerated filer o Non-accelerated filer o

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

        The number of common shares outstanding as of April 28, 2006 was 2,036,601,758





TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

 
  Page
Part I Financial Information:    
Item 1. Financial Statements    
  Consolidated Statements of Income (Unaudited) for the quarter and six months ended March 31, 2006 and April 1, 2005   1
  Consolidated Balance Sheets (Unaudited) as of March 31, 2006 and September 30, 2005   2
  Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 31, 2006 and April 1, 2005   3
  Consolidated Statements of Shareholders' Equity (Unaudited) for the six months ended March 31, 2006 and April 1, 2005   4
  Notes to Consolidated Financial Statements (Unaudited)   5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   39
Item 3. Quantitative and Qualitative Disclosures About Market Risk   59
Item 4. Controls and Procedures   59

Part II Other Information:

 

 

Item 1. Legal Proceedings

 

61
Item 1A. Risk Factors   68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   77
Item 3. Defaults Upon Senior Securities   77
Item 4. Submission of Matters to a Vote of Security Holders   77
Item 5. Other Information   78
Item 6. Exhibits   78
Signatures   79


PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share data)

 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31, 2006
  April 1, 2005
  March 31, 2006
  April 1, 2005
 
Revenue from product sales   $ 8,262   $ 8,065   $ 16,049   $ 15,719  
Service revenue     1,944     1,928     3,863     3,875  
   
 
 
 
 
  Net revenue     10,206     9,993     19,912     19,594  
Cost of product sales     5,583     5,329     10,873     10,352  
Cost of services     1,202     1,173     2,383     2,394  
Selling, general and administrative expenses     2,021     1,960     4,008     3,925  
Restructuring and asset impairment charges, net     8     4     20     11  
Separation costs     25         33      
(Gains) losses on divestitures     (41 )   2     (38 )   17  
   
 
 
 
 
  Operating income     1,408     1,525     2,633     2,895  
Interest income     33     31     70     68  
Interest expense     (189 )   (208 )   (378 )   (424 )
Other expense, net     (2 )   (575 )   (3 )   (736 )
   
 
 
 
 
  Income from continuing operations before income taxes and minority interest     1,250     773     2,322     1,803  
Income taxes     (168 )   (373 )   (430 )   (679 )
Minority interest     (2 )   (1 )   (5 )   (4 )
   
 
 
 
 
  Income from continuing operations     1,080     399     1,887     1,120  
Loss from discontinued operations, net of income taxes     (58 )   (207 )   (295 )   (219 )
   
 
 
 
 
  Income before cumulative effect of accounting change     1,022     192     1,592     901  
Cumulative effect of accounting change, net of income taxes                 21  
   
 
 
 
 
    Net income   $ 1,022   $ 192   $ 1,592   $ 922  
   
 
 
 
 
Basic earnings per share:                          
  Income from continuing operations   $ 0.54   $ 0.20   $ 0.94   $ 0.56  
  Loss from discontinued operations     (0.03 )   (0.10 )   (0.15 )   (0.11 )
   
 
 
 
 
  Income before cumulative effect of accounting change     0.51     0.10     0.79     0.45  
  Cumulative effect of accounting change                 0.01  
   
 
 
 
 
  Net income   $ 0.51   $ 0.10   $ 0.79   $ 0.46  
   
 
 
 
 
Diluted earnings per share:                          
  Income from continuing operations   $ 0.52   $ 0.19   $ 0.91   $ 0.53  
  Loss from discontinued operations     (0.03 )   (0.09 )   (0.14 )   (0.10 )
   
 
 
 
 
  Income before cumulative effect of accounting change     0.49     0.10     0.77     0.43  
  Cumulative effect of accounting change                 0.01  
   
 
 
 
 
  Net income   $ 0.49   $ 0.10   $ 0.77   $ 0.44  
   
 
 
 
 
Weighted-average number of shares outstanding:                          
  Basic     2,019     2,010     2,011     2,009  
  Diluted     2,107     2,182     2,109     2,194  

See Notes to Consolidated Financial Statements.

1



TYCO INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data)

 
  March 31,
2006

  September 30,
2005

Assets            
Current Assets:            
  Cash and cash equivalents   $ 2,389   $ 3,206
  Accounts receivable, less allowance for doubtful accounts of $383 and $422, respectively     6,822     6,732
  Inventories     4,640     4,197
  Other current assets     3,273     3,090
  Assets held for sale     73     1,290
   
 
    Total current assets     17,197     18,515
Property, plant and equipment, net     9,162     9,238
Goodwill     24,538     24,557
Intangible assets, net     5,018     5,085
Other assets     5,141     5,226
   
 
    Total Assets   $ 61,056   $ 62,621
   
 
Liabilities and Shareholders' Equity            
Current Liabilities:            
  Current maturities of long-term debt   $ 746   $ 1,954
  Accounts payable     3,148     3,065
  Accrued and other current liabilities     5,913     6,552
  Liabilities held for sale     55     219
   
 
    Total current liabilities     9,862     11,790
Long-term debt     9,242     10,600
Other liabilities     7,718     7,720
   
 
    Total Liabilities     26,822     30,110
   
 
Commitments and Contingencies (Note 9)            
Minority interest     48     61
Shareholders' Equity:            
  Common shares, $0.20 par value, 4,000,000,000 shares authorized; 2,050,175,704 and 2,014,853,113 shares outstanding, net of 40,617,183 and 12,024,224 shares owned by subsidiaries, respectively     410     403
  Capital in excess:            
    Share premium     8,667     8,540
    Contributed surplus     15,837     15,249
  Accumulated earnings     9,181     7,993
  Accumulated other comprehensive income     91     265
   
 
    Total Shareholders' Equity     34,186     32,450
   
 
    Total Liabilities and Shareholders' Equity   $ 61,056   $ 62,621
   
 

See Notes to Consolidated Financial Statements.

2



TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 
  For the
Six Months Ended

 
 
  March 31,
2006

  April 1,
2005

 
Cash Flows From Operating Activities:              
Net income   $ 1,592   $ 922  
  Loss from discontinued operations     295     219  
  Cumulative effect of accounting change         (21 )
   
 
 
Income from continuing operations     1,887     1,120  
Adjustments to reconcile net cash provided by operating activities:              
  Non-cash restructuring and asset impairment charges, net     3     (2 )
  (Gains) losses on divestitures     (38 )   13  
  Depreciation and amortization     1,035     1,054  
  Non-cash compensation expense     152     34  
  Deferred income taxes     51     72  
  Provision for losses on accounts receivable and inventory     92     126  
  Loss on the retirement of debt     2     729  
  Other non-cash items     24     23  
  Changes in assets and liabilities, net of the effects of acquisitions and divestitures:              
    Accounts receivable, net     (119 )   (585 )
    Inventories     (517 )   (319 )
    Accounts payable     114     140  
    Accrued and other liabilities     (888 )   (31 )
    Other     (164 )   116  
   
 
 
      Net cash provided by operating activities     1,634     2,490  
   
 
 
      Net cash provided by (used in) discontinued operating activities     5     (60 )
   
 
 
Cash Flows From Investing Activities:              
Capital expenditures     (729 )   (647 )
Proceeds from disposal of assets     17     52  
Acquisition of businesses, net of cash acquired     (134 )   (10 )
Acquisition of customer accounts (ADT dealer program)     (169 )   (135 )
Purchase accounting and holdback liabilities     (86 )   (23 )
Divestiture of businesses, net of cash retained     960     182  
Decrease (increase) in investments     62     (116 )
Decrease in restricted cash     31     3  
Other     2     (4 )
   
 
 
      Net cash used in investing activities     (46 )   (698 )
   
 
 
      Net cash used in discontinued investing activities     (6 )   (19 )
   
 
 
Cash Flows From Financing Activities:              
Net repayment of short-term debt     (1,214 )   (1,182 )
Repayment of long-term debt, including debt tenders     (13 )   (1,896 )
Proceeds from exercise of share options     129     118  
Dividends paid     (402 )   (225 )
Repurchase of common shares by subsidiary     (811 )    
Transfers to discontinued operations     (85 )   (179 )
Other     (15 )   (17 )
   
 
 
      Net cash used in financing activities     (2,411 )   (3,381 )
   
 
 
      Net cash provided by discontinued financing activities     10     98  
   
 
 
Effect of currency translation on cash     6     48  
Net decrease in cash and cash equivalents     (808 )   (1,522 )
Less: net increase in cash related to discontinued operations     (9 )   (19 )
Cash and cash equivalents at beginning of period     3,206     4,487  
   
 
 
Cash and cash equivalents at end of period   $ 2,389   $ 2,946  
   
 
 

See Notes to Consolidated Financial Statements.

3



TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the Six Months Ended March 31, 2006 and April 1, 2005

(in millions)

 
  Number of
Common
Shares

  Common
Shares
$0.20 Par
Value

  Share
Premium

  Contributed
Surplus

  Accumulated
Earnings

  Accumulated
Other
Comprehensive
Income (Loss)

  Total
 
Balance at September 30, 2004   2,010   $ 402   $ 8,315   $ 15,319   $ 5,740   $ 516   $ 30,292  
Comprehensive income:                                          
  Net income                           922           922  
  Currency translation                                 639     639  
  Minimum pension liability                                 (21 )   (21 )
                                     
 
  Total comprehensive income                                       1,540  
Dividends declared                           (402 )         (402 )
Share options exercised, including tax benefit of $29   6     1     117     29                 147  
Compensation expense   2     1           36                 37  
Exchange of convertible debt due 2010   1                 9                 9  
Reporting calendar alignment                           26           26  
Other               1                       1  
   
 
 
 
 
 
 
 
Balance at April 1, 2005   2,019   $ 404   $ 8,433   $ 15,393   $ 6,286   $ 1,134   $ 31,650  
   
 
 
 
 
 
 
 
 
  Number of
Common
Shares

  Common
Shares
$0.20 Par
Value

  Share
Premium

  Contributed
Surplus

  Accumulated
Earnings

  Accumulated
Other
Comprehensive
Income (Loss)

  Total
 
Balance at September 30, 2005   2,015   $ 403   $ 8,540   $ 15,249   $ 7,993   $ 265   $ 32,450  
Comprehensive income:                                          
  Net income                           1,592           1,592  
  Currency translation                                 (174 ) (174
)
  Total comprehensive income                                       1,418  
Dividends declared                           (404 )         (404 )
Restricted share grants, net of forfeitures   4     1           (1 )                
Share options exercised, including tax expense of $2   7     1     127     (2 )               126  
Repurchase of common shares by subsidiary   (30 )   (6 )         (805 )               (811 )
Exchange of convertible debt due 2018   54     11           1,224                 1,235  
Compensation expense                     152                 152  
Other                     20                 20  
   
 
 
 
 
 
 
 
Balance at March 31, 2006   2,050   $ 410   $ 8,667   $ 15,837   $ 9,181   $ 91   $ 34,186  
   
 
 
 
 
 
 
 

See Notes to Consolidated Financial Statements.

4



TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Basis of Presentation and Summary of Significant Accounting Policies

        Basis of Presentation—The unaudited Consolidated Financial Statements include the consolidated accounts of Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as the "Company" or "Tyco").

        The financial statements have been prepared in United States Dollars and in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended, and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States ("GAAP"). These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005 (the "2005 Form 10-K").

        The Consolidated Financial Statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the Company's financial position and results of operations for the interim period. The results reported in these Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year.

        The income tax provision for the quarter and six months ended March 31, 2006 includes a $127 million favorable adjustment related to a correction to prior year tax reserves on legacy tax matters.

        Change in Fiscal Year and Reporting Calendar Alignment—Effective October 1, 2004, Tyco changed its fiscal year end from a calendar fiscal year ending September 30 to a "52-53 week" year ending on the last Friday of September, such that each quarterly period will be 13 weeks in length. In addition, certain of the Company's subsidiaries had consistently closed their books up to one month prior to the Company's fiscal period end. These subsidiaries now report results for the same period as the reported results of the consolidated Company. The impact of this change was not material to the Consolidated Financial Statements. Net income for the transition period related to this change was $26 million and was reported within Shareholders' Equity during 2005. References to 2006 and 2005 are to Tyco's fiscal quarters ending March 31, 2006 and April 1, 2005, respectively, unless otherwise indicated.

        Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation.

        Recently Adopted Accounting Pronouncement—Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Tyco adopted SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost is recognized for the unvested portion of share-based payments granted prior to October 1, 2005 and all share-based payments granted subsequent to September 30, 2005 over the related vesting period. Prior to the first quarter of 2006, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock based compensation. Prior period results have not been restated. Due to the adoption of SFAS No. 123R, the Company's results for the three and six months ended March 31, 2006 include incremental share-based compensation expense totaling

5



$46 million and $94 million, respectively. As such, basic and diluted earnings per share were impacted by $0.02 and $0.03 for the three and six months ended March 31, 2006, respectively.

        Recently Issued Accounting Pronouncements—In March 2005, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143." This Interpretation clarifies the timing of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently assessing the impact that FIN No. 47 will have on the results of its operations, financial position or cash flows.

        In June 2005, the FASB issued Staff Position ("FSP") No. 143-1, "Accounting for Electronic Equipment Waste Obligations," which provides guidance on accounting for historical waste obligations associated with the European Union Waste, Electrical and Electronic Equipment Directive ("WEEE Directive"). Under the directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced, at which time the waste management obligation may be transferred to the producer of the replacement equipment. FSP No. 143-1 is effective for the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. As of the end of the second quarter of 2006, the Company continues to monitor and evaluate the effects that the adoption of FSP No. 143-1 will have on the results of operations and financial condition. Such effects will depend on the respective laws and regulations adopted by the EU member countries, their implementation guidance and the type of recycling programs and systems that are established.

2.    Restructuring and Asset Impairment Charges, Net

        During the six months ended March 31, 2006, the Company recorded net restructuring and asset impairment charges of $22 million, which includes $2 million reflected in cost of sales for the non-cash write down in carrying value of inventory. The remaining charge is comprised of net restructuring charges of $13 million and impairments of long-lived assets of $7 million. Restructuring charges during the six months ended March 31, 2006 were $27 million, which includes $21 million of severance and $6 million of facility exit and other charges. The Company completed restructuring activities announced in prior years for amounts less than originally anticipated and accordingly reversed $11 million of restructuring reserves. The Company also recorded other non-cash credits of $3 million. Most of the restructuring initiatives undertaken during 2006 relate to the Electronics and Fire and Security segments.

        During the six months ended April 1, 2005, the Company recorded net restructuring of $11 million. Restructuring charges during the six months ended April 1, 2005 were $25 million, which consisted of $14 million of severance, $5 million of facility exit charges and $6 million of other charges. The Company completed restructuring activities announced in prior years for amounts less than originally anticipated and accordingly reversed $9 million of restructuring reserves. The Company also recorded other net non-cash credits of $5 million.

6



Restructuring Reserves

        Restructuring reserves from September 30, 2005 to March 31, 2006 by the year in which the restructuring action was initiated are as follows ($ in millions):

 
  Year of Restructuring Action
 
 
  2006
  2005
  2004
  2003 and
Prior

  Total
 
Balance at September 30, 2005   $   $ 8   $ 52   $ 89   $ 149  
Charges     22     1         4     27  
Reversals         (1 )   (3 )   (7 )   (11 )
Utilization     (6 )   (6 )   (12 )   (8 )   (32 )
   
 
 
 
 
 
Balance at March 31, 2006   $ 16   $ 2   $ 37   $ 78   $ 133  
   
 
 
 
 
 

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

 
  March 31,
2006

  September 30,
2005

Electronics   $ 86   $ 91
Fire and Security     36     45
Healthcare         1
Engineered Products and Services     7     9
Corporate     4     3
   
 
    $ 133   $ 149
   
 

        At March 31, 2006, $55 million of restructuring reserves are included on the Consolidated Balance Sheets in accrued and other current liabilities and $78 million are included in other liabilities. At September 30, 2005, $58 million of restructuring reserves are included on the Consolidated Balance Sheets in accrued and other current liabilities and $91 million are included in other liabilities.

3.    Separation Transaction

        On January 13, 2006, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies—Tyco Healthcare, Tyco Electronics and a combination of Tyco Fire and Security and Engineered Products and Services (the "Proposed Separation"). The Company intends to accomplish the Proposed Separation through tax-free stock dividends to Tyco shareholders. Following the Proposed Separation, Tyco's shareholders will own 100% of the equity in all three companies. Tyco expects to complete the Proposed Separation during the first quarter of calendar 2007.

        In connection with the Proposed Separation, the Company estimates that the total costs to complete the transaction will approximate $1.0 billion, largely for tax restructuring and debt refinancing. During the six months ended March 31, 2006, the Company incurred $33 million of costs related to the Proposed Separation.

        Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of a tax opinion of counsel, the filing and effectiveness of

7



registration statements with the Securities and Exchange Commission ("SEC") and the completion of any necessary debt refinancings. Approval by the Company's shareholders is not required as a condition to the consummation of the Proposed Separation.

4.    Discontinued Operations, Divestitures and Acquisitions

Discontinued Operations

        In May 2005, Tyco announced its intent to explore the divesture of its Plastics and Adhesives business segment, a global manufacturer of plastic film, specialty tapes and adhesives, coated products and garment hangers. At September 30, 2005, the Plastics and Adhesives segment met the held for sale criteria and was included in discontinued operations in all periods presented.

        During the first quarter of 2006, the Company assessed the recoverability of the carrying value for the Plastics and Adhesives businesses. Based on market conditions during the quarter and the terms and conditions included or expected to be included in the sale agreements, fair value estimates of the businesses were reassessed. As a result of these assessments, the Company recorded a pre-tax impairment charge of $275 million for the Plastics, Adhesives and Ludlow Coated Products Group and a $17 million pre-tax impairment charge for the A&E Products Group to write down the disposal groups to their fair values less costs to sell.

        During the second quarter of 2006, the Company closed the sale of the Plastics, Adhesives and Ludlow Coated Products businesses for $975 million in gross cash proceeds. Estimated working capital and other adjustments resulted in net proceeds of $907 million. Settlement of the final working capital adjustment is expected prior to year end. The Company recognized a pre-tax loss on sale of approximately $10 million, in addition to the $275 million pre-tax impairment charge recorded during the first quarter of 2006. The sales agreement also provides for a contingent future payment of up to $30 million to Tyco based on average resin prices in the future.

        Also, during the second quarter of 2006, the Company reassessed the recoverability of the carrying value for the A&E Products Group in conjunction with the terms and conditions included in the definitive sale agreement entered into during the quarter. As a result of this reassessment, the Company recorded an additional pre-tax impairment charge of $5 million to write the business down to its fair value less costs to sell. Tyco expects to complete the A&E Products Group sale transaction during 2006.

        During the six months ended April 1, 2005, the Company recorded a $202 million pre-tax goodwill and long-lived asset impairment charge in the A&E Products Group based on an interim assessment of the recoverability of both goodwill and long-lived assets. As a result of this assessment, the Company determined that the book value of certain long-lived assets in the A&E Products reporting unit was greater than their estimated fair value and consequently recorded a long-lived asset impairment charge of $40 million. The Company also determined that the book value of the A&E Products reporting unit was in excess of its estimated fair value which resulted in a goodwill impairment charge of $162 million.

        During the six months ended April 1, 2005, the Company divested six businesses that were reported as discontinued operations and reported pre-tax losses on sales of $80 million.

8



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

 
  For the Six Months Ended
 
 
  March 31, 2006
  April 1, 2005
 
Net revenue   $ 727   $ 1,099  
Income from discontinued operations, before income taxes     32     35  
Loss on sale of discontinued operations, before income taxes     (307 )   (282 )
Income taxes     (20 )   28  
   
 
 
Loss from discontinued operations, net of income taxes   $ (295 ) $ (219 )
   
 
 

Gain (losses) on divestitures

        During the six months ended March 31, 2006, the Company divested five businesses that were reported as continuing operations in Fire and Security, Healthcare and Electronics. The Company recorded net gains on divestitures of $45 million in connection with the divestiture of these businesses, less $7 million of divestiture charges related to the write-down to estimated fair value and costs to sell certain other held for sale businesses.

        During the six months ended April 1, 2005, the Company divested six businesses that were within the Fire and Security, Healthcare and Engineered Products and Services segments. The Company reported losses and impairments on divestitures to write the carrying value of such assets down to their estimated fair value, less costs to sell, of $20 million, including $3 million reflected in cost of sales.

Businesses Held for Sale

        Balance sheet information for discontinued operations and other businesses held for sale is as follows ($ in millions):

 
  March 31,
2006

  September 30,
2005

Accounts receivable, net   $ 30   $ 225
Inventories     21     184
Other current assets     9     19
Long-lived assets including goodwill, property, plant and equipment and intangibles, net     12     854
Other non-current assets     1     8
   
 
  Total assets   $ 73   $ 1,290
   
 
Accounts payable   $ 15   $ 94
Accrued and other current liabilities     39     122
Other liabilities     1     3
   
 
  Total liabilities   $ 55   $ 219
   
 

9


Acquisitions

        During the six months ended March 31, 2006, Tyco's Healthcare segment acquired over 90% ownership in Floreane Medical Implants, S.A. ("Floreane") for approximately $122 million in cash, net of cash acquired of $3 million. Floreane is an innovator in the development of surgical support implants for parietal, urological and gynecological surgery. Additional outstanding shares are expected to be acquired during the remainder of 2006. Cash paid for other acquisitions totaled $12 million.

        During the six months ended April 1, 2005, the Company completed three acquisitions for an aggregate cost of $10 million.

        The results of operations of the acquired companies have been included in the consolidated results from the respective acquisition dates. These acquisitions did not have a material effect on the Company's financial position, results of operations or cash flows.

        At March 31, 2006, $44 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $12 million are included in accrued and other current liabilities and $32 million are included in other liabilities. These acquisition liabilities relate to facility exit costs, employee severance and benefits, distributor and supplier cancellation fees and other costs. At September 30, 2005, $70 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $24 million are included in accrued and other current liabilities and $46 million are included in other liabilities.

        During the six months ended March 31, 2006 and April 1, 2005, the Company paid $86 million and $23 million, respectively, relating to purchase accounting and holdback liabilities related to certain prior period acquisitions. Holdback liabilities represent a portion of the purchase price that is withheld from the seller pending finalization of the acquisition balance sheet and other contingencies. At March 31, 2006, holdback liabilities on our Consolidated Balance Sheets were $77 million, of which $16 million are included in accrued and other current liabilities and $61 million are included in other liabilities. At September 30, 2005, holdback liabilities on our Consolidated Balance Sheets were $148 million, of which $79 million are included in accrued and other current liabilities and $69 million are included in other liabilities.

5.    Cumulative Effect of Accounting Change

        During 2005, the Company changed the measurement date for its pension and postretirement benefit plans, from September 30th to August 31st, effective October 1, 2004. The Company believes that the one-month change of measurement date was a preferable change as it allows management adequate time to evaluate and report the actuarial information in the Company's Consolidated Financial Statements under the accelerated reporting deadlines. As a result of this change, the Company recorded a $21 million after-tax gain ($28 million pre-tax) cumulative effect adjustment in the six months ended April 1, 2005.

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6.    Earnings Per Share

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

 
  Quarter Ended
March 31, 2006

  Quarter Ended
April 1, 2005

 
  Income
  Shares
  Per Share
  Income
  Shares
  Per Share
Basic earnings per share:                                
  Income from continuing operations   $ 1,080   2,019   $ 0.54   $ 399   2,010   $ 0.20
  Share options, restricted share awards and deferred stock units       14             20      
  Exchange of convertible debt     10   74           21   152      
   
 
       
 
     
Diluted earnings per share:                                
  Income from continuing operations, giving effect to dilutive adjustments   $ 1,090   2,107   $ 0.52   $ 420   2,182   $ 0.19
   
 
       
 
     
 
  Six Months Ended
March 31, 2006

  Six Months Ended
April 1, 2005

 
  Income
  Shares
  Per Share
  Income
  Shares
  Per Share
Basic earnings per share:                                
  Income from continuing operations   $ 1,887   2,011   $ 0.94   $ 1,120   2,009   $ 0.56
  Share options, restricted share awards and deferred stock units       16             19      
  Exchange of convertible debt     22   82           45   166      
   
 
       
 
     
Diluted earnings per share:                                
  Income from continuing operations, giving effect to dilutive adjustments   $ 1,909   2,109   $ 0.91   $ 1,165   2,194   $ 0.53
   
 
       
 
     

        The computation of diluted earnings per common share for the quarter and six months ended March 31, 2006 excludes the effect of the potential exercise of options to purchase approximately 91 million shares for both periods because the effect would be anti-dilutive.

        The computation of diluted earnings per common share for the quarter and six months ended April 1, 2005 excludes the effect of the potential exercise of options to purchase approximately 73 million shares for both periods because the effect would be anti-dilutive.

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7.    Goodwill and Intangible Assets

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

 
  Electronics
  Fire and
Security

  Healthcare
  Engineered
Products and
Services

  Total
 
Balance at September 30, 2005   $ 7,395   $ 8,032   $ 5,973   $ 3,157   $ 24,557  
Purchase accounting adjustments         (6 )   (12 )   2     (16 )
Acquisitions and divestitures     1     (3 )   44         42  
Currency translation     (6 )   (20 )   3     (22 )   (45 )
   
 
 
 
 
 
Balance at March 31, 2006   $ 7,390   $ 8,003   $ 6,008   $ 3,137   $ 24,538  
   
 
 
 
 
 

        The gross carrying amount and accumulated amortization of the Company's intangible assets are as follows ($ in millions):

 
  March 31, 2006
  September 30, 2005
 
  Gross
Carrying
Amount

  Accumulated
Amortization

  Weighted
Average
Amortization
Period

  Gross
Carrying
Amount

  Accumulated
Amortization

  Weighted
Average
Amortization
Period

Amortizable:                                
  Contracts and related customer relationships   $ 5,140   $ 2,859   12 years   $ 4,974   $ 2,638   12 years
  Intellectual property     2,988     1,073   21 years     2,921     992   20 years
  Other     206     68   27 years     211     70   27 years
   
 
     
 
   
  Total   $ 8,334   $ 4,000   16 years   $ 8,106   $ 3,700   16 years
   
 
     
 
   
Non-Amortizable:                                
  Intellectual property   $ 652             $ 652          
  Other     32               27          
   
           
         
  Total   $ 684             $ 679          
   
           
         

        Intangible asset amortization for the quarters ended March 31, 2006 and April 1, 2005 was $164 million and $163 million, respectively. Intangible asset amortization for each of the six months ended March 31, 2006 and April 1, 2005 was $326 million. The estimated aggregate amortization expense on intangible assets currently owned by the Company is expected to be approximately $300 million for the remainder of 2006, $550 million for 2007, $500 million for 2008, $450 million for 2009, $400 million for 2010, and $300 million for 2011.

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8.    Debt

        Debt was as follows ($ in millions):

 
  March 31,
2006

  September 30,
2005

6.375% public notes due 2006(2)   $   $ 1,000
5.8% public notes due 2006(1)(2)     700     700
6.125% Euro denominated public notes due 2007     721     721
6.5% notes due 2007     100     100
2.75% convertible senior debentures due 2018 with a 2008 put option         1,242
6.125% public notes due 2008     399     399
7.2% notes due 2008     85     85
5.5% Euro denominated notes due 2008     823     823
6.125% public notes due 2009     399     399
6.75% public notes due 2011     999     999
6.375% public notes due 2011     1,500     1,500
6.5% British Pound denominated public notes due 2011     346     353
6.0% notes due 2013     997     996
7.0% debentures due 2013     86     86
3.125% convertible senior debentures due 2023 with a 2015 put option     750     750
7.0% public notes due 2028     497     497
6.875% public notes due 2029     790     790
6.5% British Pound denominated public notes due 2031     492     502
Other(1)(2)     304     612
   
 
Total debt     9,988     12,554
Less current portion     746     1,954
   
 
Long-term debt   $ 9,242   $ 10,600
   
 

(1)
These instruments, plus $46 million of the amount shown as other, comprise the current portion of long-term debt as of March 31, 2006.

(2)
These instruments, plus $254 million of the amount shown as other, comprise the current portion of long-term debt as of September 30, 2005.

        Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA"), holds a $1.0 billion 5-year revolving credit facility expiring on December 16, 2009. TIGSA also holds a $1.5 billion 3-year revolving bank credit facility expiring on December 22, 2006 and a $500 million 3-year unsecured letter of credit facility expiring on June 15, 2007. At March 31, 2006, letters of credit of $475 million have been issued under the $500 million facility and $25 million remains available for issuance. There were no amounts borrowed under the credit facilities at March 31, 2006.

        On January 26, 2006, the Company repaid and terminated one of its synthetic lease facilities used to finance capital expenditures for manufacturing machinery and equipment for a total cash payment of $226 million, reducing principal debt and minority interest by $214 million and $10 million, respectively.

        On February 21, 2006, TIGSA delivered a notice of redemption to the holders of its Series A 2.75% convertible senior debentures due 2018 with a 2008 put option (the "2.75% convertible senior

13



debentures"), exercising its right to redeem all such debentures at 101.1 percent of the principal amount outstanding plus accrued interest.

        The 2.75% convertible senior debentures were convertible into 43.892 Tyco common shares per $1,000 principal amount. Prior to March 8, 2006, the redemption date, $1.2 billion of the 2.75% convertible senior debentures were converted into 54.4 million Tyco common shares and on March 8, 2006, TIGSA redeemed the remaining $1 million principal amount outstanding with cash.

        During the six months ended March 31, 2006, the Company utilized $1.0 billion in cash for scheduled repayments of public notes.

9.    Commitments and Contingencies

        At March 31, 2006, the Company had a contingent purchase price liability of $80 million related to the 2001 acquisition of Com-Net by Electronics. This represents the maximum amount payable to the former shareholders of Com-Net only after the construction and installation of a communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. A liability for this contingency has not been recorded in Tyco's Consolidated Financial Statements as the outcome of this contingency cannot be reasonably determined.

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

Class Actions

        As a result of actions taken by the Company's former senior corporate management, Tyco, some members of the Company's former senior corporate management, former members of our Board of Directors and the Company's current Chief Executive Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws. Tyco, certain of the Company's current and former employees, some members of the Company's former senior corporate management and some former members of the Company's Board of Directors also are named as defendants in several Employee Retirement Income Security Act ("ERISA") class actions. In addition, some members of the Company's former senior corporate management are subject to a SEC inquiry. The findings and outcomes of the SEC inquiry may affect the course of the purported securities class actions and ERISA class actions pending against Tyco. The Company is generally obligated to indemnify its directors and officers and its former directors and officers who are named as defendants in some or all of these matters to the extent required by Bermuda law. In addition, the Company's insurance carriers may decline coverage, or the Company's coverage may be insufficient to cover its expenses and liability, in some or all of these matters. The Company is unable at this time to estimate what its ultimate liability in these matters may be, and it is possible that the Company will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on its financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.

14



Investigations

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

        On April 17, 2006, the Company reached a settlement that closes the SEC Enforcement Division's investigation of certain accounting practices and other actions by former Tyco officers. As expected, the Company has been ordered to make a payment of $50 million. In 2005, the Company recorded a charge of $50 million, which represented the Company's best estimate of the amount in fines and penalties management believes the Company will likely pay to resolve these matters.

Intellectual Property and Antitrust Litigation

        As previously disclosed in our periodic filings, the Company is party to a number of patent infringement and antitrust actions that may require the Company to pay damage awards. Tyco has assessed the status of these matters and has recorded liabilities related to certain of these matters where appropriate.

        Mallinckrodt, Inc. ("Mallinckrodt") and Nellcor Puritan Bennett, Inc. ("Nellcor"), plaintiffs/counter-defendants v. Masimo Corporation ("Masimo") et al., defendants/counter-claimants, is a consolidated patent infringement action filed on June 19, 2000 in the United States District Court for the Central District of California.

        On January 17, 2006, Tyco International Ltd., and its subsidiaries Tyco International (US) Inc., Tyco Healthcare Group LP, Mallinckrodt, Inc., and Nellcor Puritan Bennett, Inc. (collectively "Nellcor") entered into a Settlement Agreement and Release of Claims with Masimo Corporation and Masimo Laboratories, Inc. (the "Settlement") related to the consolidated patent infringement action.

        Under the terms of the settlement, Tyco on behalf of Nellcor, paid Masimo a total of $330 million on January 19, 2006, which represents $265 million in damages in the patent case for sales through January 31, 2006 (after which the infringing products will no longer be sold) and $65 million as an advance royalty for oximetry sales including Nellcor's new 06 technology products from February 1, 2006 through December 31, 2006. Under the terms of the Settlement, Nellcor received from Masimo a covenant not to sue on the Nellcor 06 products as well as a termination of all pending patent litigation with Masimo. In March 2011, Nellcor has the option to terminate Masimo's covenant not to sue and the obligation to pay future royalties on Nellcor's current products as well as any next-generation products. In addition, Nellcor will discontinue making, offering to sell, selling or shipping any products that the court found infringed on the patents held by Masimo, but will continue to provide service and

15



sensors for the previously sold products. Tyco had previously recorded a liability of $277 million related to this matter. The Settlement does not resolve the Masimo antitrust lawsuit or the related consumer antitrust class lawsuits described below.

        Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit filed on May 22, 2002 also pending in the United States District Court for the Central District of California. Tyco Healthcare and Mallinckrodt are subsidiaries of Tyco. In this lawsuit, Masimo alleges violations of antitrust laws against Tyco Healthcare and Mallinckrodt in the markets for pulse oximeter products. Masimo alleges that Tyco Healthcare and Mallinckrodt used their market position to prevent hospitals from purchasing Masimo's pulse oximetry products. Masimo seeks injunctive relief and monetary damages, including treble damages. Trial in this case began on February 22, 2005. The jury returned its verdict on March 21, 2005, and awarded Masimo $140 million in damages. The damages are automatically trebled under the antitrust statute to an award of $420 million. If ultimately successful, Masimo's attorneys are entitled to an award of reasonable fees and costs in addition to the verdict amount. The district court held a hearing on June 28, 2005 regarding post-trial motions.

        On March 22, 2006, the district court issued its Memorandum of Decision regarding the post-trial motions. In the Memorandum, the district court (i) vacated the jury's liability findings on two business practices; (ii) affirmed the jury's liability finding on two other business practices; (iii) vacated the jury's damage award in its entirety, and (iv) ordered a new trial on damages. The district court has not scheduled the new trial on the damages.

        Tyco has assessed the status of this matter and has concluded that it is more likely than not that the remainder of the jury's decision will be overturned, and, further, Tyco intends to vigorously pursue all available means to achieve such reversal. Accordingly, no provision has been made in the Consolidated Financial Statements with respect to this damage award.

        Beginning on August 29, 2005 with Natchitoches Parish Hospital Service District v. Tyco International, Ltd., twelve consumer class actions have been filed against Nellcor in the United States District Court for the Central District of California. The remaining eleven actions are Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group, LP., and Mallinckrodt Inc. filed on August 29, 2005, Scott Valley Respiratory Home Care v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on October 27, 2005, Brooks Memorial Hospital et al v. Tyco Healthcare Group LP filed on October 18, 2005, All Star Oxygen Services, Inc. et al v. Tyco Healthcare Group, et al filed on October 25, 2005, Niagara Falls Memorial Medical Center, et al v. Tyco Healthcare Group LP filed on October 28, 2005, Nicholas H. Noyes Memorial Hospital v. Tyco Healthcare and Mallinckrodt filed on November 4, 2005, North Bay Hospital, Inc. v. Tyco Healthcare Group, et al filed on November 15, 2005, Stephen Skoronski v. Tyco International Ltd, et al filed on November 21, 2005, Abington Memorial Hospital v. Tyco Int'l Ltd,; Tyco Int'l (US) Inc.; Mallinckrodt Inc.; Tyco Healthcare Group LP filed on November 22, 2005, South Jersey Hospital, Inc. v. Tyco International, Ltd., et al, filed on January 24, 2006, and Deborah Heart and Lung Center v. Tyco International, Ltd., et al, filed on January 27, 2006. In all twelve complaints, the putative class representatives, on behalf of themselves and others, seek to recover overcharges they allege they paid for pulse oximetry products as a result of anticompetitive conduct by Nellcor in violation of the federal antitrust laws. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters. The Company will respond to these complaints and intends to vigorously defend the actions.

16



        As previously reported in the Company's periodic filings, Applied Medical Resources Corp. ("Applied Medical") v. United States Surgical ("U.S. Surgical") is a patent infringement action that was filed in the United States District Court for the Central District of California in April 1999 in which U.S. Surgical, a subsidiary of Tyco, is the defendant. In February 2002, the district court held that U.S. Surgical's VERSASEAL universal seal system, contained in certain surgical trocar and access devices manufactured by U.S. Surgical, infringed certain of the plaintiff's patents. The district court entered a permanent injunction against U.S. Surgical based upon infringement of one of the three patents involved in the suit. The United States Court of Appeals for the Federal Circuit affirmed the district court's permanent injunction ruling in September 2003 for the VERSASEAL product, which is no longer on the market. In October 2003, the district court ruled in U.S. Surgical's favor, holding that two other patents involved in the case were invalid. A trial on damages for the earlier infringement ruling in the district court concluded on July 27, 2004. The jury awarded Applied Medical $44 million in damages and returned a finding that the earlier infringement was willful, giving the district court discretion to enhance those damages to up to treble the damages awarded to Applied Medical by the jury. On October 1, 2004, the district court issued post-trial rulings that (i) denied U.S. Surgical's motion to set aside the jury's finding on willfulness; and (ii) granted Applied Medical's motion for enhanced damages, enhancing the jury's damages award by 25%, or $11 million. On January 27, 2005, the district court awarded Applied Medical $10 million in costs, prejudgment interest and attorneys' fees. Thus, Applied Medical's total award is $65 million. U.S. Surgical appealed the damages award and the willfulness finding to the Court of Appeals for the Federal Circuit. On January 24, 2006, the Court of Appeals issued a decision affirming the award to Applied Medical. On February 17, 2006, Tyco, on behalf of U.S. Surgical, paid Applied Medical $66 million which includes post-judgment interest which accrued during the appeal. Tyco previously recorded a liability of $66 million related to this matter.

        On July 31, 2003, Applied Medical filed another patent infringement suit against U.S. Surgical in the United States District Court for the Central District of California. The complaint alleges that U.S. Surgical's VERSASEAL Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,533. Applied Medical seeks injunctive relief and unspecified monetary damages, including enhanced damages for alleged willful infringement. Applied Medical filed a motion for a preliminary injunction, which the district court denied on December 23, 2003. On February 7, 2005, the district court granted U.S. Surgical's motion for summary judgment. Applied Medical is appealing the summary judgment ruling. Briefing on Applied Medical's appeal has concluded and oral argument took place on February 6, 2006.

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 March 31, 2006, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $138 million to $421 million. As of March 31, 2006, Tyco concluded that the best estimate within this range is approximately $204 million, of which $32 million is included in accrued and other current liabilities and $172 million is included in other liabilities on our Consolidated Balance Sheets. In view of the Company's financial position and reserves for environmental matters of $204 million, the Company believes that any

17



potential payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows.

        Tyco has recorded asset retirement obligations for the estimated future costs associated with legal obligations to decommission two nuclear facilities. As of March 31, 2006 and September 30, 2005, the Company's asset retirement obligations were $72 million and $69 million, respectively. The Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows.

Asbestos Matters

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

        Tyco's involvement in asbestos cases has been limited because its subsidiaries did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims were never substantiated and have been dismissed by the courts. The Company will continue to vigorously defend these lawsuits and the Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims. When appropriate, the Company settles claims. However, the total amount paid to date to settle and defend all asbestos claims has been immaterial. As of March 31, 2006, there were approximately 14,500 asbestos liability cases pending against the Company and its subsidiaries.

        During 2005, the Company undertook a detailed study of its pending asbestos claims and also developed an estimate of asbestos claims that were incurred but not reported, as well as related insurance and indemnification recoveries. The impact of this study was not material to the Company's financial position, results of operations or cash flows. The Company's estimate of the liability for pending and future claims is based on claim experience over the past five years and covers claims expected to be filed through the year 2012. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all known and anticipated future claims, after taking into account its substantial indemnification rights and insurance coverage, will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

18


Income Taxes

        The Company and its subsidiaries' income tax returns are periodically examined by various regulatory tax authorities. In connection with such examinations, tax authorities, including the United States Internal Revenue Service ("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 that management has assessed as probable and estimable have been recorded through the income tax provision, equity or goodwill, as appropriate.

        The American Jobs Creation Act of 2004 (the "AJCA"), signed into law in October 2004, replaces an export incentive with a deduction from domestic manufacturing income. This provision of the AJCA did not have a material impact on the financial condition, results of operations or cash flows of the Company. The AJCA also allows the Company to repatriate up to $500 million of permanently reinvested foreign earnings in 2006 at an effective tax rate of 5.25%. This incentive would apply to the Company's U.S. owned controlled foreign companies. The Company continues to review whether to take advantage of this provision of the AJCA.

Compliance Matters

        In 2003, an allegation was brought to our attention that during the period from 1999 through 2003 certain improper payments were made by a non-U.S. subsidiary of Tyco. During 2005, Tyco reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act, that it would continue to make periodic progress reports to them and that it would present its factual findings upon conclusion of the baseline review. On March 15, 2006, the Company held a meeting with the DOJ and SEC to provide an update on the baseline review being conducted by outside counsel and provided a briefing concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities.

        At this time, Tyco cannot predict the outcome of these matters reported to regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of any or all of these matters.

Other Matters

        Earth Tech v. City of Phoenix is a contract dispute arising from Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. On December 21, 2005, Earth Tech filed a lawsuit against the City of Phoenix in the Maricopa County Superior Court alleging $3 million in damages plus interest for the City's failure to pay dewatering and computer systems costs related to the 91st Avenue project. After the City rejected Earth Tech's administrative claim against the City, Earth Tech filed and served a First Amended Complaint upon the City of Phoenix. In its First Amended Complaint, Earth Tech alleged eighteen causes of action and requested the following: (i) a recovery of at least $73 million for the value of the services performed by Earth Tech in connection with the contract; (ii) a rescission of the contract; (iii) an equitable adjustment of the Contract price for additional dewatering services and the Computer Control System;

19



and (iv) costs for demobilization and termination of the contract. The City of Phoenix's Answer to the First Amended Complaint is due on May 18, 2006.

        On December 29, 2005, the City of Phoenix filed a lawsuit against Earth Tech, Inc., its surety, Federal Insurance Company and other unnamed parties in the Maricopa County Superior Court, The City of Phoenix v. Earth Tech, Inc., Federal Insurance Company and John Does 1-50. The lawsuit is in connection with the City of Phoenix's termination on August 12, 2005 of Earth Tech's contract with the City of Phoenix, Arizona for expansion of the City's 91st Avenue Waste Water Treatment Plant. The City alleges the following causes of action: (i) Earth Tech breached its Pre-Construction Services and Construction Management at Risk Contracts; (ii) Earth Tech did not properly, reasonably or timely manage, supervise or inspect the work under the Contracts; (iii) Federal Insurance breached the terms and conditions of the performance bond; and (iv) Federal Insurance failed to investigate the City's Bond Claims. The City requested unspecified general, consequential, incidental, special and liquidated damages plus interest as its relief. On February 8, 2006, Earth Tech filed a Motion to Dismiss the City's Complaint in which Federal Insurance Company joined. The Court set a hearing date for the motions of May 22, 2006.

        The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.

10.    Retirement Plans

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

 
  U.S. Plans
 
 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31,
2006

  April 1,
2005

  March 31,
2006

  April 1,
2005

 
Service cost   $ 6   $ 5   $ 12   $ 11  
Interest cost     32     32     63     64  
Expected return on plan assets     (41 )   (38 )   (82 )   (77 )
Amortization of prior service cost     1     1     2     2  
Amortization of net actuarial loss     12     10     25     20  
   
 
 
 
 
  Net periodic benefit cost   $ 10   $ 10   $ 20   $ 20  
   
 
 
 
 

20


 
  Non-U.S. Plans
 
 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31,
2006

  April 1,
2005

  March 31,
2006

  April 1,
2005

 
Service cost   $ 29   $ 26   $ 58   $ 52  
Interest cost     34     34     68     68  
Expected return on plan assets     (31 )   (27 )   (62 )   (54 )
Amortization of prior service benefit             (1 )    
Amortization of net actuarial loss     13     11     26     22  
   
 
 
 
 
  Net periodic benefit cost   $ 45   $ 44   $ 89   $ 88  
   
 
 
 
 

        As previously discussed in the 2005 Form 10-K, the Company anticipates that it will contribute at least the minimum amount required to its pension plans in 2006 of $12 million for U.S plans and $107 million for non-U.S. plans. During the six months ended March 31, 2006, the Company has contributed $61 million to its U.S. and non-U.S. pension plans.

        During the six months ended April 1, 2005, the Company completed the merger of certain pension plans in the United Kingdom. As a result of merging certain plans, the company increased its minimum pension liability with a corresponding reduction of accumulated other comprehensive income of $21 million (net of income taxes).

        Net periodic postretirement benefit cost was as follows ($ in millions):

 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31,
2006

  April 1,
2005

  March 31,
2006

  April 1,
2005

 
Service cost   $ 1   $   $ 2   $ 1  
Interest cost     4     5     8     10  
Amortization of prior service benefit     (1 )   (1 )   (2 )   (2 )
Amortization of net actuarial loss         2         3  
   
 
 
 
 
  Net periodic postretirement benefit cost   $ 4   $ 6   $ 8   $ 12  
   
 
 
 
 

11.    Share Plans

        Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123R using the modified prospective transition method. Under this transition method, the compensation cost recognized beginning October 1, 2005 includes compensation cost for (i) all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based payments granted subsequent to September 30, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is generally recognized ratably over the requisite service period or period to retirement eligibility, if shorter. Prior period amounts have not been restated.

        As a result of the adoption of SFAS No. 123R, the Company's results for the quarter and six months ended March 31, 2006 include incremental share-based compensation expense of $46 million

21



and $94 million, respectively. The total share-based compensation cost of $77 million and $152 million for the quarter and six months ended March 31, 2006, respectively, has been included in the Consolidated Statements of Income within selling, general and administrative expenses. For the quarter and six months ended March 31, 2006, the Company has recognized a related tax benefit associated with its share-based compensation arrangements totaling $19 million and $35 million, respectively.

        Prior to October 1, 2005, the Company accounted for stock-based compensation plans in accordance with the provisions of APB Opinion No. 25, as permitted by SFAS No. 123, and accordingly did not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price of the stock at the date of grant. Had the fair value based method as prescribed by SFAS No. 123 been applied by Tyco, the effect on net income and earnings per share for the quarter and six months ended April 1, 2005 would have been as follows ($ in millions, except per share data):

 
  Quarter
Ended

  Six Months
Ended

 
 
  April 1,
2005

  April 1,
2005

 
Net income, as reported   $ 192   $ 922  
Add: Employee compensation expense for share options included in reported net income, net of income taxes     1     7  
Less: Total employee compensation expense for share options determined under fair value method, net of income taxes     (35 )   (83 )
   
 
 
Net income, pro forma   $ 158   $ 846  
   
 
 
Earnings per share:              
  Basic—as reported   $ 0.10   $ 0.46  
  Basic—pro forma     0.08     0.42  
  Diluted—as reported     0.10     0.44  
  Diluted—pro forma     0.08     0.41  

        During 2004, the Tyco International Ltd. 2004 Stock and Incentive Plan (the "2004 Plan") effectively replaced the Tyco International Ltd. Long Term Incentive Plan, as amended as of May 12, 1999 (the "LTIP I Plan"), the Tyco International Long Term Incentive Plan II (the "LTIP II Plan"), as well as the Tyco International Ltd. 1994 Restricted Stock Ownership Plan for Key Employees (the "1994 Plan") for all awards effective on or after March 25, 2004. The 2004 Plan provides for the award of stock options, stock appreciation rights, annual performance bonuses, long term performance awards, restricted units, restricted stock, deferred stock units, promissory stock and other stock-based awards (collectively, "Awards").

        The 2004 Plan provides for a maximum of 160 million common shares to be issued as Awards, subject to adjustment as provided under the terms of the 2004 Plan. In addition, any common shares that have been approved by the Company's shareholders for issuance under the LTIP Plans but which have not been awarded thereunder as of January 1, 2004, reduced by the number of common shares related to Awards made under the LTIP Plans between January 1, 2004 and March 25, 2004, the date the 2004 Plan was approved by shareholders, (or which have been awarded but will not be issued, owing to expiration, forfeiture, cancellation, return to the Company or settlement in cash in lieu of common shares on or after January 1, 2004) and which are no longer available for any reason

22


(including the termination of the LTIP Plans) will also be available for issuance under the 2004 Plan. When common shares are issued pursuant to a grant of restricted stock and restricted units (collectively, "restricted share awards"), deferred stock units, promissory stock, and performance units or as payment of an annual performance bonus or other stock-based award, the total number of common shares remaining available for grant will be decreased by a margin of at least 1.8 per common share issued. At March 31, 2006, there were approximately 166 million shares available for future grant under the 2004 Plan (including shares available under both the LTIP I and LTIP II Plans that are now assumable under the 2004 Plan).

        The 1994 Plan provided for the issuance of restricted share grants to officers and non-officer employees. The 1994 plan expired in November 2004; thus no additional grants of restricted stock have been made under this plan since November 2004 and no shares are available for future grant. At March 31, 2006, 29 million restricted shares had been granted, of which 13 million were granted under the 2004 Plan and 16 million were granted under the 1994 Plan.

        The LTIP I Plan reserved common shares for issuance to Tyco's directors, executives and managers as share options. This plan is administered by the Compensation and Human Resources Committee of the Board of Directors of the Company, which consists exclusively of independent directors of the Company. Tyco had reserved 140 million common shares for issuance under the LTIP I Plan. At March 31, 2006, there were approximately 29 million shares originally reserved for issuance under this plan that are now available for future grant under the 2004 Plan.

        The LTIP II Plan was a broad-based option plan for non-officer employees. Tyco had reserved 100 million common shares for issuance under the LTIP II Plan. The terms and conditions of this plan are similar to the LTIP I Plan. At March 31, 2006, there were approximately 32 million shares originally reserved for issuance under this plan that are now available for future grant under the 2004 Plan.

        Employee Stock Purchase Plans—Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in an employee share purchase plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. The Company matches a portion of the employee contribution by contributing an additional 15% of the employee's payroll deduction. All shares purchased under the plan are purchased on the open market by a designated broker.

        The Company also maintains two other employee stock purchase plans for the benefit of employees of certain qualified non-U.S. subsidiaries. Under one plan, eligible employees are granted options to purchase shares at the end of three years of service at 85% of the market price at the time of grant. As of March 31, 2006, there were approximately 3 million options outstanding and 7 million shares available for future issuance under this plan. All shares purchased under the other plan are purchased on the open market.

        Share Options—Options are granted to purchase common shares at prices which are equal to or greater than the market price of the common shares on the date the option is granted. Conditions of vesting are determined at the time of grant under the 2004 Plan. Options are generally exercisable in equal annual installments over a period of three years and will generally expire 10 years after the date of grant. Options assumed as part of business combination transactions are administered under Tyco's plans but do not reduce the available shares and retain all the rights, terms and conditions of the respective plans under which they were originally issued.

        At March 31, 2006, 401 million share options had been granted, of which 230 million, 124 million and 47 million were granted under the LTIP I, LTIP II and 2004 Plans, respectively.

23


        The grant-date fair value of each option grant is estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the Company's stock and implied volatility derived from exchange traded options. The average expected life was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on voluntary termination behavior, as well as an analysis of actual option forfeitures. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:

 
  For the Quarters Ended
 
 
  March 31,
2006

  April 1,
2005

 
Expected stock price volatility     33 %   33 %
Risk free interest rate     4.3 %   4.1 %
Expected life of options (years)     4.6     4.6  
Expected annual dividend per share   $ 0.40   $ 0.40  
 
  For the Six Months Ended
 
 
  March 31,
2006

  April 1,
2005

 
Expected stock price volatility     34 %   35 %
Risk free interest rate     4.2 %   3.9 %
Expected life of options (years)     4.4     4.2  
Expected annual dividend per share   $ 0.40   $ 0.40  

        The weighted-average grant-date fair values of options granted during the quarter and six months ended March 31, 2006 was $8.23 and $9.00, respectively. The weighted average grant-date fair values of options granted during the quarter and six months ended April 1, 2005 was $11.06 in both periods. The total intrinsic value of options exercised during the quarter and six months ended March 31, 2006 was $32 million and $64 million, respectively. The total intrinsic value of options exercised during the quarter and six months ended April 1, 2005 was $58 million and $84 million, respectively. The excess cash tax benefit classified as a financing cash inflow for the six months ended March 31, 2006 was not significant.

24



        A summary of option activity as of March 31, 2006 and changes during the six months then ended is presented below:

 
  Shares
  Weighted-
Average
Exercise Price

  Weighted-Average
Remaining
Contractual Term
(in years)

  Aggregate
Intrinsic
Value
(in millions)

Outstanding at October 1, 2005   140,502,534   $ 32.80          
Granted   10,693,227     29.02          
Exercised   (6,895,425 )   18.57          
Expired   (8,944,982 )   43.79          
Forfeited   (2,882,226 )   32.20          
   
               
Outstanding at March 31, 2006   132,473,128     32.50   6.1   $ 397
Vested and unvested expected to vest at March 31, 2006   130,783,323     32.51   6.1     397
Exercisable at March 31, 2006   103,545,415     33.11   5.4     365

        As of March 31, 2006, there was $237 million of total unrecognized compensation cost related to non-vested share options granted. The cost is expected to be recognized over a weighted-average period of 1.4 fiscal years.

        Restricted Share Awards—Restricted share awards are granted subject to certain restrictions. Conditions of vesting are determined at the time of grant under the 2004 Plan. Tyco's restricted share awards generally cliff vest after three years. All restrictions on the award will lapse upon normal retirement, death or disability of the employee.

        For grants which vest based on certain specified performance criteria, the fair market value of the shares or units is expensed over the period of performance, once achievement of criteria is deemed probable. For grants that vest through passage of time, the fair market value of the award at the time of the grant is amortized to expense over the period of vesting. Recipients of restricted shares have the right to vote such shares and receive dividends, whereas recipients of restricted units have no voting rights and receive dividend equivalents. The fair value of restricted share awards is determined based on the number of shares granted and the market value of the Company's shares on the grant date. During the six months ended March 31, 2006, the Company granted one million performance-based restricted share awards at a fair value of $29.00, on the grant date. Such shares generally vest over a period of three years, as determined by the Compensation Committee, upon attainment of various levels of performance that equal or exceed targeted levels.

25



        The compensation expense recognized for all restricted share awards is net of estimated forfeitures. A summary of the status of the Company's restricted share awards as of March 31, 2006 and changes during the six months then ended are presented below:

Nonvested Restricted Share Awards

  Shares
  Weighted-Average Grant-Date Fair Value
Nonvested at October 1, 2005   7,348,292   $ 28.54
Granted   6,205,873     28.93
Vested   (766,372 )   17.23
Forfeited   (709,781 )   28.11
   
     
Nonvested at March 31, 2006   12,078,012     29.48

        The weighted-average grant-date fair value of shares granted during the quarter and six months ended April 1, 2005 was $35.77 and $35.62, respectively. As of March 31, 2006, there was $240 million of total unrecognized compensation cost related to non-vested restricted share awards. That cost is expected to be recognized over a weighted-average period of 2.3 fiscal years.

        Deferred Stock Units—Deferred Stock Units ("DSUs") are notional units that are correlated to the value of Tyco common shares with distribution deferred until termination of employment. Distribution, when made, will be in the form of actual shares. Similar to restricted share grants that vest through the passage of time, the fair market value of the DSUs at the time of the grant is amortized to expense over the vesting period. Recipients of DSUs do not have the right to vote such shares and do not have the right to receive cash dividends. However, they have the right to receive notional dividends in the form of additional DSUs. Conditions of vesting are determined at the time of grant. Under the 2004 Plan, the majority of Tyco's DSU grants vest in equal annual installments over three years. The Company has granted 2 million DSUs, of which all but 0.1 million were outstanding at March 31, 2006.

12.    Consolidated Segment Data

        The segment data presented have been reclassified to exclude the results of discontinued operations. In addition, the results of the Tyco Global Network ("TGN") business, which was sold in the third quarter of 2005, are presented within Corporate for the quarter and six months ended

26



April 1, 2005. Selected information by business segment is presented in the following tables ($ in millions):

 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31, 2006
  April 1,
2005

  March 31, 2006
  April 1,
2005

 
Net revenue:                          
  Electronics   $ 3,236   $ 3,133   $ 6,258   $ 6,012  
  Fire and Security     2,873     2,874     5,666     5,756  
  Healthcare     2,409     2,369     4,696     4,688  
  Engineered Products and Services     1,688     1,607     3,292     3,120  
  Corporate(1)         10         18  
   
 
 
 
 
    Net revenue   $ 10,206   $ 9,993   $ 19,912   $ 19,594  
   
 
 
 
 
Operating income:                          
  Electronics   $ 461   $ 496   $ 845   $ 910  
  Fire and Security     289     311     517     594  
  Healthcare     579     689     1,118     1,270  
  Engineered Products and Services     192     165     361     337  
  Corporate(2)     (113 )   (136 )   (208 )   (216 )
   
 
 
 
 
    Operating income   $ 1,408   $ 1,525   $ 2,633   $ 2,895  
   
 
 
 
 

(1)
Net revenue for the quarter and six months ended April 1, 2005 relates to the TGN business.

(2)
The quarter and six months ended April 1, 2005 includes the TGN operating loss of $21 million and $42 million, respectively.

27


13.    Supplementary Balance Sheet and Cash Flow Information

        Selected supplementary balance sheet information was as follows ($ in millions):

 
  March 31,
2006

  September 30,
2005

 
Purchased materials and manufactured parts   $ 1,104   $ 1,039  
Work in process     1,066     967  
Finished goods     2,470     2,191  
   
 
 
  Inventories   $ 4,640   $ 4,197  
   
 
 
Land   $ 524   $ 526  
Buildings     3,178     3,177  
Subscriber systems     4,786     4,745  
Machinery and equipment     10,037     9,955  
Construction in progress     964     826  
Accumulated depreciation     (10,327 )   (9,991 )
   
 
 
  Property, plant and equipment, net   $ 9,162   $ 9,238  
   
 
 
Accrued expenses   $ 3,592   $ 4,351  
Other current liabilities     2,321     2,201  
   
 
 
  Accrued and other current liabilities   $ 5,913   $ 6,552  
   
 
 
Long-term pension and post-retirement liabilities   $ 1,767   $ 1,704  
Other long-term liabilities     5,951     6,016  
   
 
 
  Other liabilities   $ 7,718   $ 7,720  
   
 
 

        Supplementary non-cash financing activities were as follows ($ in millions):

 
  For the
Six Months Ended

 
  March 31,
2006

  April 1,
2005

Conversion of debt to common shares   $ 1,235   $ 9
   
 

14.    Guarantees

        Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 2006 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance and the potential exposure for nonperformance under the guarantees would not have a material effect on the Company's financial position, results of operations or cash flows.

        In disposing of assets or businesses, the Company often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate

28



the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, results of operations or cash flows.

        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 9 for a discussion of these liabilities.

        The Company has an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon expiration of this lease in October 2006, a subsidiary of the Company has the option to buy these vessels for approximately $280 million, or return the vessels to the lessor and, under a residual guarantee, pay any shortfall in sales proceeds to the lessor from a third party in an amount not to exceed $235 million. As of March 31, 2006, the Company expects this obligation to be $54 million, which is recorded in the accompanying Consolidated Balance Sheet, based on an estimate of the fair value of the vessels performed by management with the assistance of a third-party valuation.

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

        The Company records estimated product warranty costs at the time of sale. Manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Generally, product warranties are implicit in the sale; however, the customer may purchase an extended warranty. Manufactured equipment is also warranted in the same manner as product warranties. However, in most instances the warranty is either negotiated in the contract or sold as a separate component. Warranty period terms range from 90 days (e.g., consumable products) up to 20 years (e.g., power system batteries). The warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage.

        The following table reflects the roll forward of the Company's warranty accrual for the quarter and six months ended March 31, 2006 ($ in millions).

 
  For the
Quarter Ended
March 31, 2006

  For the
Six Months
Ended
March 31, 2006

 
Balance at beginning of period   $ 177   $ 193  
Accruals for warranties issued during the period     12     27  
Changes in estimates related to pre-existing warranties         (7 )
Settlements made     (23 )   (46 )
Currency translation     1      
   
 
 
Balance at March 31, 2006   $ 167   $ 167  
   
 
 

        Settlements during the quarter and six months ended March 31, 2006 include spending of $10 million and $21 million, respectively, by Engineered Products and Services in connection with a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP was initiated in 2001 and relates to the replacement of certain Model GB fire sprinkler heads

29



which were originally manufactured by Central Sprinkler. Identification and investigation of problems with the sprinkler heads commenced prior to Tyco's acquisition. The sprinkler heads are to be replaced over a 5–7 year period free of charge to property owners. The Company is assessing the future of this program, which may necessitate adjustment to the warranty reserve.

15.    Tyco International Group S.A.

        Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA") has public debt securities outstanding which are fully and unconditionally guaranteed by Tyco. The following tables present condensed consolidating financial information for Tyco, TIGSA and all other subsidiaries. Condensed financial information for Tyco International Ltd. and TIGSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

        During the fourth quarter of 2005, TIGSA completed a tax-free restructuring involving the issuance of multiple classes of shares and the distribution of certain investments, intercompany loans and intercompany receivables to Tyco International Ltd. Since the transactions were entirely among wholly owned subsidiaries of Tyco there was no impact on the consolidated statements of financial position, operations or cash flows of the Company. The transactions did, however, result in a decrease to TIGSA's investment in subsidiaries and intercompany receivables of a combined $18.4 billion. The effect of these transactions has been reflected below as if they occurred at the beginning of the earliest period presented.

30



CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Quarter Ended March 31, 2006
(in millions)

 
  Tyco
International Ltd.

  Tyco
International Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 10,206   $   $ 10,206  
Cost of product sales             5,583         5,583  
Cost of services             1,202         1,202  
Selling, general and administrative expenses     14     25     1,982         2,021  
Restructuring and asset impairment charges, net             8         8  
Separation costs     9         16         25  
Gains on divestitures             (41 )       (41 )
   
 
 
 
 
 
  Operating (loss) income     (23 )   (25 )   1,456         1,408  
Interest income     1     10     22         33  
Interest expense         (164 )   (25 )       (189 )
Other expense, net             (2 )       (2 )
Equity in net income of subsidiaries     1,380     1,000         (2,380 )    
Intercompany interest and fees     (336 )   155     181          
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     1,022     976     1,632     (2,380 )   1,250  
Income taxes             (168 )       (168 )
Minority interest             (2 )       (2 )
   
 
 
 
 
 
  Income from continuing operations     1,022     976     1,462     (2,380 )   1,080  
Loss from discontinued operations, net of income taxes             (58 )       (58 )
   
 
 
 
 
 
  Income before cumulative effect of accounting change     1,022     976     1,404     (2,380 )   1,022  
Cumulative effect of accounting change, net of income taxes                      
   
 
 
 
 
 
  Net income   $ 1,022   $ 976   $ 1,404   $ (2,380 ) $ 1,022  
   
 
 
 
 
 

31


CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Quarter Ended April 1, 2005
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 9,993   $   $ 9,993  
Cost of product sales             5,329         5,329  
Cost of services             1,173         1,173  
Selling, general and administrative expenses     54     (1 )   1,907         1,960  
Restructuring and asset impairment charges, net             4         4  
Separation costs                      
Losses on divestitures             2         2  
   
 
 
 
 
 
  Operating (loss) income     (54 )   1     1,578         1,525  
Interest income         7     24         31  
Interest expense         (188 )   (20 )       (208 )
Other expense, net         (573 )   (2 )       (575 )
Equity in net income of subsidiaries     582     162         (744 )    
Intercompany interest and fees     (336 )   719     (383 )        
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     192     128     1,197     (744 )   773  
Income taxes             (373 )       (373 )
Minority interest             (1 )       (1 )
   
 
 
 
 
 
  Income from continuing operations     192     128     823     (744 )   399  
Loss from discontinued operations, net of income taxes             (207 )       (207 )
   
 
 
 
 
 
  Income before cumulative effect of accounting change     192     128     616     (744 )   192  
Cumulative effect of accounting change, net of income taxes                      
   
 
 
 
 
 
  Net income   $ 192   $ 128   $ 616   $ (744 ) $ 192  
   
 
 
 
 
 

32



CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended March 31, 2006
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 19,912   $   $ 19,912  
Cost of product sales             10,873         10,873  
Cost of services             2,383         2,383  
Selling, general and administrative expenses     23     84     3,901         4,008  
Restructuring and asset impairment charges, net             20         20  
Separation costs     9         24         33  
Gains on divestitures             (38 )       (38 )
   
 
 
 
 
 
  Operating (loss) income     (32 )   (84 )   2,749         2,633  
Interest income     1     17     52         70  
Interest expense         (334 )   (44 )       (378 )
Other expense, net             (3 )       (3 )
Equity in net income of subsidiaries     2,313     1,581         (3,894 )    
Intercompany interest and fees     (690 )   318     372          
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     1,592     1,498     3,126     (3,894 )   2,322  
Income taxes             (430 )       (430 )
Minority interest             (5 )       (5 )
   
 
 
 
 
 
  Income from continuing operations     1,592     1,498     2,691     (3,894 )   1,887  
Loss from discontinued operations, net of income taxes             (295 )       (295 )
   
 
 
 
 
 
  Income before cumulative effect of accounting change     1,592     1,498     2,396     (3,894 )   1,592  
Cumulative effect of accounting change, net of income taxes                      
   
 
 
 
 
 
  Net income   $ 1,592   $ 1,498   $ 2,396   $ (3,894 ) $ 1,592  
   
 
 
 
 
 

33



CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended April 1, 2005
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 19,594   $   $ 19,594  
Cost of product sales             10,352         10,352  
Cost of services             2,394         2,394  
Selling, general and administrative expenses     82     1     3,842         3,925  
Restructuring and asset impairment charges, net             11         11  
Separation costs                      
Losses on divestitures             17         17  
   
 
 
 
 
 
  Operating (loss) income     (82 )   (1 )   2,978         2,895  
Interest income         16     52         68  
Interest expense         (381 )   (43 )       (424 )
Other expense, net         (729 )   (7 )       (736 )
Equity in net income of subsidiaries     1,657     709         (2,366 )    
Intercompany interest and fees     (653 )   1,095     (442 )        
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     922     709     2,538     (2,366 )   1,803  
Income taxes             (679 )       (679 )
Minority interest             (4 )       (4 )
   
 
 
 
 
 
  Income from continuing operations     922     709     1,855     (2,366 )   1,120  
Loss from discontinued operations, net of income taxes             (219 )       (219 )
   
 
 
 
 
 
  Income before cumulative effect of accounting change     922     709     1,636     (2,366 )   901  
Cumulative effect of accounting change, net of income taxes             21         21  
   
 
 
 
 
 
  Net income   $ 922   $ 709   $ 1,657   $ (2,366 ) $ 922  
   
 
 
 
 
 

34


CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2006
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
Assets                              
Current Assets:                              
  Cash and cash equivalents   $ 1   $ 1,203   $ 1,185   $   $ 2,389
  Accounts receivable, net             6,822         6,822
  Inventories             4,640         4,640
  Intercompany receivables     2,333     67     12,533     (14,933 )  
  Other current assets     30     4     3,239         3,273
  Assets held for sale             73         73
   
 
 
 
 
    Total current assets     2,364     1,274     28,492     (14,933 )   17,197
Property, plant and equipment, net             9,162         9,162
Goodwill             24,538         24,538
Intangible assets, net             5,018         5,018
Investment in subsidiaries     59,162     31,751         (90,913 )  
Intercompany loans receivable         20,994     28,012     (49,006 )  
Other assets     25     116     5,000         5,141
   
 
 
 
 
    Total Assets   $ 61,551   $ 54,135   $ 100,222   $ (154,852 ) $ 61,056
   
 
 
 
 
Liabilities and Shareholders' Equity                              
Current Liabilities:                              
  Current maturities of long-term debt   $   $ 700   $ 46   $   $ 746
  Accounts payable     4         3,144         3,148
  Accrued and other current liabilities     263     284     5,366         5,913
  Intercompany payables     8,412     4,121     2,400     (14,933 )  
  Liabilities held for sale             55         55
   
 
 
 
 
    Total current liabilities     8,679     5,105     11,011     (14,933 )   9,862
Long-term debt     1     8,654     587         9,242
Intercompany loans payable     18,615     9,397     20,994     (49,006 )  
Other liabilities     70     77     7,571         7,718
   
 
 
 
 
    Total Liabilities     27,365     23,233     40,163     (63,939 )   26,822
Minority interest             48         48
Shareholders' Equity:                              
  Preference Shares             13,070     (13,070 )  
  Common shares     418     1     (8 )   (1 )   410
  Other shareholders' equity     33,768     30,901     46,949     (77,842 )   33,776
   
 
 
 
 
    Total Shareholders' Equity     34,186     30,902     60,011     (90,913 )   34,186
   
 
 
 
 
    Total Liabilities and Shareholders' Equity   $ 61,551   $ 54,135   $ 100,222   $ (154,852 ) $ 61,056
   
 
 
 
 

35



CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2005
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
Assets                              
Current Assets:                              
  Cash and cash equivalents   $ 3   $ 1,204   $ 1,999   $   $ 3,206
  Accounts receivable, net             6,732         6,732
  Inventories             4,197         4,197
  Intercompany receivables     1,847     37     11,382     (13,266 )  
  Other current assets     21     103     2,966         3,090
  Assets held for sale             1,290         1,290
   
 
 
 
 
    Total current assets     1,871     1,344     28,566     (13,266 )   18,515
Property, plant and equipment, net             9,238         9,238
Goodwill             24,557         24,557
Intangible assets, net             5,085         5,085
Investment in subsidiaries     57,798     30,410         (88,208 )  
Intercompany loans receivable         21,577     27,254     (48,831 )  
Other assets     24     164     5,038         5,226
   
 
 
 
 
    Total Assets   $ 59,693   $ 53,495   $ 99,738   $ (150,305 ) $ 62,621
   
 
 
 
 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities:                              
  Current maturities of long-term debt   $ 2   $ 1,700   $ 252   $   $ 1,954
  Accounts payable     9         3,056         3,065
  Accrued and other current liabilities     279     367     5,906         6,552
  Intercompany payables     8,271     3,111     1,884     (13,266 )  
  Liabilities held for sale             219         219
   
 
 
 
 
    Total current liabilities     8,561     5,178     11,317     (13,266 )   11,790
Long-term debt         10,008     592         10,600
Intercompany loans payable     18,615     8,639     21,577     (48,831 )  
Other liabilities     67     8     7,645         7,720
   
 
 
 
 
    Total Liabilities     27,243     23,833     41,131     (62,097 )   30,110
Minority interest             61         61
Shareholders' Equity:                              
  Preference shares             13,070     (13,070 )  
  Common shares     405     1     (2 )   (1 )   403
  Other shareholders' equity     32,045     29,661     45,478     (75,137 )   32,047
   
 
 
 
 
    Total Shareholders' Equity     32,450     29,662     58,546     (88,208 )   32,450
   
 
 
 
 
    Total Liabilities and Shareholders' Equity   $ 59,693   $ 53,495   $ 99,738   $ (150,305 ) $ 62,621
   
 
 
 
 

36



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2006
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Cash Flows From Operating Activities:                                
  Net cash provided by (used in) operating activities   $ 300   $ (411 ) $ 1,745   $   $ 1,634  
  Net cash provided by discontinued operating activities             5         5  
Cash Flows From Investing Activities:                                
Capital expenditures             (729 )       (729 )
Proceeds from disposal of assets             17         17  
Acquisition of businesses, net of cash acquired             (134 )       (134 )
Acquisition of customer accounts (ADT dealer program)             (169 )       (169 )
Purchase accounting and holdback liabilities             (86 )       (86 )
Divestiture of businesses, net of cash retained             960         960  
Decrease in intercompany loans         1,312         (1,312 )    
Decrease (increase) in investments         99     (37 )       62  
Decrease in restricted cash             31         31  
Other             2         2  
   
 
 
 
 
 
  Net cash provided by (used in) investing activities         1,411     (145 )   (1,312 )   (46 )
  Net cash used in discontinued investing activities             (6 )       (6 )
Cash Flows From Financing Activities:                                
Net repayments of debt     (1 )   (1,001 )   (225 )       (1,227 )
Proceeds from exercise of share options     101         28         129  
Dividends paid     (402 )               (402 )
Repurchase of common shares by subsidiary             (811 )       (811 )
Loan repayments to parent             (1,312 )   1,312      
Transfer to discontinued operations             (85 )       (85 )
Other             (15 )       (15 )
   
 
 
 
 
 
  Net cash used in financing activities     (302 )   (1,001 )   (2,420 )   1,312     (2,411 )
  Net cash provided by discontinued financing activities             10         10  
Effect of currency translation on cash             6         6  
Net decrease in cash and cash equivalents     (2 )   (1 )   (805 )       (808 )
Less: net increase in cash related to discontinued operations             (9 )       (9 )
Cash and cash equivalents at beginning of period     3     1,204     1,999         3,206  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $ 1   $ 1,203   $ 1,185   $   $ 2,389  
   
 
 
 
 
 

37


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended April 1, 2005
(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Cash Flows From Operating Activities:                                
  Net cash provided by operating activities   $ 223   $ 1,269   $ 998   $   $ 2,490  
  Net cash used in discontinued operating activities             (60 )       (60 )
Cash Flows From Investing Activities:                                
Capital expenditures             (647 )       (647 )
Proceeds from disposal of assets             52         52  
Acquisition of businesses, net of cash acquired             (10 )       (10 )
Acquisition of customer accounts (ADT dealer program)             (135 )       (135 )
Purchase accounting and holdback liabilities.             (23 )       (23 )
Divestiture of businesses, net of cash retained             182         182  
Decrease in intercompany loans         499         (499 )    
Increase in investments             (116 )       (116 )
Decrease in restricted cash             3         3  
Other             (4 )       (4 )
   
 
 
 
 
 
  Net cash provided by (used in) investing activities         499     (698 )   (499 )   (698 )
  Net cash used in discontinued investing activities             (19 )       (19 )
Cash Flows From Financing Activities:                                
Net repayments of debt         (2,948 )   (130 )       (3,078 )
Proceeds from exercise of share options             118         118  
Dividends paid     (225 )               (225 )
Loan repayments to parent             (499 )   499      
Transfer to discontinued operations             (179 )       (179 )
Other     1     (2 )   (16 )       (17 )
   
 
 
 
 
 
  Net cash used in financing activities     (224 )   (2,950 )   (706 )   499     (3,381 )
  Net cash provided by discontinued financing activities             98         98  
Effect of currency translation on cash             48         48  
Net decrease in cash and cash equivalents     (1 )   (1,182 )   (339 )       (1,522 )
Less: net increase in cash related to discontinued operations             (19 )       (19 )
Cash and cash equivalents at beginning of period     1     2,452     2,034         4,487  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 1,270   $ 1,676   $   $ 2,946  
   
 
 
 
 
 

16.    Subsequent Events

       In April, with the additional purchase of 14.5 million shares for $391 million, Tyco completed its previously announced $1.5 billion share repurchase program. In May 2006, Tyco's Board of Directors approved a new $2.0 billion share repurchase program.

38


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

Results of Operations

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

Introduction

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

        The Company operates in the following business segments:

    Electronics designs, manufactures and distributes electrical and electronic components.

    Fire and Security designs, manufactures, installs, monitors and services electronic security and fire protection systems.

    Healthcare designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and adult incontinence and infant care products.

    Engineered Products and Services designs, manufactures, distributes and services engineered products, including industrial valves and controls, as well as steel tubular goods, and provides consulting, engineering and construction management and operating services.

        For the quarter and six months ended April 1, 2005, the results of the Tyco Global Network ("TGN") business, which was sold in the third quarter of 2005, are presented within Corporate.

Overview

        As previously reported in our periodic filings, on January 13, 2006, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies—Tyco Healthcare, one of the world's leading diversified healthcare companies; Tyco Electronics, the world's largest passive electronic components manufacturer; and a combination of Tyco Fire and Security and Engineered Products and Services, a global business with leading positions in residential and commercial security, fire protection, and industrial products and services (the "Proposed Separation"). After thorough reviews of strategic options with our Board of Directors, we believe that this strategy is the best way to position our market-leading companies for sustained growth and value creation.

        Following the Proposed Separation, Tyco's shareholders will own 100% of the equity in all three companies through tax-free stock dividends. Each company will have its own independent Board of Directors and strong corporate governance standards. Tyco expects to complete the Proposed Separation during the first quarter of calendar 2007.

39


        Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of a tax opinion of counsel and the filing and effectiveness of registration statements with the Securities and Exchange Commission ("SEC") and the completion of any necessary debt refinancings. Approval by the Company's shareholders is not required as a condition to the consummation of the Proposed Separation.

        As we prepare for the Proposed Separation, we remain committed to returning capital to shareholders. During the first six months of 2006, we repurchased 30.0 million of our common shares for $809 million, which followed $300 million in share repurchases during 2005. In April 2006, we completed the $1.5 billion share repurchase program previously approved by the Board of Directors with the additional purchase of 14.5 million shares for $391 million. The Board of Directors has approved a new $2.0 billion share purchase program. We will continue to use excess cash to repurchase shares over the balance of the year. Also, following the Proposed Separation, we expect that all three companies will be dividend-paying companies. We are also focused on growing profitability within each of these companies before and after the Proposed Separation, so that each may be well positioned for long-term growth as independent entities.

        On February 16, 2006, we completed the sale of our Plastics, Adhesives and Ludlow Coated Products businesses, previously announced in 2005, for $975 million in gross cash proceeds. Estimated working capital and other adjustments resulted in net proceeds of $907 million. Settlement of the final working capital adjustment is expected prior to year end. As such, the operations of Plastics and Adhesives are reflected as discontinued operations in the accompanying consolidated financial statements up to the date of disposal. Details related to the Company's divestiture program and the related discontinued operations are discussed in "Discontinued Operations and Divestitures."

        On February 21, 2006, TIGSA delivered a notice of redemption to the holders of its Series A 2.75% convertible senior debentures due 2018 with a 2008 put option (the "2.75% convertible senior debentures"), exercising its right to redeem all such debentures at 101.1 percent of the principal amount outstanding plus accrued interest. The 2.75% convertible senior debentures were convertible into 43.892 Tyco common shares per $1,000 principal amount. Prior to March 8, 2006, the redemption date, $1.2 billion of the 2.75% convertible senior debentures were converted into 54.4 million Tyco common shares and on March 8, 2006, TIGSA redeemed the remaining $1 million principal amount outstanding with cash.

        During the three months ended March 31, 2006, we also repaid and terminated one of our synthetic lease facilities for a total cash payment of $226 million, reducing principal debt and minority interest by $214 million and $10 million, respectively.

        Additionally, during the three months ended March 31, 2006, we utilized $1.0 billion in cash for scheduled repayments of public notes.

        During the three months ended March 31, 2006, the United States Internal Revenue Service ("IRS") continued to audit the years 1997 through 2000. In 2004, the Company submitted to the IRS proposed adjustments to its 1997 through 2000 U.S. federal income tax returns. During the three months ended March 31, 2006, the IRS and the Company agreed to several of the proposed adjustments and also agreed to resolution of certain legacy tax matters. These adjustments did not have a material impact on the financial condition, results of operations or cash flows of the Company.

        The Company is in the process of preparing proposed amendments to prior period U.S. federal income tax returns for additional periods. The proposed amendments are not expected to have a material adverse impact on the financial condition, results of operations or cash flows of the Company.

40


Operating Results

        Net revenue and net income for the quarters and six months ended March 31, 2006 and April 1, 2005 was as follows ($ in millions):

 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 31,
2006

  April 1,
2005

  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 8,262   $ 8,065   $ 16,049   $ 15,719  
Service revenue     1,944     1,928     3,863     3,875  
   
 
 
 
 
Net revenue   $ 10,206   $ 9,993   $ 19,912   $ 19,594  
   
 
 
 
 
Operating income   $ 1,408   $ 1,525   $ 2,633   $ 2,895  
Interest income     33     31     70     68  
Interest expense     (189 )   (208 )   (378 )   (424 )
Other expense, net     (2 )   (575 )   (3 )   (736 )
   
 
 
 
 
Income from continuing operations before income taxes and minority interest     1,250     773     2,322     1,803  
Income taxes     (168 )   (373 )   (430 )   (679 )
Minority interest     (2 )   (1 )   (5 )   (4 )
   
 
 
 
 
Income from continuing operations     1,080     399     1,887     1,120  
Loss from discontinued operations, net of income taxes     (58 )   (207 )   (295 )   (219 )
   
 
 
 
 
Income before cumulative effect of accounting change     1,022     192     1,592     901  
Cumulative effect of accounting change, net of income taxes                 21  
   
 
 
 
 
Net income   $ 1,022   $ 192   $ 1,592   $ 922  
   
 
 
 
 

        Net revenue increased $213 million, or 2.1%, for the second quarter and $318 million, or 1.6%, for the first six months of 2006 as compared to the same periods last year. Foreign currency exchange rates unfavorably affected the second quarter by $254 million and the impact on the first half of 2006 remained unfavorable by $481 million. The net impact of acquisitions and divestitures negatively impacted each period by $33 million and $106 million, respectively.

        Operating income decreased $117 million, or 7.7%, for the second quarter while operating margin also decreased 1.5 percentage points to 13.8%. Operating income decreased $262 million, or 9.1%, for the first six months of 2006 while operating margins decreased 1.6 percentage points to 13.2%. Foreign currency exchange negatively impacted operating income by $44 million and $80 million for the second quarter and first six months of 2006, respectively. The second quarter and six month period were also negatively impacted by incremental stock option charges required under Statement of Financial Accounting Standards ("SFAS") No. 123R of $46 million and $94 million, respectively, and separation costs of $25 million and $33 million, respectively. During the second quarter and six months ended 2006, we recorded net gains on divestitures of $41 million and $38 million, respectively, primarily relating to the sale of a business within Healthcare compared to net losses on divestitures of $2 million and $17 million for the second quarter and first six months of 2005, respectively.

        We continued to utilize cash to strengthen the balance sheet, as well as return capital to shareholders. During the first six months of 2006, we reduced our debt balance to $10.0 billion by exchanging approximately $1.2 billion of convertible debt for 54.4 million common shares and retiring an additional $1.2 billion of debt with cash. Additionally, we used $809 million to repurchase 30.0 million shares of common stock and paid $402 million to shareholders in the form of dividends.

Segment Results:

        The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations.

41



Quarter Ended March 31, 2006 Compared to Quarter Ended April 1, 2005

Electronics

        Net revenue, operating income and operating margin for Electronics were as follows ($ in millions):

 
  For the Quarters Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 3,182   $ 3,100  
Service revenue     54     33  
   
 
 
Net revenue   $ 3,236   $ 3,133  
   
 
 
Operating income   $ 461   $ 496  
Operating margin     14.2 %   15.8 %

        Net revenue for Electronics increased $103 million in the quarter ended March 31, 2006 over the quarter ended April 1, 2005. The increase in net revenue reflects volume growth which was broad based across customer-end markets, especially communications, consumer electronics, industrial machinery, power utilities and premise wiring end markets. Unfavorable changes in foreign currency exchange rates impacted net revenue by $108 million.

        Operating income and operating margin for the quarter ended March 31, 2006 decreased as compared to the same period in the prior year due primarily to increased material costs of approximately $56 million and $18 million related to the unfavorable impact of foreign currency. Additionally, the current quarter includes a $13 million charge for stock option expense and $9 million of net charges for restructuring, impairment and divestiture activity. These decreases were partially offset by the increased volume mentioned above and cost savings initiatives.

Fire and Security

        Net revenue, operating income and operating margin for Fire and Security were as follows ($ in millions):

 
  For the Quarters Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 1,345   $ 1,331  
Service revenue     1,528     1,543  
   
 
 
Net revenue   $ 2,873   $ 2,874  
   
 
 
Operating income   $ 289   $ 311  
Operating margin     10.1 %   10.8 %

        Net revenue for Fire and Security remained flat in the quarter ended March 31, 2006 over the quarter ended April 1, 2005. Unfavorable changes in foreign currency ($53 million) and the negative impact of acquisitions and divestitures ($35 million) were primarily offset by revenue increases at Worldwide Fire Services as a result of growth in electrical and mechanical contracting in North America and Tyco Safety Products due to suppression products. Worldwide Security also increased operationally, although to a lesser extent, as a result of stronger residential and commercial sales in North America.

        Operating income and operating margin decreased in the quarter ended March 31, 2006 over the same period in the prior year. Revenue increases at Worldwide Fire Services and Tyco Safety Products were offset by lower gross margins within Worldwide Fire Services and Worldwide Security and a $10 million charge for stock option expense.

        Attrition rates for customers in our global electronic security services business remained relatively constant at 14.4% on a trailing twelve-month basis as of March 31, 2006, as compared to 14.3% as of December 30, 2005.

42


Healthcare

        Net revenue, operating income and operating margin for Healthcare were as follows ($ in millions):

 
  For the Quarters Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 2,392   $ 2,352  
Service revenue     17     17  
   
 
 
Net revenue   $ 2,409   $ 2,369  
   
 
 
Operating income   $ 579   $ 689  
Operating margin     24.0 %   29.1 %

        Net revenue for Healthcare increased 1.7% in the quarter ended March 31, 2006 over the quarter ended April 1, 2005. This increase resulted primarily from increased revenue within Medical Devices and Supplies, largely driven by Europe within the International division and to a much lesser extent, higher product sales in vessel sealing within Surgical. Additionally, revenues within Pharmaceuticals increased over the prior year relating to specialty chemicals and the quarter ended March 31, 2006 was favorably impacted by acquisition and divestiture activity ($15 million). Partially offsetting these increases were unfavorable changes in foreign currency exchange rates ($59 million) and revenue declines within Imaging, primarily due to the impact of voluntary product recalls ($25 million).

        Operating income and operating margin in the quarter ended March 31, 2006 decreased $110 million and 5.1 percentage points, respectively, as compared to the quarter ended April 1, 2005. The increased revenue within Medical Devices and Supplies noted above was offset by the impact of the voluntary product recalls and increased compliance-related costs of $31 million and continued weakness in Retail of $14 million. Additionally, Healthcare invested an incremental $43 million in research and development and sales and marketing over the same period in the prior year. Operating income in the quarter ended March 31, 2006 includes $46 million of divestiture gains related to the sale of the Radionics business, a $10 million charge related to stock option expense and was adversely impacted by unfavorable foreign exchange rates ($19 million). The quarter ended April 1, 2005 benefited $20 million from the refinement of litigation liabilities and related insurance recoveries.

Engineered Products and Services

        Net revenue, operating income and operating margin for Engineered Products and Services were as follows ($ in millions):

 
  For the Quarters Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 1,343   $ 1,282  
Service revenue     345     325  
   
 
 
Net revenue   $ 1,688   $ 1,607  
   
 
 
Operating income   $ 192   $ 165  
Operating margin     11.4 %   10.3 %

        Net revenue for Engineered Products and Services increased 5.0% in the quarter ended March 31, 2006 over the quarter ended April 1, 2005, which included a 4.8% increase in product revenue and a 6.2% increase in service revenue. The increase in net revenue was due to higher demand in industrial

43



and commercial markets and increased project sales, primarily at Flow Control and Fire & Building Products. Partially offsetting these increases were unfavorable changes in foreign currency exchange rates ($34 million).

        Operating income increased 16.4% while operating margins increased 1.1 percentage points in the quarter ended March 31, 2006 as compared to the quarter ended April 1, 2005. The increase in operating income was primarily attributable to improved volume at Flow Control and Fire & Building Products as well as higher project margins at Infrastructure Services. These increases were partially offset by reduced steel spreads of $14 million at Electrical & Metal Products and $5 million of stock option expense.

Corporate

        Corporate expenses were $113 million and $136 million in the quarters ended March 31, 2006 and April 1, 2005, respectively. The current period includes $23 million of costs related to the Proposed Separation and $8 million of stock option expense. The same period in the prior year included $21 million of TGN operating losses and $50 million for the SEC settlement.

Adoption of SFAS No. 123R

        Effective October 1, 2005, the Company adopted SFAS No. 123R, Share-Based Payment, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Tyco adopted SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost is recognized for the unvested portion of share-based payments granted prior to October 1, 2005 and all share-based payments granted subsequent to September 30, 2005 over the related vesting period. Prior to the first quarter of 2006, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock based compensation. Prior period results have not been restated. Due to the adoption of SFAS No. 123R, the Company's results for the quarter and six months ended March 31, 2006 include incremental share-based compensation expense totaling $46 million and $94 million, respectively. As such, basic and diluted earnings per share were impacted by $0.02 and $0.03 for the three and six months ended March 31, 2006, respectively.

Interest Income and Expense

        Interest income was $33 million in the quarter ended March 31, 2006 as compared to $31 million in the quarter ended April 1, 2005. Interest expense was $189 million in the quarter ended March 31, 2006 as compared to $208 million in the quarter ended April 1, 2005. The decrease in interest expense reflects a lower debt balance, partially offset by the impact of higher interest rates on our interest rate swap program compared to the same period in the prior year.

Other Expense, Net

        During the quarter ended April 1, 2005, the Company recorded losses from the retirement of debt of $573 million.

Income Taxes

        Our effective income tax rate was 13.4% and 48.3% during the quarters ended March 31, 2006 and April 1, 2005, respectively. The effective rate for the current period was favorably impacted by $127 million relating to an adjustment to correct prior year tax reserves on legacy tax matters. In 2005

44



the effective rate was unfavorably impacted as a result of the retirement of debt for which no benefit existed.

Six Months Ended March 31, 2006 Compared to Six Months Ended April 1, 2005

Electronics

        Net revenue, operating income and operating margin for Electronics were as follows ($ in millions):

 
  For the Six Months Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 6,154   $ 5,943  
Service revenue     104     69  
   
 
 
Net revenue   $ 6,258   $ 6,012  
   
 
 
Operating income   $ 845   $ 910  
Operating margin     13.5 %   15.1 %

        Net revenue for Electronics increased $246 million in the six months ended March 31, 2006 over the six months ended April 1, 2005. The increase in net revenue reflects volume growth which was broad based across customer-end markets, especially communications, consumer electronics, industrial machinery and power utilities. Unfavorable changes in foreign currency exchange rates adversely impacted net revenue by $200 million.

        Operating income and operating margin for the six months ended March 31, 2006 decreased as compared to the same period in the prior year due primarily to increased material costs of approximately $93 million and unfavorable changes in foreign currency exchange rates ($34 million). Operating income for the six months ended March 31, 2006 also includes a $24 million charge for stock option expense and net restructuring, impairment and divestiture charges of $14 million compared to net restructuring and other credits of $3 million in the six months ended April 1, 2005. These decreases were partially offset by the increased volume and cost savings initiatives.

Fire and Security

        Net revenue, operating income and operating margin for Fire and Security were as follows ($ in millions):

 
  For the Six Months Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 2,612   $ 2,660  
Service revenue     3,054     3,096  
   
 
 
Net revenue   $ 5,666   $ 5,756  
   
 
 
Operating income   $ 517   $ 594  
Operating margin     9.1 %   10.3 %

        Net revenue for Fire and Security decreased 1.6% in the six months ended March 31, 2006 over the six months ended April 1, 2005, which was comprised of a 1.8% decrease in product revenue and a 1.4% decrease in service revenue. The decrease in net revenue was primarily due to unfavorable changes in foreign currency exchange rates ($113 million) along with the negative impact of divestitures and acquisitions ($94 million) partially offset by increases at Worldwide Fire Services primarily due to

45



growth in electrical and mechanical contracting in North America. Worldwide Security and Tyco Safety Products also increased operationally, although to a much lesser extent.

        Operating income and operating margin decreased in the six months ended March 31, 2006 over the same period in the prior year. The decrease was primarily due to lower margins in Worldwide Fire Services and Worldwide Security offsetting the increased revenue discussed above and a $21 million charge for stock option expense. Also, the impact of cost reduction efforts were offset by increased sales and marketing spending.

        Attrition rates for customers in our global electronic security services business improved to an average of 14.4% on a trailing twelve-month basis as of March 31, 2006, as compared to 14.8% as of September 30, 2005.

Healthcare

        Net revenue, operating income and operating margin for Healthcare were as follows ($ in millions):

 
  For the Six Months Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 4,664   $ 4,655  
Service revenue     32     33  
   
 
 
Net revenue   $ 4,696   $ 4,688  
   
 
 
Operating income   $ 1,118   $ 1,270  
Operating margin     23.8 %   27.1 %

        Net revenue for Healthcare remained relatively flat in the six months ended March 31, 2006 over the six months ended April 1, 2005. Revenue increased in Medical Devices and Supplies, largely driven by Europe in the International division related to increased volume of surgical and critical care products. Increased sales in active pharmaceutical ingredients and specialty chemicals within Pharmaceutical also contributed to the increase, although to a much lesser extent. These increases were primarily offset by unfavorable changes in foreign currency exchange rates ($110 million). Although revenue increased in Imaging and Respiratory, it was negatively impacted by voluntary product recalls ($59 million).

        Operating income and operating margin in the six months ended March 31, 2006 decreased as compared to the six months ended April 1, 2005. The increased volume in International was offset by the impact of voluntary product recalls and increased compliance-related costs of $77 million, increased raw material costs of $44 million and continued weakness in Retail of $34 million. Operating income was adversely impacted by $35 million due to changes in foreign currency exchange rates, as well as a $22 million charge for stock option expense. Additionally, the six months ended March 31, 2006 includes an incremental $146 million investment in research and development and sales and marketing as well as a $46 million gain on divestiture relating to the sale of a business within Medical Devices and Supplies. The six months ended April 1, 2005 benefited $20 million from the refinement of litigation liabilities and related insurance recoveries.

46



Engineered Products and Services

        Net revenue, operating income and operating margin for Engineered Products and Services were as follows ($ in millions):

 
  For the Six Months Ended
 
 
  March 31,
2006

  April 1,
2005

 
Revenue from product sales   $ 2,619   $ 2,461  
Service revenue     673     659  
   
 
 
Net revenue   $ 3,292   $ 3,120  
   
 
 
Operating income   $ 361   $ 337  
Operating margin     11.0 %   10.8 %

        Net revenue for Engineered Products and Services increased 5.5% in the six months ended March 31, 2006 over the six months ended April 1, 2005, which included a 6.4% increase in product revenue and a 2.1% increase in service revenue. The increase in net revenue was primarily due to higher demand in industrial and commercial markets and increased project sales at Flow Control and Fire & Building Products. The above increase in revenue was partially offset by unfavorable changes in foreign currency exchange rates ($58 million).

        Operating income increased 7.1% for the six months ended March 31, 2006 as compared to the six months ended April 1, 2005. The increase in operating income was due to improved volume at Flow Control and Fire & Building Products as well as higher project margins at Infrastructure Services. These increases were partially offset by reduced steel spreads of $50 million at Electrical & Metal Products and $10 million of stock option expense.

Corporate

        Corporate expenses were $208 million and $216 million in the six months ended March 31, 2006 and April 1, 2005, respectively. The current period includes $31 million of costs related to the Proposed Separation as well as $17 million of stock option expense. The same period in the prior year included $42 million of TGN operating losses and $50 million for the SEC settlement.

Interest Income and Expense

        Interest income was $70 million in the six months ended March 31, 2006 as compared to $68 million in the six months ended April 1, 2005. Interest expense was $378 million in the six months ended March 31, 2006 as compared to $424 million in the six months ended April 1, 2005. The decrease in interest expense reflects a lower debt balance, partially offset by the impact of higher interest rates on our interest rate swap program compared to the same period in the prior year.

Other Expense, Net

        During the six months ended April 1, 2005, the Company recorded losses from the retirement of debt of $729 million.

Income Taxes

        Our effective income tax rate was 18.5% and 37.7% during the six months ended March 31, 2006 and April 1, 2005, respectively. The effective rate for the current period was favorably impacted by $127 million relating to an adjustment to correct prior year tax reserves on legacy tax matters. In 2005

47



the effective rate was unfavorably impacted as a result of the retirement of debt for which no benefit existed.

Cumulative effect of accounting change

        During 2005, the Company changed the measurement date for its pension and postretirement benefit plans, from September 30thto August 31st, effective October 1, 2004. The Company believes that the one-month change of measurement date was a preferable change as it allows management adequate time to evaluate and report the actuarial information in the Company's Consolidated Financial Statements under the accelerated reporting deadlines. As a result of this change, the Company recorded a $21 million after-tax gain ($28 million pre-tax) cumulative effect adjustment in the six months ended April 1, 2005.

Discontinued Operations and Divestitures

Discontinued Operations

        In May 2005, Tyco announced its intent to explore the divesture of its Plastics and Adhesives business segment, a global manufacturer of plastic film, specialty tapes and adhesives, coated products and garment hangers. At September 30, 2005, the Plastics and Adhesives segment met the held for sale criteria and was included in discontinued operations in all periods presented.

        During the first quarter of 2006, the Company assessed the recoverability of the carrying value for the Plastics and Adhesives businesses. Based on market conditions during the quarter and the terms and conditions included or expected to be included in the sale agreements, fair value estimates of the businesses were reassessed. As a result of these assessments, the Company recorded a pre-tax impairment charge of $275 million for the Plastics, Adhesives and Ludlow Coated Products Group and a $17 million pre-tax impairment charge for the A&E Products Group to write down the disposal groups to their fair values less costs to sell.

        During the second quarter of 2006, the Company closed the sale of the Plastics, Adhesives and Ludlow Coated Products businesses for $975 million in gross cash proceeds. Estimated working capital and other adjustments resulted in net proceeds of $907 million. Settlement of the full working capital adjustment is expected prior to year end. The Company recognized a pre-tax loss on sale of approximately $10 million, in addition to the $275 million pre-tax impairment charge recorded during the first quarter of 2006. The sales agreement also provides for a contingent future payment of up to $30 million to Tyco based on average resin prices in the future.

        Also, during the second quarter of 2006, the Company reassessed the recoverability of the carrying value for the A&E Products Group in conjunction with the terms and conditions included in the definitive sale agreement entered into during the quarter. As a result of this reassessment, the Company recorded an additional pre-tax impairment charge of $5 million to write the business down to its fair value less costs to sell. Tyco expects to complete the A&E Products Group sale transaction during 2006.

        During the six months ended April 1, 2005, the Company recorded a $202 million pre-tax goodwill and long-lived asset impairment charge in the A&E Products Group based on an interim assessment of the recoverability of both goodwill and long-lived assets. As a result of this assessment, the Company determined that the book value of certain long-lived assets in the A&E Products reporting unit was greater than their estimated fair value and consequently recorded a long-lived asset impairment charge of $40 million. The Company also determined that the book value of the A&E Products reporting unit was in excess of its estimated fair value which resulted in a goodwill impairment charge of $162 million.

        During the six months ended April 1, 2005, the Company divested six businesses that were reported as discontinued operations and reported pre-tax losses on sale of $80 million.

48


Gain (losses) on divestitures

        During the six months ended March 31, 2006, the Company divested five businesses that were reported as continuing operations in Fire and Security, Healthcare and Electronics. The Company recorded net gains on divestitures of $45 million in connection with the divestiture of these businesses, as well as $7 million of divestiture charges related to the write-down to estimated fair value, less costs to sell, of certain other held for sale businesses.

        During the six months ended April 1, 2005, the Company divested six businesses that were within the Fire and Security, Healthcare and Engineered Products and Services segments. The Company reported losses and impairments on divestitures to write the carrying value of such assets down to their estimated fair value, less costs to sell, of $20 million, including $3 million reflected in cost of sales.

Acquisitions

        During the six months ended March 31, 2006, Tyco's Healthcare segment acquired over 90% ownership in Floreane Medical Implants, S.A. ("Floreane") for approximately $122 million in cash, net of cash acquired of $3 million. Floreane is an innovator in the development of surgical support implants for parietal, urological and gynecological surgery. Additional outstanding shares are expected to be acquired during the remainder of 2006. Cash paid for other acquisitions totaled $12 million.

        During the six months ended April 1, 2005, the Company completed three acquisitions for an aggregate cost of $10 million.

        The results of operations of the acquired companies have been included in the consolidated results from the respective acquisition dates. These acquisitions did not have a material effect on the Company's financial position, results of operations or cash flows.

Change in Fiscal Year and Reporting Calendar Alignment

        Effective October 1, 2004, Tyco changed its fiscal year end from a calendar fiscal year ending September 30 to a "52-53 week" year ending on the last Friday of September, such that each quarterly period will be 13 weeks in length. In addition, certain of the Company's subsidiaries had consistently closed their books up to one month prior to the Company's fiscal period end. These subsidiaries now report results for the same period as the reported results of the consolidated Company. The impact of this change was not material to the Consolidated Financial Statements. Net income for the transition period related to this change was $26 million and was reported within Shareholders' Equity during 2005.

Critical Accounting Policies and Estimates

        The preparation of the Consolidated Financial Statements in conformity with 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.

        We believe that our accounting policies for depreciation and amortization of security monitoring systems, goodwill, revenue recognition, income taxes and long-lived assets are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. During the six months ended March 31, 2006, there were no significant changes to these policies or in the underlying accounting assumptions and estimates used in the above critical accounting policies from those disclosed in the Consolidated Financial Statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005 (the "2005 Form 10-K").

49



Liquidity and Capital Resources

        The sources of our cash flow from operating activities and the use of a portion of that cash in our operations were as follows ($ in millions):

 
  For the
Quarters Ended

  For the Six
Months Ended

 
 
  March 31,
2006

  April 1,
2005

  March 31,
2006

  April 1,
2005

 
Cash flows from operating activities:                          
Operating income   $ 1,408   $ 1,525   $ 2,633   $ 2,895  
Non-cash restructuring and asset impairment charges, net     (3 )   2     3     (2 )
(Gains) losses on divestitures     (49 )   (5 )   (38 )   13  
Depreciation and amortization(1)     519     525     1,035     1,054  
Deferred income taxes     77     (22 )   51     72  
Provision for losses on accounts receivable and inventory     38     60     92     126  
Non-cash compensation expense     77     14     152     34  
Other, net     4     (14 )   18     12  
Net change in working capital     (788 )   79     (1,574 )   (679 )
Interest income     33     31     70     68  
Interest expense     (189 )   (208 )   (378 )   (424 )
Income tax expense     (168 )   (373 )   (430 )   (679 )
   
 
 
 
 
Net cash provided by operating activities   $ 959   $ 1,614   $ 1,634   $ 2,490  
   
 
 
 
 
Other cash flow items:                          
Capital expenditures, net(2)   $ (420 ) $ (316 ) $ (712 ) $ (595 )
Decrease in the sale of accounts receivable     3     6     7     15  
Acquisition of customer accounts (ADT dealer program)     (92 )   (68 )   (169 )   (135 )
Purchase accounting and holdback liabilities     (6 )   (6 )   (86 )   (23 )

(1)
The quarters ended March 31, 2006 and April 1, 2005 included depreciation expense of $355 million and $362 million, respectively, and amortization of intangible assets of $164 million and $163 million, respectively. The six months ended March 31, 2006 and April 1, 2005 included depreciation expense of $709 million and $728 million, respectively, as well as amortization of intangible assets of $326 million in both periods.

(2)
Included net proceeds received for the sale/disposition of property, plant and equipment of $8 million and $24 million for the quarters ended March 31, 2006 and April 1, 2005, respectively, as well as $17 million and $52 million for the six months ended March 31, 2006 and April 1, 2005, respectively.

        The net change in working capital was a cash decrease of $788 million in the three months ended March 31, 2006. The change in working capital included a $443 million decrease in accrued and other current liabilities during the three months, primarily related to decreased accrued legal and audit fees and income taxes, as well as a $244 million increase in inventories.

        The net change in working capital was a cash decrease of $1,574 million in the six months ended March 31, 2006. The components of this change are set forth in detail in the Consolidated Statements of Cash Flows. The change in working capital included an $888 million decrease in accrued and other current liabilities during the six months, primarily related to decreased accrued legal and audit fees, income taxes and the annual payout of cash bonuses for performance in the prior year, as well as a $517 million increase in inventories.

50



        Cash flows from operating activities and other cash flow items by segment were as follows ($ in millions):

 
  Electronics
  Fire and
Security

  Healthcare
  Engineered
Products
and
Services

  Corporate
  Total
 
Cash flows from operating activities:                                      
Operating income (loss)   $ 845   $ 517   $ 1,118   $ 361   $ (208 ) $ 2,633  
Non-cash restructuring and asset impairment charges, net             3             3  
Losses (gains) on divestitures     5     1     (46 )       2     (38 )
Depreciation     236     286     133     49     5     709  
Intangible assets amortization     35     259     31     1         326  
   
 
 
 
 
 
 
Depreciation and amortization     271     545     164     50     5     1,035  
Deferred income taxes                     51     51  
Provision for losses on accounts receivable and inventory     43     11     27     11         92  
Net increase in working capital and other     (73 )   (211 )   (592 )   (192 )   (336 )   (1,404 )
Interest income                     70     70  
Interest expense                     (378 )   (378 )
Income tax expense                     (430 )   (430 )
   
 
 
 
 
 
 
Net cash provided by (used in) operating activities   $ 1,091   $ 863   $ 674   $ 230   $ (1,224 ) $ 1,634  
   
 
 
 
 
 
 
Other cash flow items:                                      
Capital expenditures, net   $ (253 ) $ (210 ) $ (204 ) $ (42 ) $ (3 ) $ (712 )
Decrease in sale of accounts receivable         6     1             7  
Acquisition of customer accounts (ADT dealer program)         (169 )               (169 )
Purchase accounting and holdback liabilities     (76 )   (3 )   (6 )   (1 )       (86 )

        On January 26, 2006, we repaid and terminated one of our synthetic lease facilities for a total cash payment of $226 million, reducing principal debt and minority interest by $214 million and $10 million, respectively. Also, during the first six months of 2006, we utilized $1.0 billion in cash for scheduled repayments of public notes.

        During the first six months of 2006, we repurchased 30.0 million of our common shares for $809 million, continuing the $1.5 billion share repurchase program previously approved by the Board of Directors in 2005. We completed the $1.5 billion share repurchase program in April 2006 with the additional purchase of 14.5 million shares for $391 million. In May 2006, the Board of Directors approved a new $2.0 billion share repurchase program. We will continue to use excess cash to repurchase shares over the balance of the year.

        During the six months ended March 31, 2006, we purchased approximately 193,738 customer contracts for electronic security services through the ADT dealer program for cash of $169 million.

        During the six months ended March 31, 2006, we paid $86 million relating to purchase accounting and holdback liabilities related to certain prior period acquisitions. Holdback liabilities represent a portion of the purchase price that is withheld from the seller pending finalization of the acquisition balance sheet and other contingencies. At March 31, 2006, holdback liabilities on our Consolidated Balance Sheets were $77 million, of which $16 million are included in accrued and other current liabilities and $61 million was included in other liabilities.

51



        During the six months ended March 31, 2006, we paid $134 million related to acquisitions of businesses, net of cash acquired, including a net $122 million related to Tyco's acquisition of over 90% ownership of Floreane. Floreane is an innovator in the development of surgical support implants for parietal, urological and gynecological surgery. Additional outstanding shares are expected to be acquired during the remainder of 2006.

        At March 31, 2006, $44 million of acquisition liabilities remained on our Consolidated Balance Sheets, of which $12 million are included in accrued and other current liabilities and $32 million are included in other liabilities.

        We funded capital expenditures to improve the cost structure of our businesses, invest in new processes and technology, and maintain high quality production standards. The level of capital expenditures is not expected to exceed depreciation in 2006 and is expected to remain consistent with the level of spending in 2005.

        Income taxes paid, net of refunds, during the six months ended March 31, 2006 was $534 million.

        During the first six months of 2006, we made additional cash outflows of approximately $400 million for the resolution of certain previously accrued legal matters including a patent dispute in the Healthcare segment. We expect to make a cash payment of $50 million to settle the SEC enforcement action in 2006.

        As previously mentioned, on January 13, 2006, the Company announced that its Board of Directors approved a plan to separate the Company into three separate, publicly traded companies. In connection with the Proposed Separation, we estimate that the total costs to complete the transaction will approximate $1.0 billion, largely for tax restructuring and debt refinancing.

Capitalization

        Shareholders' equity was $34.2 billion, or $16.68 per share, at March 31, 2006, compared to $32.5 billion, or $16.10 per share, at September 30, 2005. Shareholders' equity increased $1.7 billion as net income for the six months ended March 31, 2006 of $1.6 billion and the exchange of convertible debt due 2018 of $1.2 billion was offset by the repurchase of common shares by subsidiary, as previously mentioned, the payment of dividends and unfavorable foreign currency translation.

        Total debt was $10.0 billion and total debt as a percentage of total capitalization (total debt and shareholders' equity) was 23% at March 31, 2006 compared to 28% at September 30, 2005. Our debt levels significantly decreased as compared to September 30, 2005 primarily due to the redemption of $1.2 billion of our Series A 2.75% convertible senior debentures due 2018 with a 2008 put option, and the scheduled $1.0 billion repayment of our 6.375% public notes due 2006. Additionally, we also repaid and terminated one of our synthetic lease facilities reducing our debt by $214 million. Our cash balance decreased to $2.4 billion at March 31, 2006, as compared to $3.2 billion at September 30, 2005.

        Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA"), holds a $1.0 billion 5-year revolving credit facility expiring on December 16, 2009. TIGSA also holds a $1.5 billion 3-year revolving bank credit facility expiring on December 22, 2006 and a $500 million 3-year unsecured letter of credit facility expiring on June 15, 2007. At March 31, 2006, letters of credit of $475 million have been issued under the $500 million facility and $25 million remains available for issuance. There were no amounts borrowed under the credit facilities at March 31, 2006, however, the Company may borrow under these facilities from time to time to manage its overall short-term liquidity needs.

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        The Company's bank credit agreements contain a number of financial and other covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, minimum levels of net worth, and limits on the incurrence of liens. As previously discussed, a synthetic lease facility was repaid and terminated on January 26, 2006. At March 31, 2006, the Company had one remaining synthetic lease facility with other covenants, including interest coverage and leverage ratios. The Company's outstanding indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants are presently considered restrictive to the Company's operations. The Company is currently in compliance with all of its debt covenants.

        Following the Proposed Separation, it is anticipated that all three companies will be capitalized to provide financial flexibility to take advantage of future growth opportunities. They are expected to have financial policies, balance sheet and credit metrics that are commensurate with solid investment grade ratings. Tyco will continue to follow financial policies that are consistent with its current credit ratings until the planned transactions take place. The Company's existing debt is expected to be allocated among the three companies or refinanced. Any existing or potential liabilities that cannot be associated with a particular entity will be allocated appropriately to each of the businesses, and a sharing agreement among the three companies will be established.

        On December 9, 2004, the Board of Directors approved an increase in the quarterly dividend on our common shares from $0.0125 to $0.10 per share. As a result, dividend payments were $402 million related to the first six months of 2006 versus $225 for the first six months of 2005. Following the Proposed Separation, we expect that all three companies will be dividend-paying companies.

        As previously discussed, in May 2006, the Board of Directors approved a new $2.0 billion share repurchase program. Pursuant to the new 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. A Rule 10b5-1 trading plan permits the Company to repurchase its shares during periods when the Company would not normally be active in the trading market due to insider trading laws, provided the plan is adopted when the Company is not aware of material non-public information. Under a Rule 10b5-1 trading plan, we would be unable to repurchase shares above a pre-determined price per share. Additionally, the maximum number of shares that we may purchase each day would be governed by Rule 10b-18.


Commitments and Contingencies

        At March 31, 2006, the Company had a contingent purchase price liability of $80 million related to the 2001 acquisition of Com-Net by Electronics. This represents the maximum amount payable to the former shareholders of Com-Net only after the construction and installation of a communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. A liability for this contingency has not been recorded in Tyco's Consolidated Financial Statements as the outcome of this contingency cannot be reasonably determined.

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

Class Actions

        For a detailed discussion of contingencies related to Tyco's securities class actions, shareholder derivative litigation, Employee Retirement Income Security Act litigation and investigation, and litigation against our former senior management, see Note 9 to our Consolidated Financial Statements. We are generally obligated to indemnify our directors and officers and our former directors and officers who are named as defendants in some or all of these matters to the extent required by Bermuda law. In addition, our insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and liability, in some or all of these matters. We are unable at this time to estimate what

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our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.

Investigations

        For a detailed discussion of contingencies related to governmental investigations related to Tyco see Note 9 to our Consolidated Financial Statements. We cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government instrumentalities (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters.

        On April 17, 2006, the Company reached a settlement that closes the SEC Enforcement Division's investigation of certain accounting practices and other actions by former Tyco officers. As expected, the Company has been ordered to make a payment of $50 million. In 2005, the Company recorded a charge of $50 million, which represented the Company's best estimate of the amount in fines and penalties management believes the Company will likely pay to resolve these matters.

Intellectual Property and Antitrust Litigation

        The Company is party to a number of patent infringement and antitrust actions that may require the Company to pay damage awards. Tyco has assessed the status of these matters and has recorded liabilities related to certain of these matters where appropriate. For a detailed discussion of contingencies related to Tyco's intellectual property and antitrust litigation, see Note 9 to our Consolidated Financial Statements.

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 March 31, 2006, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $138 million to $421 million. As of March 31, 2006, Tyco concluded that the best estimate within this range is approximately $204 million, of which $32 million is included in accrued and other current liabilities and $172 million is included in other liabilities on the Company's Consolidated Balance Sheets. In view of the Company's financial position and reserves for environmental matters of $204 million, 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.

Asbestos Matters

        For a detailed discussion of contingencies related to Tyco's asbestos matters, see Note 9 to our Consolidated Financial Statements. We believe that we have valid defenses to these claims and intend to continue to defend them vigorously. Additionally, we believe that we have adequate amounts recorded for potential settlements and adverse judgments in asbestos-related litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all known and anticipated future claims, after taking into account its substantial indemnification rights and insurance coverage, will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

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Income Taxes

        Tyco and its subsidiaries' income tax returns are periodically examined by various regulatory tax authorities. In connection with such 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 that management has assessed as probable and estimable have been recorded through the income tax provision, equity or goodwill, as appropriate.

        The American Jobs Creation Act of 2004 (the "AJCA"), signed into law in October 2004, replaces an export incentive with a deduction from domestic manufacturing income. This provision of the AJCA did not have a material impact on the financial condition, results of operations or cash flows of the Company. The AJCA also allows the Company to repatriate up to $500 million of permanently reinvested foreign earnings in 2006 at an effective tax rate of 5.25%. This incentive would apply to the Company's U.S. owned controlled foreign companies. The Company continues to review whether to take advantage of this provision of the AJCA.

Compliance Matters

        In 2003, an allegation was brought to our attention that during the period from 1999 through 2003 certain improper payments were made by a non-U.S. subsidiary of Tyco. During 2005, Tyco reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act, that it would continue to make periodic progress reports to them, and that it would present its factual findings upon conclusion of the baseline review. On March 15, 2006, the Company held a meeting with the DOJ and SEC to provide an update on the baseline review being conducted by outside counsel and provided a briefing concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities.

        At this time, Tyco cannot predict the outcome of these matters reported to regulatory and law enforcement authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of any or all of these matters.

Other Matters

        The Company is a party to a contract dispute arising from Earth Tech's contract with the City of Phoenix, Arizona for the expansion of the City's 91st Avenue Waste Water Treatment Plant. Both Earth Tech and the City of Phoenix have filed lawsuits in the local county superior court alleging the other party has breached the contract. At this time, Tyco cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of this matter. For a detailed discussion of contingencies related to Tyco's other legal matters, see Note 9 to our Consolidated Financial Statements.

        The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.

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Backlog

        At March 31, 2006, Tyco had a backlog of unfilled orders of $14.0 billion, compared to a backlog of $13.6 billion at September 30, 2005. Backlog by segment was as follows ($ in millions):

 
  March 31,
2006

  September 30,
2005

Fire and Security   $ 6,832   $ 6,732
Engineered Products and Services     4,075     4,007
Electronics     2,766     2,591
Healthcare     299     272
   
 
    $ 13,972   $ 13,602
   
 

        Within Fire and Security, backlog increased primarily as a result of strong bookings in North America and Asia. Backlog for Fire and Security includes recurring "revenue-in-force," which represents twelve months' fees for monitoring and maintenance services under contract in the security business. The amount of recurring revenue-in-force at March 31, 2006 and September 30, 2005 was $3,600 million and $3,550 million, respectively. Backlog within Engineered Products and Services increased primarily as a result of increased orders at Flow Control. Within Electronics, backlog increased as a result of increased bookings in most key end markets. Backlog in Healthcare represents unfilled orders, which, in the nature of the business, are normally shipped shortly after purchase orders are received. We do not view backlog in Healthcare to be a significant indicator of the level of future sales activity.


Off-Balance Sheet Arrangements

Sale of Accounts Receivable

        The aggregate amount outstanding under the Company's remaining international accounts receivable programs was $73 million and $80 million at March 31, 2006 and September 30, 2005.

Guarantees

        Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 2006 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance and the potential exposure for nonperformance under the guarantees would not have a material effect on the Company's financial position, results of operations or cash flows.

        In disposing of assets or businesses, the Company often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, results of operations or cash flows.

        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contingencies—Environmental Matters.

        The Company has an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon expiration of this lease in October 2006, a subsidiary of the Company has the option to buy these vessels for approximately $280 million, or return the vessels to the lessor and, under a residual guarantee, pay any shortfall in sales proceeds to the lessor from a third party in an amount not to exceed $235 million. As of March 31, 2006, the Company expects this obligation to be $54 million,

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which is recorded in the accompanying Consolidated Balance Sheet, based on an estimate of the fair value of the vessels performed by management with the assistance of a third-party valuation.

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

        The Company generally records estimated product warranty costs at the time of sale. For further information on estimated product warranty, see Note 14 to the Consolidated Financial Statements.


Accounting Pronouncements

        Recently Adopted Accounting Pronouncement—Effective October 1, 2005, the Company adopted SFAS No. 123R, "Share-Based Payment," which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Tyco adopted SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost is recognized for the unvested portion of share-based payments granted prior to October 1, 2005 and all share-based payments granted subsequent to September 30, 2005 over the related vesting period. Prior to the first quarter of 2006, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25 in accounting for employee stock based compensation. Prior period results have not been restated. Due to the adoption of SFAS No. 123R, the Company's results for the three and six months ended March 31, 2006 include incremental share-based compensation expense totaling $46 million and $94 million, respectively. As such, basic and diluted earnings per share were impacted by $0.02 and $0.03 for the three and six months ended March 31, 2006, respectively.

        Recently Issued Accounting Pronouncements—In March 2005, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143." This Interpretation clarifies the timing of liability recognition for legal obligations associated with an asset retirement when the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently assessing the impact that FIN No. 47 will have on the results of its operations, financial position or cash flows.

        In June 2005, the FASB issued Staff Position ("FSP") No. 143-1, "Accounting for Electronic Equipment Waste Obligations," which provides guidance on accounting for historical waste obligations associated with the European Union Waste, Electrical and Electronic Equipment Directive ("WEEE Directive"). Under the directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced, at which time the waste management obligation may be transferred to the producer of the replacement equipment. FSP No. 143-1 is effective for the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. As of the end of the second quarter of 2006, the Company continues to monitor and evaluate the effects that the adoption of FSP No. 143-1 will have on the results of operations and financial condition. Such effects will depend on the respective laws and regulations adopted by the EU member countries, their implementation guidance and the type of recycling programs and systems that are established.


Forward-Looking Information

        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-

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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 efficiencies, product expansion, backlog, the consummation and benefits of acquisitions and divestitures, the Proposed Separation or other matters, 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:

    overall economic and business conditions;

    the demand for Tyco's goods and services;

    competitive factors in the industries in which Tyco competes;

    changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

    results and consequences of Tyco's internal investigation and governmental investigations concerning the Company's governance, management, internal controls and operations;

    the outcome of litigation and governmental proceedings as a result of actions taken by our former senior corporate management;

    effect of income tax audit settlements;

    the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures;

    our ability to operate within the limitations imposed by financing arrangements and to maintain our credit ratings;

    interest rate fluctuations and other changes in borrowing costs;

    other capital market conditions, including foreign currency rate fluctuations;

    availability of and fluctuations in the prices of key raw materials, including steel;

    economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders;

    the ability to achieve cost savings in connection with the Company's strategic restructuring and Six Sigma initiatives;

    potential further impairment of our goodwill and/or our long-lived assets;

    the impact of fluctuations in the price of Tyco common shares;

    changes in U.S. and non-U.S. government regulations in general, and in particular changes in rules and regulations regarding the safety, efficacy, sales, promotions, insurance reimbursement and pricing of Tyco's disposable medical products and other specialty products, as well as changes in rules and regulations regarding the retirement and disposal of certain electrical products;

    the possible effects on Tyco of future legislation in the U.S. that may limit or eliminate potential U.S. tax benefits resulting from Tyco's incorporation in Bermuda or deny U.S. government contracts to Tyco based upon its incorporation in Bermuda; and

    the potential distraction costs associated with negative publicity relating to actions of our former senior corporate management.

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        Additionally, there are several factors and assumptions that could affect the Company's plan to separate into three independent entities, our future results and cause actual results to differ materially from those expressed in our forward looking statements:

    increased demands on the Company's management team as a result of the Proposed Separation;

    changes in business, political and economic conditions in the U.S. and in other countries in which the Company currently does business;

    changes in governmental regulations and policies and actions of regulatory bodies;

    changes in operating performance;

    required changes to existing financings, and changes in credit ratings, including those that may result from the Proposed Separation;

    the Company's ability to obtain the financing necessary to consummate the Proposed Separation; and

    the Company's ability to satisfy certain conditions precedent, including final approval by the Tyco Board of Directors, receipt of a tax opinion of counsel and the filing and effectiveness of registration statements with the SEC.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        The Company's exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure discussed in the 2005 Form 10-K. In order to manage the volatility relating to our more significant market risks, we enter into forward foreign currency exchange contracts, cross-currency swaps, foreign currency options, and interest rate swaps. In order to achieve an appropriate balance of fixed and floating rate debt through the use of swaps, Tyco has swapped $3.0 billion notional amount of its fixed rate debt to floating rate debt. At March 31, 2006 we are receiving a weighted-average fixed rate of 6.3% and paying a weighted-average variable rate of 6.5% under these swap arrangements.

        We utilize established risk management policies and procedures in executing derivative financial instrument transactions. We do not execute transactions or hold derivative financial instruments for trading or speculative purposes. 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. Counterparties to derivative financial instruments are limited to financial institutions with at least an A/A2 long-term debt rating.


Item 4.    Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'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). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2006, our disclosure controls and procedures were

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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.

        To ensure that our internal control over financial reporting continues to operate effectively and efficiently, we proactively identify opportunities for control improvements. We have ongoing initiatives to standardize and upgrade various financial operating systems and eliminate many of the manual and redundant tasks previously performed under older systems or processes. These changes will be implemented in stages over the next several years. During the quarter, we continued to enhance the internal controls relating to income tax accounting including further strengthening the coordination between the tax and controllership functions, incorporating enhanced monitoring controls and implementing additional process level controls. We believe that these initiatives further strengthen our internal control over financial reporting, as well as automate a number of our processes and activities. We believe that the necessary procedures are in place to maintain effective internal control over financial reporting as these initiatives continue. There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, these internal controls.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

        Except as discussed below, there have been no material developments in the Company's legal proceedings since the Company filed the 2005 Form 10-K. For a description of the Company's previously reported legal proceedings, refer to Part I, Item 3. Legal Proceedings, in the 2005 Form 10-K.

Securities Class Actions

        As previously reported in our periodic filings, Tyco and certain of our former directors and officers have been named as defendants in over 40 securities class actions. Most of the securities class actions have now been transferred to the United States District Court for the District of New Hampshire by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings. On January 28, 2003, a consolidated securities class action complaint was filed in these proceedings. On January 7, 2005, the Company answered the plaintiffs' consolidated complaint. On January 14, 2005, lead plaintiffs made a motion for class certification, which the Company opposed on July 22, 2005. That motion is still pending. On July 5, 2005, the Company moved for revision of the Court's October 14, 2004 order in light of a change in law, insofar as the order denied the Company's motion to dismiss the consolidated complaint for failure to plead loss causation. On December 2, 2005, the Court denied the Company's motion. On April 4, 2006 plaintiffs filed a partial motion for summary judgment that was denied.

        As previously reported in our periodic filings, a class action complaint, Ezra Charitable Trust v. Tyco International Ltd., was filed in the United States District Court for the Southern District of Florida on May 28, 2003. The Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of New Hampshire. Thereafter, the Company moved to dismiss the complaint. On December 22, 2004, plaintiff moved to amend the complaint. The proposed amendment asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco International Ltd. and Edward Breen, our current Chief Executive Officer, and seeks to add as defendants David FitzPatrick, our former Chief Financial Officer, and PricewaterhouseCoopers LLP, our former independent auditors. As against defendants Breen and FitzPatrick, the complaint asserts a cause of action under Section 20(a) of the Securities Exchange Act of 1934. On March 25, 2005, the United States District Court for the District of New Hampshire granted plaintiff's motion to amend. Plaintiff filed an amended complaint that day. On March 28, 2005, the Court denied defendants' motion to dismiss the original complaint, without prejudice to the defendants' ability to move against the amended complaint. On April 25, 2005, defendants moved to dismiss the consolidated amended class action complaint. On September 2, 2005, the United States District Court for the District of New Hampshire entered a Memorandum and Order dismissing the amended complaint. On October 18, 2005, plaintiff filed a notice to appeal in the United States District Court for the District of New Hampshire and briefing has begun.

        As previously reported in our periodic filings, the United States District Court for the District of New Jersey granted one plaintiff's motion for appointment as lead plaintiff in Stumpf v. Tyco International Ltd., an action originally filed on July 28, 2003 and O'Loughlin v. Tyco International Ltd., an action originally filed on September 26, 2003. On December 13, 2004, lead plaintiff Mark Newby filed a consolidated securities class action complaint purporting to represent a class of purchasers of TyCom securities between July 26, 2000 and December 17, 2001. Plaintiff names as defendants Tyco International Ltd., TyCom, Ltd., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc., (the "Underwriters") along with certain former Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 of the Securities Act of 1933 and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, Goldman Sachs, Merrill Lynch, Citigroup and certain

61



former Tyco and TyCom executives. The complaint alleges the TyCom registration statement and prospectus relating to the sale of TyCom securities were inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation, Tyco's and TyCom's finances and TyCom's business prospects. On February 18, 2005, the Company moved to dismiss the consolidated securities class action complaint. On September 2, 2005, the United States District Court for the District of New Hampshire granted in part and denied in part the Company's motion to dismiss. The Court granted the Company's motion to dismiss allegations that the TyCom registration statement and prospectus were misleading to the extent that they failed to disclose alleged looting of Tyco by former senior executives, accounting fraud, analyst conflicts and the participation by James Brennan in the offering, because plaintiff failed to plead that those alleged omissions were disclosed during the class period, with a resultant drop in the value of TyCom stock. However, the Court denied the Company's motion to dismiss with respect to other allegations. On September 19, 2005, plaintiff filed a motion for reconsideration of the Court's September 2, 2005 ruling with respect to Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc. On January 6, 2006, the Court held that the Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Citigroup Inc. should remain in the case on the claim concerning TyCom's business prospects, but that the Section 11 claim related to alleged looting of Tyco by former senior executives was dismissed as to both the Tyco defendants and the Underwriters because the affirmative defense of lack of loss causation was apparent on the face of the complaint. On January 13, 2006, Tyco International Ltd. and TyCom answered the consolidated securities class action complaint. On March 8, 2006, the plaintiff filed a motion for class certification which is still pending.

        As previously reported in our periodic filings, the Company appealed to the United States Court of Appeals for the First Circuit the decision of the United States District Court for the District of New Hampshire to remand Brazen v. Tyco International Ltd. to the Circuit Court for Cook County, Illinois and Hromyak v. Tyco International Ltd., Goldfarb v. Tyco International Ltd., Mandel v. Tyco International Ltd., Myers v. Tyco International Ltd., Rappold v. Tyco International Ltd., and Schuldt v. Tyco International Ltd. to the Circuit Court for Palm Beach County, Florida. Plaintiffs moved to dismiss the Company's appeal. On December 29, 2004, the United States Court of Appeals for the First Circuit granted plaintiffs' motion and dismissed the Company's appeal. On April 28, 2005, the Company moved in the Circuit Court for Palm Beach County, Florida to stay and to strike the class allegations in Goldfarb, Mandel, Myers, Rappold, and Schuldt. Also on April 28, 2005, the Company moved in the Circuit Court for Palm Beach County, Florida to dismiss Hromyak. On July 8, 2005, the Court granted in part and denied in part the motion to stay and to strike the class allegations in Goldfarb, Mandel, Myers, Rappold, and Schuldt. On August 23, 2005, the Circuit Court granted Tyco's motion to dismiss Hromyak. The Hromyak plaintiffs filed a notice of appeal on September 20, 2005 and briefing has been completed.

        As previously reported in our periodic filings, on March 10, 2005, plaintiff Lionel I. Brazen filed an amended class action complaint in the Circuit Court for Cook County, Illinois purporting to represent a class of purchasers who exchanged shares of Mallinckrodt, Inc. common stock for shares of Tyco common stock pursuant to the Joint Proxy Statement and Prospectus, and the Registration Statement in which it was included, in connection with the October 17, 2000 merger of Tyco and Mallinckrodt, Inc. Plaintiff names as defendants Tyco International Ltd., and certain former Tyco executives and asserts causes of action under Section 11, 12(a)(2) and 15 of the Securities Act of 1933. The amended class action complaint alleges that the defendants made statements in the Registration Statement and the Joint Proxy Statement and Prospectus that were materially false and misleading and failed to disclose material adverse facts regarding the business and operations of Tyco. On April 21, 2005, the Company moved in the Circuit Court for Cook County, Illinois to dismiss or stay or, in the alternative, to strike the class allegations. On July 22, 2005, the court denied the Company's motion.

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Also, on July 22, 2005, the Court granted the motion to dismiss individual defendants Michael A. Ashcroft, Joshua M. Berman, Richard S. Bodman, John F. Fort, III, Stephen W. Foss, James S. Pasman Jr., W. Peter Slusser and Frank E. Walsh, Jr. On August 2, 2005, Tyco filed a motion for a finding pursuant to Supreme Court Rule 308(a), which was denied on August 16, 2005. On August 19, 2005, Tyco filed an interlocutory appeal of the Circuit Court for Cook County Illinois' July 22, 2005 memorandum and order. On December 27, 2005, the Appellate Court of Illinois, First Judicial District, denied Tyco's interlocutory appeal. On January 31, 2006, the Company filed a petition for leave to appeal the decision of the appellate court, but that petition was denied. On January 6, 2006, the plaintiff filed a renewed motion for class certification which was granted. On February 14, 2006, Tyco filed its answer to the complaint.

        As previously reported in our periodic filings, on April 29, 2005, an action was filed against Tyco in the United States District Court for the Southern District of Florida, Stevenson v. Tyco International Ltd., et. al. Plaintiff names as additional defendants our current Chief Executive Officer, Edward Breen, our former Chief Financial Officer, David FitzPatrick, our current Executive Vice President and General Counsel, William Lytton, current members of Tyco's Board of Directors including Dennis Blair, Bruce Gordon, John Krol, Carl McCall, Mackey McDonald, Brendan O'Neill, Sandra Wijnberg, and Jerome York, as well as former members of Tyco's Board of Directors, including Michael Ashcroft, Joshua Berman, Richard Bodman, George Buckley, John Fort, Steven Foss, Wendy Lane, James Pasman, Peter Slusser and Joseph Welch. The complaint asserts causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges that defendants made material misrepresentations that resulted in artificially deflated stock prices. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.

        As previously reported in our periodic filings, plaintiff moved to remand Davis v. Kozlowski, an action originally filed on December 9, 2003, from the United States District Court for the District of New Hampshire back to the Circuit Court of Cook County, Illinois. On March 17, 2005, the United States District Court for the District of New Hampshire granted plaintiff's motion to remand and denied defendants' motion to dismiss. On March 31, 2005, the Company moved for reconsideration of the Court's remand order. On January 20, 2006, the Court issued an order terminating the motion for reconsideration, vacating the remand order and staying the case pending the Supreme Court's decision in Merrill Lynch, Pierce, Fenner & Smiths Inc. v. Dabit, 04-1371, which is currently pending before the United States Supreme Court. Following the Supreme Court's decision, the United States District Court for the District of New Hampshire solicited briefs from the parties regarding its impact on the Davis litigation.

        As previously reported in our periodic filings, a complaint was filed on September 2, 2004 in the Court of Common Pleas for Dauphin County, Pennsylvania, Jasin v. Tyco International Ltd., et. al. This pro se plaintiff named as additional defendants Tyco International (US) Inc., L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, Mark H. Swartz, our former Chief Financial Officer and Director, and Juergen W. Gromer, currently President of Tyco Electronics. Plaintiff's complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 11 of the Securities Act of 1933. Claims against Messrs. Kozlowski, Swartz and Gromer are also asserted under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder and Section 20A of the Securities Exchange Act of 1934, as well as Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Plaintiff also asserts common law fraud, negligent misrepresentation, unfair trade practice, breach of contract, breach of the duty of good faith and fair dealing and violation of Section 1-402 of the Pennsylvania Securities Act of 1972. Tyco has removed the complaint to the United States District Court for the Middle District of Pennsylvania. The Judicial Panel on Multidistrict Litigation transferred this action to

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the United States District Court for the District of New Hampshire. The plaintiff has moved to vacate the conditional transfer order.

Shareholder Derivative Litigation

        As previously reported in our periodic filings, an action was filed on June 7, 2002 in the Supreme Court of the State of New York, Levin v. Kozlowski, alleging that the individually named defendants breached their fiduciary duties, committed waste and mismanagement and engaged in self-dealing in connection with Tyco's accounting practices, individual board members' use of funds, and the financial disclosures of certain mergers and acquisitions. It is further alleged that certain of the individual defendants converted corporate assets for their own use. Plaintiffs seek money damages. Plaintiffs agreed to stay that action pending the resolution of the federal derivative action, which was dismissed by the United States District Court for the District of New Hampshire on October 14, 2004; and the appeal from that ruling was voluntarily dismissed on May 19, 2005. On June 14, 2005, the plaintiffs resumed the Levin action. On September 22, 2005, the Company filed a motion to dismiss the derivative complaint.

ERISA Litigation and Investigation

        As previously reported in our periodic filings, Tyco and certain of our current and former employees, officers and directors, have been named as defendants in eight class actions brought under the Employee Retirement Income Security Act. Two of the actions were filed in the United States District Court for the District of New Hampshire and the six remaining actions were transferred to that court by the Judicial Panel on Multidistrict Litigation. All eight actions have been consolidated in the District Court in New Hampshire. The complaints purported to bring claims on behalf of the Tyco International (US) Inc. Retirement Savings and Investment Plans and the participants therein. On January 12, 2005, the United States District Court for the District of New Hampshire denied, without prejudice, the Company's motion to dismiss certain additional individual defendants from the action. On January 20, 2005, Plaintiffs filed a motion for class certification. On January 27, 2005, the Company answered the plaintiffs' consolidated complaint. Also, on January 28, 2005, the Company and certain individual defendants filed a motion for reconsideration of the Court's January 12, 2005 order, insofar as it related to the Tyco International (US) Inc. Retirement Committee. On May 25, 2005, the Court denied the motion for reconsideration. On July 11, 2005, the Company and certain individual defendants opposed plaintiffs' motion for class certification. The motion is still pending.

        In addition, Tyco and certain of our current and former executives have received requests from the United States Department of Labor for information concerning the administration of the Tyco International (US) Inc. Retirement Savings and Investment Plans. The current focus of the Department's inquiry concerns losses allegedly experienced by the plans due to investments in our shares. The Department of Labor has authority to bring suit on behalf of the plans and their participants against those acting as fiduciaries to the plans for recovery of losses and additional penalties, although it has not informed us of any intention to do so.

Tyco Litigation Against Former Senior Management

        As previously reported in our periodic filings, we have filed a number of civil complaints against certain of our former directors and executive officers for breach of fiduciary duty and other wrongful conduct. In addition, as previously disclosed in our periodic filings, we have filed a civil complaint against our former Chairman and Chief Executive Officer, L. Dennis Kozlowski, and our former Chief Financial Officer, Mark H. Swartz, pursuant to Section 16(b) of the Securities Exchange Act of 1934 for disgorgement of short-swing profits from prohibited transactions in our common shares believed to exceed $40 million. The Judicial Panel on Multidistrict Litigation has transferred each of these actions to the United States District Court for the District of New Hampshire.

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Subpoenas and Document Requests From Governmental Entities

        As previously disclosed in our periodic filings, we and others have received various subpoenas and requests from the Securities and Exchange Commission ("SEC"), the United States Department of Labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. We are cooperating with these investigations and are complying with these requests.

        Certain current and former employees in Fire and Security received subpoenas from the SEC's Division of Enforcement seeking testimony related to past accounting practices for the ADT dealer connect fees. As previously reported in our periodic filings, these practices have been discontinued.

        The United States Department of Labor served document subpoenas on Tyco and Fidelity Management Trust Company for documents concerning the administration of the Tyco International (US) Inc. Retirement Savings and Investment Plans. The current focus of the Department's inquiry concerns the losses allegedly experienced by the plans due to investments in our stock. The Department of Labor has authority to bring suit on behalf of the plans and their participants against those acting as fiduciaries to the plans for recovery of losses and additional penalties, although it has not informed us of any intention to do so. The Company is continuing to cooperate with the Department's investigation.

        As previously disclosed, in November 2004, we received an Order from the SEC to report facts and circumstances involving our participation, if any, in the United Nations Oil for Food Program governing sales of Iraqi oil. On January 10, 2005 and November 8, 2005, we responded to the Order and provided information concerning transactions under the United Nations Oil for Food Program. On January 31, 2006, we received a Subpoena from the SEC to produce additional documents and information related to the participation of three of our businesses in the Oil for Food Program. We will respond to that Subpoena and continue to cooperate with the SEC in its investigation of this matter.

        On January 27, 2006, we received from the New Jersey Division of Criminal Justice Office of the Attorney General a subpoena requesting documents related to, among other things, former employees, the use of certain chemicals, and the filing of reports under state and federal environmental reporting laws at the same New Jersey facility sold by Tyco in 2000. The subpoena seeks information for the period from January 1987 to December 2000. We are gathering information responsive to the subpoena and will cooperate fully with the investigators.

Intellectual Property and Antitrust Litigation

        As previously reported in our periodic filings, we are party to a number of patent infringement and antitrust actions. Tyco has assessed the status of these matters and has recorded liabilities related to certain of these matters where appropriate.

        Mallinckrodt, Inc. ("Mallinckrodt") and Nellcor Puritan Bennett, Inc. ("Nellcor"), plaintiffs/counter-defendants v. Masimo Corporation ("Masimo") et al., defendants/counter-claimants, is a consolidated patent infringement action filed on June 19, 2000 in the United States District Court for the Central District of California.

        On January 17, 2006, Tyco International Ltd., and its subsidiaries Tyco International (US) Inc., Tyco Healthcare Group LP, Mallinckrodt, Inc., and Nellcor Puritan Bennett, Inc. (collectively "Nellcor") entered into a Settlement Agreement and Release of Claims with Masimo Corporation and Masimo Laboratories, Inc. (the "Settlement") related to the consolidated patent infringement action.

        Under the terms of the settlement, Tyco on behalf of Nellcor, paid Masimo a total of $330 million on January 19, 2006, which represents $265 million in damages in the patent case for sales through January 31, 2006 (after which the infringing products will no longer be sold) and $65 million as an advance royalty for oximetry sales including Nellcor's new 06 technology products from February 1,

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2006 through December 31, 2006. Under the terms of the Settlement, Nellcor receives from Masimo a covenant not to sue on the Nellcor 06 products as well as a termination of all pending patent litigation with Masimo. In March 2011, Nellcor has the option to terminate Masimo's covenant not to sue and the obligation to pay future royalties on Nellcor's current products as well as any next-generation products. In addition, Nellcor shall discontinue making, offering to sell, selling or shipping any products that the court found infringed on the patents held by Masimo, but will continue to provide service and sensors for the previously sold products. Tyco had previously recorded a liability of $277 million related to this matter. The Settlement does not resolve the Masimo antitrust lawsuit or the related consumer antitrust class lawsuits described below.

        Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit filed on May 22, 2002 also pending in the United States District Court for the Central District of California. Tyco Healthcare and Mallinckrodt are subsidiaries of Tyco. In this lawsuit, Masimo alleges violations of antitrust laws against Tyco Healthcare and Mallinckrodt in the markets for pulse oximeter products. Masimo alleges that Tyco Healthcare and Mallinckrodt used their market position to prevent hospitals from purchasing Masimo's pulse oximetry products. Masimo seeks injunctive relief and monetary damages, including treble damages. Trial in this case began on February 22, 2005. The jury returned its verdict on March 21, 2005, and awarded Masimo $140 million in damages. The damages are automatically trebled under the antitrust statute to an award of $420 million. If ultimately successful, Masimo's attorneys are entitled to an award of reasonable fees and costs in addition to the verdict amount. The district court held a hearing on June 28, 2005 regarding post-trial motions.

        On March 22, 2006, the district court issued its Memorandum of Decision regarding the post-trial motions. In the Memorandum, the district court (i) vacated the jury's liability findings on two business practices; (ii) affirmed the jury's liability finding on two other business practices; (iii) vacated the jury's damage award in its entirety; and (iv) ordered a new trial on damages. The district court has not scheduled the new trial on the damages.

        Tyco has assessed the status of this matter and has concluded that it is more likely than not that the remainder of the jury's decision will be overturned, and, further, Tyco intends to vigorously pursue all available means to achieve such reversal. Accordingly, no provision has been made in the Consolidated Financial Statements with respect to this damage award.

        Beginning on August 29, 2005 with Natchitoches Parish Hospital Service District v. Tyco International, Ltd., twelve consumer class actions have been filed against Nellcor in the United States District Court for the Central District of California. The remaining eleven actions are Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group, LP., and Mallinckrodt Inc. filed on August 29, 2005, Scott Valley Respiratory Home Care v. Tyco Healthcare Group LP, and Mallinckrodt Inc. filed on October 27, 2005, Brooks Memorial Hospital et al v. Tyco Healthcare Group LP filed on October 18, 2005, All Star Oxygen Services, Inc. et al v. Tyco Healthcare Group, et al filed on October 25, 2005, Niagara Falls Memorial Medical Center, et al v. Tyco Healthcare Group LP filed on October 28, 2005, Nicholas H. Noyes Memorial Hospital v. Tyco Healthcare and Mallinckrodt filed on November 4, 2005, North Bay Hospital, Inc. v. Tyco Healthcare Group, et al filed on November 15, 2005, Stephen Skoronski v. Tyco International Ltd, et al filed on November 21, 2005, Abington Memorial Hospital v. Tyco Int'l Ltd,; Tyco Int'l (US) Inc.; Mallinckrodt Inc.; Tyco Healthcare Group LP filed on November 22, 2005, South Jersey Hospital, Inc. v. Tyco International, Ltd., et al, filed on January 24, 2006, and Deborah Heart and Lung Center v. Tyco International, Ltd., et al, filed on January 27, 2006. In all twelve complaints, the putative class representatives, on behalf of themselves and others, seek to recover overcharges they allege they paid for pulse oximetry products as a resu