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Tyco International 10-Q 2007 QuickLinks -- Click here to rapidly navigate through this document
UNITED STATES 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 30, 2007 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 001-13836 TYCO INTERNATIONAL LTD.
Second Floor, 90 Pitts Bay Road, Pembroke, HM 08, Bermuda 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 May 2, 2007 was 1,982,457,210.
Item 1. Financial Statements
TYCO INTERNATIONAL LTD.
See Notes to Consolidated Financial Statements. 1
See Notes to Consolidated Financial Statements. 2
See Notes to Consolidated Financial Statements. 3
See Notes to Consolidated Financial Statements. 4
1. Basis of Presentation, Restatement 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. The year-end condensed balance sheet data was derived from audited financial statements, but does 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/A for the fiscal year ended September 29, 2006 (the "2006 Form 10-K/A"). The Consolidated Financial Statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company's financial position, results of operations and cash flows for the interim period. The results reported in these Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year. References to 2007 and 2006 are to Tyco's fiscal quarters ending March 30, 2007 and March 31, 2006 respectively, unless otherwise indicated. During the second quarter of 2007, the Company identified certain errors in its income tax accounting primarily related to maintaining and tax effecting jurisdictional data and the classification of tax amounts in the Consolidated Balance Sheets. In addition, certain errors had been recorded and disclosed in the period in which they were identified rather than in the period in which they occurred since they were immaterial. While these errors are immaterial both individually and in the aggregate to Tyco's Consolidated Financial Statements, the Company has determined that these errors will become material to Tyco's income from continuing operations upon completion of the Proposed Separation. In anticipation of the Proposed Separation, the Company has restated its Consolidated Financial Statements. The total impact of these errors is an increase of income tax expense of $127 million and $104 million for the quarter and six months ended March 31, 2006, respectively. The Company has restated its reported results to reflect the impact on income taxes. The following tables reflect the impact of the income tax restatement on the Company's Consolidated Statements of Income. The amounts previously reported are derived from the Form 10-Q 5 for the quarter ended March 31, 2006 filed on May 9, 2006 and have been reclassified for the effects of discontinued operations.
6
7 The following table reflects the impact of the income tax restatement on the Company's Consolidated Statement of Cash Flow for the six months ended March 31, 2006. The amounts previously reported are derived from the Form 10-Q for the quarter ended March 31, 2006 filed on May 9, 2006 and have been reclassified for the effects of discontinued operations as well as other reclassifications to conform with current period presentation.
8 Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation. Recently Issued Accounting Pronouncements—In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for Tyco in the first quarter of fiscal 2009. The Company is currently assessing the impact that SFAS No. 159 will have on the results of its operations, financial position or cash flows. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)." SFAS No. 158 requires that employers recognize the funded status of defined benefit pension and other postretirement benefit plans as a net asset or liability on the balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as a component of net periodic benefit cost. Under SFAS No. 158, companies are required to measure plan assets and benefit obligations as of their fiscal year end. The Company presently uses a measurement date of August 31st. SFAS No. 158 also requires additional disclosure in the notes to the financial statements. The recognition provisions of SFAS No. 158 are effective at the end of fiscal 2007, while the measurement date provisions become effective in fiscal 2009. The Company is currently assessing the impact of SFAS No. 158 on its consolidated financial statements. Based on the funded status of defined benefit and other postretirement plans as of September 29, 2006, the Company estimates that it would recognize a net $356 million liability through a reduction in shareholders' equity. The ultimate amounts recorded are highly dependent on various estimates and assumptions including, among other things, the discount rate selected, future compensation levels and performance of plan assets. Changes in these assumptions could increase or decrease the estimated impact of implementing SFAS No. 158. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which enhances existing guidance for measuring assets and liabilities at fair value. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for Tyco beginning in fiscal 2009. The Company is currently assessing the impact, if any, that SFAS No. 157 will have on the results of its operations, financial position or cash flows. In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109." This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for Tyco in the first quarter of fiscal 2008. The Company is currently assessing the impact that FIN No. 48 will have on the results of its operations, financial position or cash flows. 9 2. 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. In connection with the Proposed Separation, the Company estimates that it will incur income statement charges at the high end of the previously disclosed range of $1.2 billion to $1.6 billion, after tax, related primarily to debt refinancing, tax restructuring, professional services and employee-related costs. During the quarters ended March 30, 2007 and March 31, 2006, the Company incurred pre-tax costs related to the Proposed Separation of $106 million and $25 million, respectively. During the six months ended March 30, 2007 and March 31, 2006, the Company incurred pre-tax costs related to the Proposed Separation of $191 million and $33 million, respectively. Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, the effectiveness of Registration Statements filed 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. Tyco has received an initial private letter ruling from the Internal Revenue Service ("IRS") and an opinion from outside counsel regarding the U.S. federal income tax consequences of the Proposed Separation noting it will qualify for favorable tax treatment. In January 2007, Tyco filed initial Registration Statements with the SEC to register the equity of Tyco Healthcare and Tyco Electronics. In April 2007, amended Registration Statements were filed. The Company expects the Proposed Separation to occur in the second calendar quarter of 2007 subject to the conditions discussed above. 3. Discontinued Operations and Divestitures Discontinued Operations During the fourth quarter of 2006, the Company entered into a definitive sale agreement to divest the Printed Circuit Group ("PCG") business, a component of the Electronics segment. During the first quarter of 2007, the Company consummated the sale of its PCG business for $231 million in net cash proceeds and recorded a pre-tax gain on the sale of $45 million. During the first quarter of 2007, the operations of Aguas Industriales de Jose, C.A. ("AIJ"), a majority owned Engineered Products and Services segment joint venture in Venezuela, was sold for $42 million in net cash proceeds and a pre-tax gain on sale of $19 million was recorded. During the first quarter of 2007, the Company also collected a $30 million receivable due from the purchaser of the Plastics, Adhesives and Ludlow Coated Products businesses related to the decline in average resin prices. During the first quarter of 2006, Tyco reached a definitive agreement to sell its Plastics, Adhesives and Ludlow Coated Products businesses and was negotiating the sale of its A&E Products business. At that time, the Company assessed the recoverability of the carrying value of these businesses and, based on existing market conditions and the terms and conditions included or expected to be included in the 10 respective sales agreements, recorded pre-tax impairment charges of $275 million and $17 million related to the Plastics, Adhesives and Ludlow Coated Products businesses and the A&E Products business, respectively, to write the businesses down to 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, subject to settlement of the final working capital adjustment. The Company recognized a pre-tax loss on sale of approximately $10 million, during the second quarter of 2006. 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 $5 million to write the business down to its fair value less costs to sell. The PCG, AIJ, Plastics, Adhesives and Ludlow Coated Products and A&E Products businesses all met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented. Net revenue, income (loss) from operations, income (loss) on sale and income tax (expense) benefit for discontinued operations are as follows ($ in millions):
Gain (losses) on divestitures During the quarter and six months ended March 30, 2007, the Company recorded $9 million of divestiture charges in continuing operations in connection with the divestiture or write-down to fair-value of certain businesses. During the six months ended March 31, 2006, the Company divested four businesses that were reported as continuing operations in Fire and Security and Healthcare. The Company recorded net gains on divestitures of $46 million in connection with the divestiture of these businesses, less $5 million of divestiture charges related to the write-down to estimated fair value and costs to sell certain other held for sale businesses primarily in Electronics. 11 Businesses Held for Sale Balance sheet information for discontinued operations and other businesses and assets held for sale, included in other current assets and accrued and other current liabilities in the Consolidated Balance Sheets, is as follows ($ in millions):
4. Acquisitions During the fourth quarter of 2006, Tyco's Healthcare segment acquired over 50% ownership of Airox S.A. ("Airox") for $59 million, net of cash acquired of $4 million. During the first quarter of 2007, Tyco's Healthcare segment acquired the remaining outstanding shares of Airox in a mandatory tender offer for approximately $46 million in cash, and now owns 100% of the business. During the first quarter of 2007, the Company also recorded an additional $8 million in-process research and development charge, included within restructuring and asset impairment charges, net in the Consolidated Statements of Income, in conjunction with the acquisition. In-process research and development charges for the entire acquisition totaled $19 million. These charges relate to the development of second generation technology which has not yet obtained regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use. During the six month ended March 31, 2006, Tyco's Healthcare segment acquired over 90% ownership in Floreane Medical Implants, S.A. ("Floreane") for approximately $122 million, net of cash acquired of $3 million. During the second quarter of 2007, the Company acquired additional outstanding shares for approximately $9 million in cash, and now has over 95% ownership. During the six months ended March 31, 2006, the Company recorded a $3 million in-process research and development charge, included within restructuring and asset impairment charges, net in the Consolidated Statements of Income, in conjunction with the acquisition. These charges primarily relate to the development and replacement of certain core technologies. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use. 12 Cash paid for other acquisitions, primarily within Healthcare and Fire and Security, during the six months ended of March 30, 2007 totaled $30 million. Cash paid for other acquisitions, primarily within Fire and Security, during the six months ended March 31, 2006 totaled $12 million. These acquisitions were funded utilizing cash from operations. 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 30, 2007, $37 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $12 million are included in accrued and other current liabilities and $25 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 29, 2006, $40 million of acquisition liabilities remained on the Consolidated Balance Sheets, of which $14 million are included in accrued and other current liabilities and $26 million are included in other liabilities. During the six months ended March 30, 2007 and March 31, 2006, the Company paid cash of approximately $20 million and $86 million, respectively, relating to purchase accounting and holdback liabilities related to certain prior period acquisitions. Of the total cash paid during the six months ended March 31, 2006, $75 million was reported in discontinued operations. 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 30, 2007, holdback liabilities on our Consolidated Balance Sheets were $105 million, of which $14 million are included in accrued and other current liabilities and $91 million are included in other liabilities. At September 29, 2006 holdback liabilities on our Consolidated Balance Sheets were $112 million, of which $23 million are included in accrued and other current liabilities and $89 million are included in other liabilities. Approximately $55 million and $53 million of the total holdback liabilities at March 30, 2007 and September 29, 2006, respectively, are retained liabilities of discontinued operations. 13 5. Restructuring and Asset Impairment Charges, Net Restructuring and asset impairment charges, net during the quarters and six months ended March 30, 2007 and March 31, 2006 are as follows ($ in millions):
2007 Charges During the first quarter of 2007, the Company launched a restructuring program across all segments including the corporate organization which will streamline some of the businesses and reduce the operational footprint. The Company expects to incur charges of approximately $600 million over the next two years related to the restructuring program. The $600 million program includes actions of approximately $270 million at Fire & Security; $150 million at Healthcare; $80 million at Engineered Products & Services; $60 million at Electronics and $40 million at Corporate. The restructuring program includes numerous actions which are designed to improve operating efficiency and strengthen the Company's competitive position in the future. During 2007, many of the actions initiated related to improving field efficiencies and consolidating certain administrative functions in the European operations of Fire & Security. In addition, Healthcare began to consolidate certain facilities in the United States and Corporate began to consolidate certain headquarter functions. The restructuring actions were largely reductions in workforce and are expected to be completed by the end of 2008. During the six months ended March 30, 2007, the Company recorded net restructuring and asset impairment charges of $167 million, which includes $1 million reflected in cost of sales for the non-cash write down in carrying value of inventory and $8 million for an in-process research and development charge at Healthcare. The remaining charge is comprised of restructuring charges of $149 million, which include $144 million of severance and $5 million of facility exit charges and other cash charges, and $9 million of asset impairments. Net restructuring and asset impairment charges during the second quarter were $76 million comprised of restructuring charges of $67 million, which include $65 million of severance and $2 million of facility exit charges and other cash charges, and $9 million of asset impairments. 14 2006 Charges During the six months ended March 31, 2006, the Company recorded net restructuring and asset impairment charges of $21 million, which include $2 million reflected in cost of sales for the non-cash write down in carrying value of inventory and a $3 million in-process research and development charge at Healthcare. The remaining charge is comprised of net restructuring charges of $12 million and impairments of long-lived assets of $4 million. Net restructuring and asset impairment charges during the second quarter were $8 million, which include $7 million of severance and impairments of long-lived assets of $1 million. Restructuring Reserves Restructuring reserves from September 29, 2006 to March 30, 2007 by the year in which the restructuring action was initiated are as follows ($ in millions):
Restructuring reserves by segment are as follows ($ in millions):
At March 30, 2007, $150 million of restructuring reserves are included on the Consolidated Balance Sheets in accrued and other current liabilities and $70 million are included in other liabilities. At September 29, 2006, $33 million of restructuring reserves are included on the Consolidated Balance Sheets in accrued and other current liabilities and $74 million are included in other liabilities. 15 6. Cumulative Effect of Accounting Change During 2006, the Company adopted FIN No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143." FIN No. 47 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 and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 requires that conditional asset retirement obligations, along with the associated capitalized asset retirement costs, be initially reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and an increase of $10 million in the carrying amount of the related assets. The initial recognition resulted in a cumulative effect of accounting change of $22 million pre-tax loss ($14 million after-tax), reflecting the accumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47 been in effect at the time. 7. Earnings Per Share The reconciliations between basic and diluted earnings per share are as follows (in millions, except per share data):
The computation of diluted earnings per common share for the quarter and six months ended March 30, 2007 excludes the effect of the potential exercise of options to purchase approximately 16 54 million shares and 61 million shares, respectively because the effect would be anti-dilutive. The computation of dilutive earnings per common share for the quarter and six months ended March 30, 2007 excludes restricted share awards of approximately 2 million shares and 5 million shares respectively, because the effect would be anti-dilutive. The computation of diluted earnings per common share for the quarter and six months ended March 31, 2006 excludes the effect of the potential exercise of options to purchase approximately 91 million shares for both periods because the effect would be anti-dilutive. The computation of diluted earnings per common share for the quarter and six months ended March 31, 2006 excludes restricted share awards of approximately 8 million shares and 9 million shares respectively, because the effect would be anti-dilutive. 8. Goodwill and Intangible Assets The changes in the carrying amount of goodwill are as follows ($ in millions):
The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets ($ in millions):
17 Intangible asset amortization for the quarters ended March 30, 2007 and March 31, 2006 was $169 million and $164 million, respectively. Intangible asset amortization for the six months ended March 30, 2007 and March 31, 2006 was $337 million and $326 million, respectively. The estimated aggregate amortization expense on intangible assets currently owned by the Company is expected to be approximately $300 million for the remainder of 2007, $600 million for 2008, $550 million for 2009, $450 million for 2010, $400 million for 2011 and $350 million for 2012. 9. Debt Debt was as follows ($ in millions):
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 and a $1.5 billion 3-year revolving bank credit facility expiring on December 21, 2007. Additionally, TIGSA holds a $500 million 3-year unsecured letter of credit facility expiring on June 15, 2007. At March 30, 2007, letters of credit of $494 million have been issued under the $500 million facility and $6 million remains available for issuance. At March 30, 2007, $700 million has been borrowed under the $1.5 billion 3-year revolving bank credit facility. There were no amounts borrowed under the other credit facility at March 30, 2007. 18 10. Financial Instruments Interest Rate Exposures At September 29, 2006, the Company had interest rate swaps in a net loss position of $6 million designated as fair value hedges with expiration dates in 2011. During the first quarter of 2007, the Company terminated the interest rate swaps. Since the interest rate swaps were designated as hedging instruments of outstanding debt, the related loss will be amortized over the remaining life of the related debt instruments. At September 29, 2006, the Company also had interest rate and foreign currency swap agreements in a net gain position of $52 million designated as a fair value hedge with an expiration date in 2011. During the first quarter of 2007, the Company terminated these agreements. The settlement of these swaps and $17 million of swaps in a gain position that were terminated in the fourth quarter of 2006 resulted in a net cash inflow of $63 million in the first quarter of 2007. Foreign Currency Exposures The Company hedges its net investment in certain foreign operations. The cumulative translation adjustment component of other comprehensive income includes a net loss of $28 million and $284 million during the quarter and six months ended March 30, 2007, respectively, for hedges of the foreign currency exposure of the Company's net investment in certain foreign operations. In December 2006, due to required changes to the legal entity structure to facilitate the Proposed Separation, the Company determined that it will no longer consider certain intercompany foreign currency transactions to be long-term investments. As a result, the related foreign currency transaction gains and losses on such investments were recorded in the income statement subsequent to this determination rather than to the currency translation component of shareholders' equity. Forward contracts that were previously designated as hedges of these net investments, with notional value of $4.9 billion at the time of de-designation, will continue to be used to manage this exposure but will no longer be designated as net investment hedges. 11. Commitments and Contingencies At March 30, 2007, the Company had a contingent purchase price 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. 19 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 former General Counsels and the Company's current Chief Executive Officer and former Chief Financial 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. While the Company has from time to time engaged plaintiffs' counsel in settlement discussions, 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. 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 entities or instrumentalities (which in turn could negatively impact the Company's business with non-governmental customers) or suffer other penalties or adverse impacts, each of which could have a material adverse effect on the Company's business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters. Intellectual Property and Antitrust Litigation As previously disclosed in our periodic filings, the Company is a 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. Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit filed on May 22, 2002 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 20 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 held the new trial on the damages on October 18 and 19, 2006. On January 25, 2007, the district court ordered an additional hearing on the issue of damages, which took place on March 22, 2007. 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 In.; 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. The Company will respond to these complaints and intends to vigorously defend the actions. 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. 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 July 2003 in which U.S. Surgical, a subsidiary of Tyco, is the defendant. The complaint alleges that U.S. Surgical's VERSASEAL Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,553. 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 21 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 appealed the summary judgment ruling. On May 15, 2006, the United States Court of Appeals for the Federal Circuit issued a decision on the appeal vacating the district court's grant of summary judgment and remanding the case for further proceedings. On January 9, 2007, the district court entered an order that denied both parties' motion for summary judgment on the ground that material facts remain in dispute. The district court has scheduled trial in this case for July 10, 2007. It is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of this matter. 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 30, 2007, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $146 million to $348 million. As of March 30, 2007, Tyco concluded that the best estimate within this range is approximately $186 million, of which $28 million is included in accrued and other current liabilities and $158 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 $186 million, 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. Tyco has recorded obligations according to the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations," and FIN No. 47 for the estimated future costs associated with legal obligations to decommission two nuclear facilities and retire certain other assets. As of March 30, 2007 and September 29, 2006, the Company's AROs were $113 million and $111 million, respectively. The Company recorded an insignificant amount of accretion and foreign currency translation related to AROs during the quarter and six months ended March 30, 2007. 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. See further discussion on the implementation of FIN No. 47 in Note 6. 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. 22 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 in any year to settle and defend all asbestos claims has been immaterial. As of March 30, 2007, there were approximately 15,500 asbestos liability cases pending against the Company and its subsidiaries. The Company estimates its pending asbestos claims and claims that were incurred but not reported, as well as related insurance and indemnification recoveries. The Company's estimate of the liability for pending and future claims is based on claim experience over the past five years and covers claims expected to be filed over the next seven years. The Company believes that it has adequate amounts 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. Income Taxes The Company and its subsidiaries' income tax returns are periodically examined by various tax authorities. In connection with such examinations, tax authorities, including the Internal Revenue Service ("IRS"), have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. While the timing and ultimate resolution of these matters is uncertain, the Company anticipates that certain of these matters could be resolved during 2007. Amounts related to these tax adjustments and other tax contingencies and related interest that management has assessed as probable and estimable have been recorded. The IRS continues to audit the years 1997 through 2000. In 2004 the Company submitted to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the proposed adjustments. Also during 2006, the Company developed proposed amendments to U.S. federal income tax returns for additional periods through 2002. On the basis of previously accepted amendments, the Company has determined that acceptance of these adjustments is probable and, accordingly, has recorded them in the Consolidated Financial Statements. Such adjustments did not have a material impact on the Company's financial condition, results of operations or cash flows. The Company has yet to complete proposed amendments to its U.S. federal income tax returns for periods subsequent to 2002, which will primarily reflect the roll forward through 2006 of the amendments for the periods 1997 to 2002. When the Company's tax return positions are updated additional adjustments may be identified and recorded in the Consolidated Financial Statements. While the final adjustments cannot be determined until the income tax return amendment process is completed, the Company believes that any resulting adjustments will not have a material impact on its financial condition, results of operations or cash flows. 23 Compliance Matters Tyco has received and responded to various allegations and other information suggesting that certain improper payments were made by Tyco subsidiaries in recent years. During 2005 and 2006, 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 such allegations and information. Tyco also informed the DOJ and the SEC that it retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("FCPA"), that it would continue to make periodic progress reports to these agencies, and that it would present its factual findings upon conclusion of the baseline review. The Company has and will continue to have communications with the DOJ and SEC to provide updates on the baseline review being conducted by outside counsel, including, as appropriate, briefings concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities. To date, the baseline review has revealed that some business practices may not comply with Tyco and FCPA requirements. At this time, Tyco cannot predict the outcome of other allegations 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. However, it is possible that the Company may be required to pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect on its financial position, results of operations or cash flows. 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; and (iv) costs for demobilization and termination of the contract. The City of Phoenix filed a Motion to Dismiss rather than filing an answer to the First Amended Complaint on May 18, 2006. The Court granted the City's Motion to Dismiss without prejudice on September 19, 2006 allowing Earth Tech 30 days to file a Second Amended Complaint. Earth Tech filed its Second Amended Complaint against the City of Phoenix on September 25, 2006. 24 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 denied Earth Tech's Motion to Dismiss on September 25, 2006. The City of Phoenix filed an Amended Complaint against Earth Tech and Federal Insurance on September 25, 2006. In the Amended Complaint, the City of Phoenix alleged damages of $128 million. The Presiding Judge of Maricopa County Superior Court on July 11, 2006 consolidated all of the pending lawsuits related to this dispute on the Court's complex litigation docket. At this time, Tyco cannot predict the outcome of this matter and therefore cannot estimate the range of potential loss or extent of risk, if any, that may result from an adverse resolution of this matter. The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows. 12. Retirement Plans Pension Plans—The net periodic benefit cost for all U.S. and non-U.S. defined benefit pension plans for the quarters and six months ended March 30, 2007 and March 31, 2006 was as follows ($ in millions):
25
As previously discussed in the 2006 Form 10-K/A, the Company anticipates that it will contribute at least the minimum required to its pension plans in 2007 of $10 million for U.S. plans and $141 million for non-U.S. plans. During the six months ended March 30, 2007, the Company has contributed $119 million to its non-U.S. pension plans. During the six months ended March 30, 2007, the Company completed the merger of certain pension plans in the United Kingdom. Also, in anticipation of the Proposed Separation, the Company legally separated certain pension plans that included participants of Tyco Electronics, Tyco Healthcare and other subsidiaries. As a result, the Company remeasured the assets and projected benefit obligation of the separated pension plans. As a result of these actions, the Company decreased its minimum pension liability with a corresponding increase to accumulated other comprehensive income of $35 million, net of income taxes and an increase to its prepaid pension assets by $58 million. Postretirement Benefit Plans—Net periodic postretirement benefit cost was as follows ($ in millions):
As previously discussed in the 2006 Form 10-K/A, the Company expects to make contributions to its postretirement benefit plans of $26 million in 2007. During the six months ended March 30, 2007, the Company has contributed $12 million to its postretirement benefit plans. Rabbi Trust—During the six months ended March 30, 2007, the Company, as permitted under the trust agreement, sold substantially all of the assets from one of the trusts and received $271 million of proceeds. Trust assets were primarily composed of corporate-owned life insurance policies. 26 13. Share Plans Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123R, "Share-Based Payment," using the modified prospective transition method. Total share-based compensation cost recognized during the six months ended March 30, 2007 and March 31, 2006 of $160 million and $149 million, respectively, has been included in the Consolidated Statements of Income within selling, general and administrative expenses. The Company issued its annual share-based compensation grants during the first quarter of each year. The total number and type of awards granted, primarily in connection with the annual grant, and the related weighted-average grant-date fair values, were as follows (in millions, except per share data):
The options granted in 2007 are exercisable in equal annual installments over a period of four years. The restricted share awards granted in 2007 vest in one-third increments over a period of four years beginning in year two. The weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
14. Consolidated Segment Data The segment data presented have been reclassified to exclude the results of discontinued operations. Selected information by business segment is presented in the following tables ($ in millions):
27
15. Supplementary Information Selected supplementary balance sheet information was as follows ($ in millions):
28 Inventories are recorded at the lower of cost (primarily first-in, first-out) or market value. Supplementary non-cash financing activities were as follows ($ in millions):
Supplementary income tax information: The effective income tax rate was 19.7% and 23.2% during the quarters ended March 30, 2007 and March 31, 2006, respectively. The decrease in the effective rate is primarily the result of benefits of approximately $102 million from the release of a deferred tax valuation allowance related to non-U.S. tax rulings received during the quarter. Additionally, taxes for the quarter were impacted by reduced reserve requirements on certain legacy tax matters, offset by tax costs related to the Proposed Separation and decreased profitability in operations in lower tax rate jurisdictions. 16. 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 2007 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 Note 11 for a discussion of these liabilities. At September 29, 2006, the Company had a $54 million obligation under an off-balance sheet leasing arrangement for five cable laying sea vessels which was recorded in the accompanying Consolidated Balance Sheet based on the estimated fair value of the vessels. Upon expiration of this lease in October 2006, a subsidiary of the Company exercised its option to buy these vessels for $280 million and, accordingly, the residual guarantee was settled. In the normal course of business, the Company is liable for contract completion and product performance. In the opinion of management, such obligations will not significantly affect the Company's financial position, results of operations or cash flows. 29 The Company records estimated product warranty costs at the time of sale. Manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Generally, product warranties are implicit in the sale; however, the customer may purchase an extended warranty. Manufactured equipment is also warranted in the same manner as product warranties. However, in most instances the warranty is either negotiated in the contract or sold as a separate component. Warranty period terms range from 90 days (e.g., consumable products) up to 20 years (e.g., power system batteries). The warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. Following is a roll forward of the Company's warranty accrual for the quarter and six months ended March 30, 2007 ($ in millions).
In 2001, Engineered Products and Services initiated a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain Model GB fire sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco's acquisition. Under this program, the sprinkler heads are being replaced over a 5-7 year period free of charge to property owners. Settlements during the quarter and six months ended March 30, 2007 include cash expenditures of $9 million and $17 million, respectively, related to the VRP. On May 1, 2007, the Consumer Products Safety Commission and the Company announced plans to end the VRP on August 31, 2007. Under these plans, the Company will fulfill all valid claims for replacement of faulty sprinklers received up to August 31, 2007. 17. Tyco International Group S.A. TIGSA, a wholly owned subsidiary of the Company, has public debt securities outstanding (see Note 9) which are fully and unconditionally guaranteed by Tyco. The following tables, as restated for the adjustments discussed in Note 1, present condensed consolidating financial information for Tyco, TIGSA and all other subsidiaries. Condensed financial information for Tyco and TIGSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries. 30
31
CONDENSED CONSOLIDATING STATEMENT OF INCOME (RESTATED)
32
CONDENSED CONSOLIDATING STATEMENT OF INCOME
33
CONDENSED CONSOLIDATING STATEMENT OF INCOME (RESTATED)
34
CONDENSED CONSOLIDATING BALANCE SHEET
35
CONDENSED CONSOLIDATING BALANCE SHEET
36
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
37
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (RESTATED)
38 18. Subsequent Events On April 27, 2007, the Company announced that, in connection with the Proposed Separation, the Company and certain of its subsidiaries that are issuers of its corporate debt have commenced tender offers to purchase for cash substantially all of its outstanding U.S. Dollar denominated public debt, aggregating approximately $6.6 billion, with maturities from 2007 to 2029. In conjunction with the tender offers, the relevant issuer will also solicit consents for certain clarifying amendments to the indentures pursuant to which the debt was issued. Additionally, the Company's subsidiary, Tyco International Group S.A., commenced on April 30, 2007 tender offers to purchase for cash all of its outstanding Euro and Pound Sterling denominated public debt, aggregating the equivalent of approximately $1.9 billion, with maturities from 2008 to 2031, issued under its Euro Medium Term Note Programme (the "EMTN Notes") and a consent solicitation for certain clarifying amendments to the fiscal agency agreement pursuant to which the EMTN Notes were issued. On April 25, 2007, the Company, certain of its subsidiaries and a syndicate of banks entered into three bridge loan facilities with an aggregate commitment amount of $10 billion. Funds under these bridge loan facilities will be used, together with cash on hand, to pay for debt tendered subject to consents obtained pursuant to the tender offers that the Company and certain of its subsidiaries commenced in order to purchase substantially all of their outstanding public debt. Additionally, on April 25, 2007, the Company, certain of its subsidiaries and a syndicate of banks entered into three revolving credit facilities with an initial aggregate commitment amount of $2.5 billion that will increase to $4.25 billion at the time of the Proposed Separation. Of the aggregate commitment amount of $4.25 billion, a $1.25 billion commitment will be available to the Company, and a $1.5 billion commitment will be available to each of Tyco Healthcare and Tyco Electronics. The revolving credit facilities will replace the Company's existing revolving credit facilities and be used for working capital, capital expenditures and other corporate purposes. The Company initially will guarantee the new revolving credit facilities and Tyco Healthcare and Tyco Electronics will each assume the obligations of the Company with respect to their revolving credit facilities upon the Proposed Separation. 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the Company's financial condition and results of operations, including the effects of the restatement described in Note 1 to the Consolidated Financial Statements, 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:
References to the segment data are to the Company's continuing operations and prior period amounts have been reclassified to exclude the results of discontinued operations. Restatement—Accounting for Income Taxes During the second quarter of 2007, the Company identified certain errors in its income tax accounting primarily related to maintaining and tax effecting jurisdictional data and the classification of tax amounts in the Consolidated Balance Sheets. In addition, certain errors had been recorded and disclosed in the period in which they were identified rather than in the period in which they occurred since they were immaterial. While these errors are immaterial both individually and in the aggregate to Tyco's Consolidated Financial Statements, the Company has determined that these errors will become material to Tyco's income from continuing operations upon completion of the Proposed Separation. In anticipation of the Proposed Separation, the Company has restated its Consolidated Financial Statements. Effect of Restatement The total impact of these errors is an increase of income tax expense of $127 million and $104 million for the quarter and six months ended March 31, 2006, respectively. The Company has restated its reported results to reflect the impact on income taxes. The following tables reflect the impact of the income tax restatement on the Company's Consolidated Statements of Income. The amounts previously reported are derived from the Form 10-Q 40 for the quarter ended March 31, 2006 filed on May 9, 2006 and have been reclassified for the effects of discontinued operations.
41
42 The following table reflects the impact of the income tax restatement on the Company's Consolidated Statement of Cash Flow for the six months ended March 31, 2006. The amounts previously reported are derived from the Form 10-Q for the quarter ended March 31, 2006 filed on May 9, 2006 and have been reclassified for the effects of discontinued operations as well as other reclassifications to conform with current period presentation.
Overview As previously reported, 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"). 43 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. Additionally, we will, if approved by our Board of Directors, execute a reverse share split, and as a result, four Tyco shares will be converted into one share. Shareholder approval for the reverse share split was obtained at the March 8, 2007 Special General Meeting of Shareholders. Each of the three companies will have its own independent Board of Directors and strong corporate governance standards. We expect to incur separation costs related to debt refinancing, tax restructuring, professional services and employee-related costs. We currently estimate that the income statement charges will be at the high end of the previously disclosed range of $1.2 billion to $1.6 billion, after-tax. The total charges to complete the Proposed Separation will be influenced by the manner in which and the conditions under which we execute the tax restructuring and debt refinancing transactions. During the quarters ended March 30, 2007 and March 31, 2006, we incurred pre-tax costs related to the Proposed Separation of $106 million and $25 million, respectively. During the six months ended March 30, 2007 and March 31, 2006, we incurred pre-tax costs related to the Proposed Separation of $191 million and $33 million, respectively. Most of the remaining charges are expected to be incurred before completing the Proposed Separation. Consummation of the Proposed Separation is subject to certain conditions, including final approval by the Tyco Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, the effectiveness of Registration Statements filed 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. Tyco has received an initial private letter ruling from the Internal Revenue Service ("IRS") and an opinion from outside counsel regarding the U.S. federal income tax consequences of the Proposed Separation noting it will qualify for favorable tax treatment. On January 18, 2007, Tyco filed initial Registration Statements with the SEC to register the equity of Tyco Healthcare and Tyco Electronics. In April 2007, amended Registration Statements were filed. The Company expects the Proposed Separation to occur in the second calendar quarter of 2007 subject to the conditions described above. Upon separation, Tyco Healthcare will change its name to Covidien Ltd. At or shortly before the completion of the Proposed Separation, we will reorganize to a new management and segment reporting structure. As part of these planned organizational changes, we will assess new reporting units and perform valuations to determine assignment of goodwill to the new reporting units based on relative fair values. We will also test the recoverability of goodwill. As such, we estimate that based on preliminary valuations and assumptions we may incur a pre-tax charge of approximately $100 million for the estimated amount of goodwill that we anticipate may be impaired as a result of the planned reorganization to a new management and segment reporting structure. The assessment relied on a number of preliminary assumptions that will be revised to reflect market conditions at the time of the final assessment. At the time of the organizational changes when these assessments actually occur, a charge, if any, could be materially different than the estimate provided herein. We are 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. Following the Proposed Separation, we expect that all three companies will be dividend-paying companies. As we prepare for the Proposed Separation, we remain committed to returning excess cash to shareholders. During the quarter ended December 29, 2006, we repurchased 22 million of our common shares for $659 million completing the $2.0 billion share repurchase program approved by the 44 Board of Directors in May 2006. During the quarter and six months ended March 31, 2007, we paid dividends of $196 million and $395 million, respectively, to shareholders. During the quarter ended December 29, 2006, a subsidiary of the Company exercised its option to buy five cable laying sea vessels that were previously included under an off-balance sheet leasing arrangement for $280 million. Additionally, during the quarter ended December 29, 2006, we received $38 million related to restitution owed by Mark H. Swartz, former Chief Financial Officer and during the quarter ended March 30, 2007, we received the remaining $98 million held in escrow related to the restitution owed by L. Dennis Kozlowski, former Chairman and Chief Executive Officer. During the quarter ended December 29, 2006, we completed the sale of our Printed Circuit Group ("PCG"), a Tyco Electronics business and leading manufacturer of high-technology printed circuit boards for the military, aerospace and commercial markets, for $231 million in net cash proceeds and recorded a pre-tax gain on sale of $45 million. Additionally, we collected the $30 million receivable due from the purchaser of our Plastics, Adhesives and Ludlow Coated Products businesses. During the quarter ended December 29, 2006, we also consummated the sale of the Aguas Industriales de Jose, C.A. ("AIJ"), a majority owned Engineered Products and Services segment joint venture in Venezuela, for $42 million in net cash proceeds and a pre-tax gain of $19 million was recorded. The PCG and AIJ businesses met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented. Details related to the Company's divestiture program and the related discontinued operations are discussed in "Discontinued Operations and Divestitures." We are continuing to assess the strategic fit of our various businesses and are considering additional divestitures where businesses do not align with our long term vision. Tyco, Tyco Electronics and Tyco Healthcare will explore a number of strategic alternatives for under-performing or non-strategic businesses including possible divestiture. At the conclusion of this process, management will present its recommendations to the Board of Directors for their review and approval. This includes our Infrastructure Services business which is part of our Engineered Products and Services segment. The Infrastructure Services business had total net revenue of $1.2 billion and operating income of $55 million in 2006. For Tyco Electronics, this includes the Power Systems business. The Power Systems business had total net revenue of approximately $500 million and operating losses of approximately $30 million in 2006. Should the outcome of the strategic review process result in approval to divest the Power Systems business, there could be a resulting pre-tax impairment charge of up to $450 million. To further improve operating efficiency, during the first quarter of 2007, we launched a restructuring program across all segments including the corporate organization which will streamline some of the businesses and reduce the operational footprint. We expect to incur charges of approximately $600 million over the next two years, of which $400 million is expected to be incurred in 2007. We expect that the total cash expenditures for this program will be approximately $450 million, of which $250 million is expected in 2007. During the quarter and six months ended March 30, 2007, we incurred charges of $66 million and $148 million, respectively, and utilized cash of $17 million and $19 million, respectively, related to this program. We believe this restructuring program will strengthen our competitive position over the long term. 45 Operating Results Net revenue and net income for the quarters and six months ended March 30, 2007 and March 31, 2006, as restated, were as follows ($ in millions):
Net revenue increased $751 million, or 7.4%, for the second quarter and $1,483 million, or 7.5%, for the first six months of 2007 as compared to the same periods last year. The increases reflect revenue growth in all segments. In addition, foreign currency exchange rates favorably affected the second quarter by $302 million and the impact on the first six months of 2007 remained favorable by $581 million. The net impact of acquisitions and divestitures positively impacted the second quarter by $4 million and negatively impacted the first six months of 2007 by $7 million. Operating income decreased $249 million, or 17.7%, for the second quarter while operating margin decreased 3.3 percentage points to 10.7%. Operating income decreased $296 million, or 11.2%, for the first six months of 2007 while operating margin decreased 2.4 percentage points to 11.0%. Income from revenue growth in all segments was more than offset by unfavorable spreads on both steel and copper products in our Electronics and Engineered Products and Services segments as well as higher material costs and increased investments in sales and marketing and research development. Additionally, operating income was adversely impacted by costs incurred relating to the Proposed Separation and the restructuring program announced in November 2006. Separation costs negatively impacted operating income by $106 million and $191 million for the second quarter and first six months of 2007. In the same periods last year, operating income was negatively impacted by $25 million and $33 million, respectively, of separation costs. In addition, during the quarter and six months ended March 30, 2007 we incurred $18 million and $22 million, respectively, of incremental general and administrative expenses to establish corporate organizations to support three separate, publicly traded companies. The net impact of restructuring and asset impairment charges negatively impacted the second quarter and the first six months of 2007 by $76 million and $166 million, respectively, compared to $7 million and $19 million, respectively, in the same periods last year. Divestiture charges negatively impacted both the quarter and six months ended March 30, 2007 by $9 million as compared to net divestiture gains of $44 million and $41 million, respectively, in the same periods in the prior year. 46 The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations. Quarter Ended March 30, 2007 Compared to Quarter Ended March 31, 2006 Electronics Net revenue, operating income and operating margin for Electronics were as follows
Net revenue for Electronics increased 9.6% in the quarter ended March 30, 2007 over the quarter ended March 31, 2006. The increase in net revenue reflects growth in the automotive, industrial machinery, aerospace and defense, power utility, undersea telecommunications, mobile phone and consumer electronics markets, partially offset by revenue declines in the computer and communication service provider markets. Favorable changes in foreign currency exchange rates positively impacted net revenue by $115 million. Operating income and operating margin decreased compared to the same quarter in the prior year. Income from increased revenue and cost improvements was more than offset by $43 million in higher material costs, primarily copper, and increased investments in engineering and selling. Operating income for the quarter ended March 30, 2007 included $15 million of net restructuring and asset impairment charges compared to $4 million in the quarter ended March 31, 2006. The quarter ended March 31, 2006 also included $4 million of divestiture related charges. Fire and Security Net revenue, operating income and operating margin for Fire and Security were as follows ($ in millions):
Net revenue for Fire and Security increased 6.1% in the quarter ended March 30, 2007 over the quarter ended March 31, 2006. The increase in net revenue was primarily due to favorable changes in foreign currency exchange rates of $77 million and revenue increases at Worldwide Fire Services and Worldwide Security. Revenue increases at Worldwide Fire Services were the result of continued growth in electrical and mechanical contracting in North America and Europe. Revenue increases at Worldwide Security were due to growth in the recurring revenue base primarily in North America and 47 Asia. These net revenue increases were partially offset by a decrease in revenue within Safety Products, primarily as a result of decreased sales in breathing products. Operating income and operating margin decreased in the quarter ended March 31, 2007 as compared to the same period in the prior year. Revenue growth was more than offset by net restructuring and asset impairment charges of $43 million. Attrition rates for customers in our global electronic security services business continued to decline to an average of 13.1% on a trailing twelve-month basis as of March 30, 2007. As a result of our ongoing review of attrition rates and related patterns in which revenues are earned, management is in the process of reassessing amortization and depreciation methods and lives for its company-owned security systems and dealer intangible assets and may make adjustments in future periods. Healthcare Net revenue, operating income and operating margin for Healthcare were as follows
Net revenue for Healthcare increased 5.3% in the quarter ended March 30, 2007 over the quarter ended March 31, 2006. Increased revenue within Medical Devices and Supplies was largely driven by increased sales in Europe and the United States of surgical products and, to a lesser extent, imaging and medical products. Pharmaceutical contributed to the increase in revenue driven by strong performance within dosage, specialty chemical and active pharmaceutical products. Favorable changes in foreign currency exchange rates positively impacted net revenue by $51 million. Operating income and operating margin in the quarter ended March 30, 2007 decreased as compared to the quarter ended March 31, 2006 as operating income in the quarter ended March 31, 2006 included $46 million of divestiture gains related to the sale of a business within Medical Devices and Supplies. Additionally, the quarter ended March 30, 2007 includes $5 million of restructuring and asset impairment charges and $1 million of costs incurred related to the Proposed Separation. Engineered Products and Services Net revenue, operating income and operating margin for Engineered Products and Services were as follows ($ in millions):
Net revenue for Engineered Products and Services increased 8.7% in the quarter ended March 30, 2007 over the quarter ended March 31, 2006. The increase in net revenue was primarily due to higher 48 demand in industrial and commercial markets in both Flow Control and Fire & Building Products, as well as increased project sales predominantly in Flow Control. These increases were partially offset by a decrease in Infrastructure Services as a result of a strategic decision to be more selective in bidding for new projects and one-time hurricane relief business in the same period in the prior year. Electrical & Metal Products net revenues were essentially level as higher volumes of steel and copper products were offset by lower selling prices on steel products. Favorable changes in foreign currency exchange rates positively impacted net revenue by $59 million. Operating income decreased 18.1% in the quarter ended March 30, 2007 as compared to the quarter ended March 31, 2006. The decrease was primarily due to the negative impact of lower steel and copper spreads in Electrical & Metal Products driven by lower selling prices on steel products and the flow through of higher cost steel and copper inventory. This decrease was partially offset by the impact of net revenue increases in Flow Control and Fire & Building Products. Additionally, the quarter ended March 30, 2007 included $10 million of restructuring and asset impairment charges, a $2 million net loss on divestitures and $1 million of costs incurred related to the Proposed Separation compared to no charges in the prior year. Corporate Corporate expenses were $252 million and $111 million in the quarters ended March 30, 2007 and March 31, 2006, respectively. The current quarter included $104 million related to the Proposed Separation, a $7 million loss on divestitures and $3 million of restructuring charges. In addition, during the quarter ended March 30, 2007 we incurred $18 million of incremental general and administrative expenses to establish corporate organizations to support three separate, publicly traded companies. The quarter ended March 31, 2006 included $23 million related to the Proposed Separation. Interest Income and Expense Interest income was $39 million and $33 million during the quarters ended March 30, 2007 and March 31, 2006, respectively. The increase in interest income is related to a higher cash balance. Interest expense was $160 million in the quarter ended March 30, 2007 as compared to $188 million in the quarter ended March 31, 2006. The decrease in interest expense reflects lower debt outstanding. Other Income (Expense), Net Other income (expense), net was $8 million and $(2) million during the quarters ended March 30, 2007 and March 31, 2006, respectively and is primarily composed of gains and losses on the sale of investments. Income Taxes Our effective income tax rate was 19.7% and 23.2% during the quarters ended March 30, 2007 and March 31, 2006, respectively. The decrease in the effective rate is primarily the result of benefits of approximately $102 million from the release of a deferred tax valuation allowance related to non-U.S. tax rulings received during the quarter. Additionally, taxes for the quarter were impacted by reduced reserve requirements on certain legacy tax matters, offset by tax costs related to the Proposed Separation and decreased profitability in operations in lower tax rate jurisdictions. 49 Six Months Ended March 30, 2007 Compared to Six Months Ended March 31, 2006 Electronics Net revenue, operating income and operating margin for Electronics were as follows
Net revenue for Electronics increased 9.5% in the six months ended March 30, 2007 over the six months ended March 31, 2006. The increase in net revenue reflects growth in the automotive, industrial machinery, aerospace and defense, power utility, undersea telecommunications, mobile phone and consumer electronics markets, partially offset by revenue declines in the computer and communication service provider markets. Favorable changes in foreign currency exchange rates and net acquisitions and divestitures activity positively impacted net revenue by $221 million and $14 million, respectively. Operating income increased compared to the same period in the prior year due to increased sales volume and lower price erosion. These increases were partially offset by $116 million in higher material costs, primarily copper, and net restructuring and asset impairment charges of $24 million in the six months ended March 30, 2007 compared to $8 million in the six months ended March 31, 2006. The six months ended March 31, 2006 also included $4 million of divesture related charges. Fire and Security Net revenue, operating income and operating margin for Fire and Security were as follows
Net revenue for Fire and Security increased 6.3% in the six months ended March 30, 2007 over the six months ended March 31, 2006. The increase in net revenue was primarily due to favorable changes in foreign currency exchange rates of $155 million and revenue increases at Worldwide Fire Services and Worldwide Security. Revenue increases at Worldwide Fire Services were the result of continued growth in electrical and mechanical contracting in North America, Asia and Europe. Revenue increases at Worldwide Security were due to growth in the recurring revenue base primarily in North American and Asia as well as growth in North America contracting revenue. These increases were partially offset by the net impact of acquisition and divestiture activity of $18 million. Operating income increased in the six months ended March 31, 2007 as compared to the same period in the prior year driven primarily by lower costs and productivity improvements in North America, increases in income from revenue growth, lower selling, general and administrative expenses, partially offset by net restructuring and asset impairment charges of $80 million. 50 Attrition rates for customers in our global electronic security services business continued to decline to an average of 13.1% on a trailing twelve-month basis as of March 30, 2007. As a result of our ongoing review of attrition rates and related patterns in which revenues are earned, management is in the process of reassessing amortization and depreciation methods and lives for its company-owned security systems and dealer intangible assets and may make adjustments in future periods. Healthcare Net revenue, operating income and operating margin for Healthcare were as follows
Net revenue for Healthcare increased 6.1% in the six months ended March 30, 2007 over the six months ended March 31, 2006. Increased revenue within Medical Devices and Supplies was largely driven by increased sales in Europe and the United States of surgical products and, to a lesser extent, imaging, respiratory and medical products. Pharmaceutical contributed to the increase in revenue driven by strong performance within dosage, specialty chemical and active pharmaceutical products. Favorable changes in foreign currency exchange rates positively impacted net revenue by $96 million. These increases were partially offset by a $23 million decline in the Retail business. The decline was primarily in infant care, largely attributable to aggressive price reductions by both branded and private-label competitors. Operating income and operating margin in the six months ended March 30, 2007 decreased as compared to the six months ended March 31, 2006. Revenue growth was more than offset by $29 million of restructuring and asset impairment charges including charges of $8 million related to in-process research and development. Additionally, the decline in operating income in the six months ended March 30, 2007 was also related to increased legal and employee related costs as well as $4 million of separation costs. Operating income in the six months ended March 31, 2006 included $46 million of divestiture gains related to the sale of a business within Medical Devices and Supplies. Engineered Products and Services Net revenue, operating income and operating margin for Engineered Products and Services were as follows ($ in millions):
Net revenue for Engineered Products and Services increased 8.0% in the six months ended March 30, 2007 over the six months ended March 31, 2006. The increase in net revenue was primarily due to higher demand in industrial and commercial markets in both Flow Control and Fire & Building 51 Products, as well as increased project sales predominantly in Flow Control. These increases were partially offset by a decrease at Infrastructure Services as a result of a strategic decision to be more selective in bidding for new projects and one-time hurricane relief business in the same period in the prior year. Electrical & Metal Products net revenues were essentially flat as higher selling prices and volumes of copper products were offset by lower selling prices on steel products. Favorable changes in foreign currency exchange rates positively impacted net revenue by $109 million. Operating income decreased 6.8% in the six months ended March 30, 2007 as compared to the six months ended March 31, 2006. The decrease was primarily due to the negative impact of lower steel and copper spreads in Electrical & Metal Products driven by lower selling prices on steel products and the flow through of higher cost steel and copper inventory. This decrease was partially offset by the impact of net revenue increases in Flow Control and Fire & Building Products. Additionally, the six months ended March 30, 2007 included $16 million of restructuring and asset impairment charges, a $2 million net loss on divestitures and $2 million of costs incurred related to the Proposed Separation. Corporate Corporate expenses were $447 million and $206 million in the six months ended March 30, 2007 and March 31, 2006, respectively. The current six month period includes $207 million related to the Proposed Separation, $17 million of restructuring charges and a $7 million loss on divestitures. In addition, during the six months ended March 30, 2007 we incurred $22 million of incremental general and administrative expenses to establish corporate organizations to support three separate, publicly traded companies. The same period in the prior year included $31 million related to the Proposed Separation. Interest Income and Expense Interest income was $80 million and $70 million during the six months ended March 30, 2007 and March 31, 2006, respectively. The increase in interest income is related to a higher cash balance. Interest expense was $327 million in the six months ended March 30, 2007 as compared to $376 million in the six months ended March 31, 2006. The decrease in interest expense reflects lower debt outstanding. Other Income (Expense), Net Other income (expense), net was $9 million and $(3) million during the six months ended March 30, 2007 and March 31, 2006, respectively and is primarily composed of gains and losses on the sale of investments. Income Taxes Our effective income tax rate was 24.5% and 22.9% during the six months ended March 30, 2007 and March 31, 2006, respectively. The increase in the effective rate is primarily the result of tax costs related to the Proposed Separation and decreased profitability in operations in lower tax rate jurisdictions, partially offset by releases of deferred tax valuation allowances, reduced reserve requirements on certain legacy tax matters and the benefit associated with the reinstatement of the research tax credit. Cumulative effect of accounting change During 2006, the Company adopted FIN No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143." FIN No. 47 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 and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 requires that conditional asset retirement 52 obligations, along with the associated capitalized asset retirement costs, be initially reported at their fair values. Upon adoption, the Company recognized a liability of $32 million for asset retirement obligations and an increase of $10 million in the carrying amount of the related assets. The initial recognition resulted in a cumulative effect of accounting change of $22 million pre-tax loss ($14 million after-tax), reflecting the accumulated depreciation and accretion that would have been recognized in prior periods had the provisions of FIN No. 47 been in effect at the time. Discontinued Operations and Divestitures Discontinued Operations During the fourth quarter of 2006, the Company entered into a definitive sale agreement to divest the Printed Circuit Group ("PCG") business, a component of the Electronics segment. During the first quarter of 2007, the Company consummated the sale of its PCG business for $231 million in net cash proceeds and recorded a pre-tax gain on the sale of $45 million. During the first quarter of 2007, the operations of Aguas Industriales de Jose, C.A. ("AIJ"), a majority owned Engineered Products and Services segment joint venture in Venezuela, was sold for $42 million in net cash proceeds and a pre-tax gain on sale of $19 million was recorded. During the first quarter of 2007, the Company also collected a $30 million receivable due from the purchaser of the Plastics, Adhesives and Ludlow Coated Products businesses related to the decline in average resin prices. During the first quarter of 2006, Tyco reached a definitive agreement to sell its Plastics, Adhesives and Ludlow Coated Products businesses and was negotiating the sale of its A&E Products business. At that time, the Company assessed the recoverability of the carrying value of these businesses and, based on existing market conditions and the terms and conditions included or expected to be included in the respective sales agreements, recorded pre-tax impairment charges of $275 million and $17 million related to the Plastics, Adhesives and Ludlow Coated Products businesses and the A&E Products business, respectively, to write the businesses down to 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, subject to settlement of the final working capital adjustment. The Company recognized a pre-tax loss on sale of approximately $10 million during the second quarter of 2006. 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. The PCG, AIJ, Plastics, Adhesives and Ludlow Coated Products and A&E Products businesses all met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented. Gain (losses) on divestitures During the quarter and six months ended March 30, 2007, the Company recorded $9 million of divestiture charges in continuing operations in connection with the divestiture or write-down to fair-value of certain businesses. During the six months ended March 31, 2006, the Company divested four businesses that were reported as continuing operations in Fire and Security and Healthcare. The Company recorded net gains on divestitures of $46 million in connection with the divestiture of these businesses, less 53 $5 million of divestiture charges related to the write-down to estimated fair value and costs to sell certain other held for sale businesses primarily in Electronics. Acquisitions During the fourth quarter of 2006, Tyco's Healthcare segment acquired over 50% ownership of Airox S.A. ("Airox") for $59 million, net of cash acquired of $4 million. During the first quarter of 2007, Tyco's Healthcare segment acquired the remaining outstanding shares of Airox in a mandatory tender offer for approximately $46 million in cash, and now owns 100% of the business. During the first quarter of 2007, the Company also recorded an additional $8 million in-process research and development charge, included within restructuring and asset impairment charges, net in the Consolidated Statements of Income, in conjunction with the acquisition. In-process research and development charges for the entire acquisition totaled $19 million. These charges relate to the development of second generation technology which has not yet obtained regulatory approval. As of the acquisition date, the in-process research and development was not considered to be technologically feasible or to have any alternative future use. During the six month ended March 31, 2006, Tyco's Healthcare segme | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||