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Tyco International 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

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


FORM 10-Q


ý

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

For the Quarterly Period Ended March 28, 2008

or

o

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

001-13836
(Commission File Number)


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

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

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

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

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

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

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

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

        The number of common shares outstanding as of April 25, 2008 was 482,240,431.




TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

 
   
  Page
Part I.   Financial Information    

Item 1.

 

Financial Statements

 

 

 

 

Consolidated Statements of Income (Unaudited) for the quarters and six months ended March 28, 2008 and March 30, 2007

 

1

 

 

Consolidated Balance Sheets (Unaudited) as of March 28, 2008 and September 28, 2007

 

2

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 28, 2008 and March 30, 2007

 

3

 

 

Consolidated Statements of Shareholders' Equity (Unaudited) for the six months ended March 28, 2008 and March 30, 2007

 

4

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

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

 

40

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

63

Item 4.

 

Controls and Procedures

 

63

Part II.

 

Other Information

 

 

Item 1.

 

Legal Proceedings

 

65

Item 1A.

 

Risk Factors

 

76

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

76

Item 3.

 

Defaults Upon Senior Securities

 

77

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

77

Item 5.

 

Other Information

 

77

Item 6.

 

Exhibits

 

78

Signatures

 

79


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements


TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share data)

 
  For the
Quarters Ended

  For the
Six Months Ended

 
 
  March 28,
2008

  March 30,
2007

  March 28,
2008

  March 30,
2007

 
Revenue from product sales   $ 3,111   $ 2,854   $ 6,210   $ 5,583  
Service revenue     1,755     1,636     3,496     3,246  
   
 
 
 
 
  Net revenue     4,866     4,490     9,706     8,829  
Cost of product sales     2,196     2,058     4,388     4,009  
Cost of services     990     928     1,956     1,832  
Selling, general and administrative expenses     1,205     1,223     2,374     2,377  
Separation (credits) costs     (5 )   32     4     57  
Restructuring, asset impairment and divestiture charges, net     37     45     48     101  
   
 
 
 
 
  Operating income     443     204     936     453  
Interest income     25     11     83     25  
Interest expense     (115 )   (64 )   (232 )   (130 )
Other income, net         1     52     2  
   
 
 
 
 
  Income from continuing operations before income taxes and minority interest     353     152     839     350  
Income taxes     (79 )   12     (204 )   (27 )
Minority interest     (1 )       (2 )   (1 )
   
 
 
 
 
  Income from continuing operations     273     164     633     322  
Income from discontinued operations, net of income taxes     7     671     10     1,306  
   
 
 
 
 
  Net income   $ 280   $ 835   $ 643   $ 1,628  
   
 
 
 
 
Basic earnings per share:                          
  Income from continuing operations   $ 0.56   $ 0.33   $ 1.29   $ 0.65  
  Income from discontinued operations     0.02     1.36     0.02     2.64  
   
 
 
 
 
  Net income   $ 0.58   $ 1.69   $ 1.31   $ 3.29  
   
 
 
 
 
Diluted earnings per share:                          
  Income from continuing operations   $ 0.56   $ 0.33   $ 1.28   $ 0.64  
  Income from discontinued operations     0.01     1.33     0.03     2.59  
   
 
 
 
 
  Net income   $ 0.57   $ 1.66   $ 1.31   $ 3.23  
   
 
 
 
 
Weighted-average number of shares outstanding:                          
  Basic     486     493     489     494  
  Diluted     489     506     493     507  

See Notes to Consolidated Financial Statements.

1



TYCO INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share data)

 
  March 28,
2008

  September 28,
2007

Assets            
Current Assets:            
  Cash and cash equivalents   $ 1,074   $ 1,894
  Accounts receivable, less allowance for doubtful accounts of $208 and
$194, respectively
    3,137     2,945
  Inventories     2,025     1,811
  Class action settlement escrow         2,992
  Prepaid expenses and other current assets     1,761     1,632
  Assets of discontinued operations     983     1,084
   
 
    Total current assets     8,980     12,358
Property, plant and equipment, net     3,613     3,543
Goodwill     11,922     11,636
Intangible assets, net     2,636     2,697
Other assets     2,723     2,581
   
 
    Total Assets   $ 29,874   $ 32,815
   
 
Liabilities and Shareholders' Equity            
Current Liabilities:            
  Loans payable and current maturities of long-term debt   $ 525   $ 380
  Accounts payable     1,516     1,665
  Class action settlement liability         2,992
  Accrued and other current liabilities     3,316     3,470
  Liabilities of discontinued operations     526     598
   
 
    Total current liabilities     5,883     9,105
Long-term debt     3,977     4,082
Other liabilities     3,985     3,937
   
 
    Total Liabilities     13,845     17,124
   
 
Commitments and Contingencies (Note 9)            
Minority interest     55     67
Shareholders' Equity:            
  Common shares, $0.80 par value, 1,000,000,000 shares authorized; 485,183,892 and 496,301,846 shares outstanding, net of 13,333,248 and 1,277,449 shares owned by subsidiaries, respectively     388     397
  Capital in excess:            
    Share premium     9,209     9,189
    Contributed surplus     5,029     5,439
  Accumulated earnings     433     34
  Accumulated other comprehensive income     915     565
   
 
    Total Shareholders' Equity     15,974     15,624
   
 
    Total Liabilities and Shareholders' Equity   $ 29,874   $ 32,815
   
 

See Notes to Consolidated Financial Statements.

2



TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 
  For the
Six Months Ended

 
 
  March 28,
2008

  March 30,
2007

 
Cash Flows From Operating Activities:              
Net income   $ 643   $ 1,628  
  Income from discontinued operations, net of income taxes     (10 )   (1,306 )
   
 
 
Income from continuing operations     633     322  
Adjustments to reconcile net cash provided by operating activities:              
  Depreciation and amortization     566     592  
  Non-cash compensation expense     57     81  
  Deferred income taxes     (105 )   (93 )
  Provision for losses on accounts receivable and inventory     61     44  
  Other non-cash items     43     18  
  Changes in assets and liabilities, net of the effects of acquisitions and divestitures:              
    Accounts receivable, net     (107 )   (67 )
    Inventories     (149 )   (280 )
    Other current assets     (24 )   164  
    Accounts payable     (206 )   (51 )
    Accrued and other liabilities     (325 )   (50 )
    Class action settlement liability     (3,020 )    
    Other     (45 )   32  
   
 
 
      Net cash (used in) provided by operating activities     (2,621 )   712  
   
 
 
      Net cash provided by discontinued operating activities     4     1,696  
   
 
 
Cash Flows From Investing Activities:              
Capital expenditures     (356 )   (299 )
Proceeds from disposal of assets     10     10  
Acquisition of businesses, net of cash acquired     (27 )   (16 )
Accounts purchased from ADT dealer network     (187 )   (176 )
Liquidation of rabbi trust investments         271  
Class action settlement escrow     2,960      
Other     (9 )   43  
   
 
 
      Net cash provided by (used in) investing activities     2,391     (167 )
   
 
 
      Net cash provided by (used in) discontinued investing activities     14     (505 )
   
 
 
Cash Flows From Financing Activities:              
Proceeds from issuance of short-term debt         195  
Repayment of short-term debt     (371 )    
Proceeds from issuance of long-term debt     667      
Repayment of long-term debt, including debt tenders     (256 )   (2 )
Proceeds from exercise of share options     21     212  
Dividends paid     (148 )   (395 )
Repurchase of common shares by subsidiary     (477 )   (668 )
Transfer from discontinued operations     19     1,083  
Other     (69 )   13  
   
 
 
      Net cash (used in) provided by financing activities     (614 )   438  
   
 
 
      Net cash used in discontinued financing activities     (18 )   (1,077 )
   
 
 
Effect of currency translation on cash     24     21  
Effect of currency translation on cash related to discontinued operations         19  
   
 
 
Net (decrease) increase in cash and cash equivalents     (820 )   1,137  
Less: net increase in cash related to discontinued operations         (133 )
Cash and cash equivalents at beginning of period     1,894     2,193  
   
 
 
Cash and cash equivalents at end of period   $ 1,074   $ 3,197  
   
 
 

See Notes to Consolidated Financial Statements.

3



TYCO INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the Six Months Ended March 28, 2008 and March 30, 2007

(in millions)

 
  Number of
Common
Shares

  Common
Shares
$0.80 Par
Value

  Share
Premium

  Contributed
Surplus

  Accumulated
Earnings

  Accumulated
Other
Comprehensive
Income

  Total
 
Balance at September 29, 2006   498   $ 398   $ 8,787   $ 14,493   $ 10,692   $ 1,017   $ 35,387  
Comprehensive income:                                          
  Net income                           1,628           1,628  
  Currency translation                                 476     476  
  Unrealized gain on marketable securities, net of income taxes of $1 million                                 2     2  
  Minimum pension liability, net of income taxes of $23 million                                 35     35  
                                     
 
  Total comprehensive income                                       2,141  
Dividends declared                           (395 )         (395 )
Share options exercised, including tax benefit of $25 million   2     2     210     25                 237  
Repurchase of common shares by subsidiary   (5 )   (4 )         (664 )               (668 )
Compensation expense                     159                 159  
   
 
 
 
 
 
 
 
Balance at March 30, 2007   495   $ 396   $ 8,997   $ 14,013   $ 11,925   $ 1,530   $ 36,861  
   
 
 
 
 
 
 
 
 
 
  Number of
Common
Shares

  Common
Shares
$0.80 Par
Value

  Share
Premium

  Contributed
Surplus

  Accumulated
Earnings

  Accumulated
Other
Comprehensive
Income

  Total
 
Balance at September 28, 2007   496   $ 397   $ 9,189   $ 5,439   $ 34   $ 565   $ 15,624  
Comprehensive income:                                          
  Net income                           643           643  
  Currency translation                                 339     339  
  Unrealized gain on marketable securities and derivative instruments, net of income taxes of $2 million                                 4     4  
  Change in net actuarial loss and prior service credit, net of income taxes of $3 million                                 7     7  
                                     
 
  Total comprehensive income                                       993  
Dividends declared                           (147 )         (147 )
Share options exercised, including tax benefit of $3 million   1     1     20     3                 24  
Repurchase of common shares by subsidiary   (12 )   (10 )         (467 )               (477 )
Compensation expense                     53                 53  
Exchange of convertible debt                     1                 1  
Adoption of FIN No. 48 (see Note 4)                           (79 )         (79 )
Other                           (18 )         (18 )
   
 
 
 
 
 
 
 
Balance at March 28, 2008   485   $ 388   $ 9,209   $ 5,029   $ 433   $ 915   $ 15,974  
   
 
 
 
 
 
 
 

See Notes to Consolidated Financial Statements.

4



TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Basis of Presentation and Summary of Significant Accounting Policies

        Basis of Presentation—The unaudited Consolidated Financial Statements include the consolidated results 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 disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 2007 (the "2007 Form 10-K").

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

        References to 2008 and 2007 are to Tyco's fiscal quarters ending March 28, 2008 and March 30, 2007, respectively, unless otherwise indicated.

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

        Recently Adopted Accounting Pronouncements—In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board 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 became effective for Tyco in the first quarter of 2008. As a result of adopting FIN No. 48, Tyco increased its reserve for uncertain tax positions by $55 million and reduced its deferred tax assets by $24 million with a corresponding $79 million cumulative effect adjustment to shareholders' equity. See Note 4 for additional information related to the adoption of FIN No. 48.

        Recently Issued Accounting Pronouncements—In March 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities." SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. The disclosure provisions of SFAS No. 161 are effective for Tyco in the second quarter of 2009.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for Tyco in the first quarter of 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.

5


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

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

        SFAS No. 158 also requires companies to measure plan assets and benefit obligations as of their fiscal year end. The Company presently uses a measurement date of August 31st. The measurement date provisions become effective in fiscal 2009. The Company is currently assessing the impact that SFAS No. 158 measurement date provisions will have on the results of its operations, financial position or cash flows.

2.    Discontinued Operations

        In February 2008, the Company executed a definitive agreement to sell Ancon Building Products ("Ancon") for approximately $174 million. Ancon manufactures stainless steel products used in masonry construction. The Company has assessed and determined that the carrying value of Ancon is recoverable and will continue to assess recoverability based on current fair value, less cost to sell, until the business is sold. Fair value used for the impairment assessment was based on existing market conditions and the terms included in the sale agreement. The transaction closed in the third quarter of 2008.

        In February 2008, the Company sold Nippon Dry-Chemical Co., Ltd. ("NDC"), one of the leading companies in the Japanese fire protection industry, for $50 million in net cash proceeds and a pre-tax gain of $7 million was recorded.

        In January 2008, the Company sold a European manufacturer of public address products and acoustic systems and recorded an $8 million pre-tax loss on sale.

        Infrastructure Services provides consulting, engineering, construction management and operating services for the water, wastewater, environmental, transportation and facilities market and are expected to be sold in several transactions. On September 17, 2007, the Company executed a definitive agreement to sell for approximately $295 million in cash 100% of the stock of Empresa de Transmissao de Energia do Oeste Ltda. ("ETEO"), part of Infrastructure Services. The transaction is subject to Brazilian regulatory approval and normal closing conditions and is expected to close by the end of 2008. On February 11, 2008, the Company executed a definitive agreement to sell the remaining portion of Infrastructure Services for approximately $510 million, excluding Earth Tech Brasil Ltda. ("ET Brasil") and certain assets and contingent liabilities to be retained by the Company as described

6


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Discontinued Operations (Continued)


in "Other Matters" in Note 9. The transaction is subject to regulatory approval and normal closing conditions and is expected to close by the end of 2008. The Company has assessed and determined that the carrying values of Infrastructure Services and ETEO are recoverable and will continue to assess recoverability based on current fair value, less cost to sell, until the businesses are sold. During the second quarter of 2008, the Company recorded a pre-tax impairment charge of approximately $22 million to write down ET Brasil to its fair value, less cost to sell. Fair value used for the impairment assessment was based on existing market conditions as well as terms and conditions expected to be included in the sales agreement.

        During September 2007, Tyco entered into an economic hedge of the Brazilian Real denominated contractual sale price of the ETEO business. Since this hedging transaction is directly linked to the expected proceeds from the sale of a business that is reflected in discontinued operations, Tyco began including the impact of this hedge in discontinued operations during the first quarter of 2008. During the quarter and six months ended March 28, 2008, Tyco incurred losses of $5 million and $15 million, respectively, on this hedge. The impact of this hedge in the prior year was not material.

        During the first quarter of 2007, Aquas Industriales de Jose, C.A. ("AIJ"), a joint venture that was majority owned by Infrastructure Services, was sold for $42 million in net cash proceeds and a pre-tax gain on sale of $19 million was recorded.

        All of the above businesses met the held for sale and discontinued operations criteria and have been included in discontinued operations in all periods presented.

        During the third quarter of 2007, Tyco completed the spin-offs of Covidien and Tyco Electronics (the "Separation") and has presented its Healthcare and Electronics businesses as discontinued operations in all periods prior to the completion of the Separation in June 2007.

        Net interest amounts were proportionally allocated to Covidien and Tyco Electronics based on the debt amounts that Tyco believes were utilized by Covidien and Tyco Electronics historically inclusive of amounts directly incurred. Allocated net interest was calculated using our historical weighted-average interest rate on debt, including the impact of interest rate swap agreements. These allocated amounts were included in discontinued operations. During the quarter ended March 30, 2007, allocated interest income and interest expense was $16 million and $91 million, respectively. During the six months ended March 30, 2007, allocated interest income and interest expense was $29 million and $181 million, respectively.

        During the quarter and six months ended March 30, 2007, the Company incurred pre-tax separation costs of $75 million and $132 million, respectively, related to professional services and employee-related costs.

        The Company has used available information to develop its best estimates for certain assets and liabilities related to the Separation. In limited instances, final determination of the balances will be made in subsequent periods. During the six months ended March 28, 2008, $18 million was recorded through shareholders' equity, primarily related to adjustments to certain pre-separation tax liabilities. Adjustments may be recorded to shareholders' equity in the future for the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of Tyco, Covidien and/or Tyco Electronics legal entities and for certain amended income tax returns for the periods prior to the Separation.

7


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2.    Discontinued Operations (Continued)

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

 
  For the Quarters Ended
  For the Six Months Ended
 
 
  March 28, 2008
  March 30, 2007
  March 28, 2008
  March 30, 2007
 
Net revenue   $ 402   $ 6,348   $ 813   $ 12,368  
   
 
 
 
 
Pre-tax income from discontinued operations   $ 41   $ 970   $ 77   $ 1,876  
Pre-tax (loss) gain on sale of discontinued operations     (20 )   (8 )   (31 )   51  
Separation costs         (75 )       (132 )
Economic hedge of ETEO sale price     (5 )       (15 )    
Income tax expense     (9 )   (216 )   (21 )   (489 )
   
 
 
 
 
Income from discontinued operations, net of income taxes   $ 7   $ 671   $ 10   $ 1,306  
   
 
 
 
 

        Balance sheet information for discontinued operations is as follows ($ in millions):

 
  March 28,
2008

  September 28,
2007

Accounts receivable, net   $ 331   $ 392
Inventories     24     36
Prepaid expenses and other current assets     37     30
Property, plant and equipment, net     66     150
Goodwill and other intangibles, net     55     55
Other assets     470     421
   
 
  Total assets   $ 983   $ 1,084
   
 
Loans payable and current maturities of long-term debt   $ 6   $ 5
Accounts payable     140     199
Accrued and other current liabilities     192     303
Long-term debt     17     18
Other liabilities     171     73
   
 
  Total liabilities   $ 526   $ 598
   
 
Minority interest   $ 33   $ 30

8


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3.    Restructuring and Asset Impairment Charges, Net

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

 
  For the Quarters Ended
  For the Six Months Ended
 
 
  March 28, 2008
  March 30, 2007
  March 28, 2008
  March 30, 2007
 
ADT Worldwide   $ 11   $ 25   $ 18   $ 56  
Flow Control         6     2     11  
Fire Protection Services     1     2     1     2  
Electrical and Metal Products     3         7      
Safety Products     26     5     27     12  
Corporate and Other     2     5     2     18  
   
 
 
 
 
      43     43     57     99  
Charges in cost of sales and selling, general and administrative     (6 )   (1 )   (9 )   (1 )
   
 
 
 
 
Restructuring and asset impairment charges, net   $ 37   $ 42   $ 48   $ 98  
   
 
 
 
 

        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 aggregate charges related to the program of approximately $350 million to $400 million primarily through the end of 2008. Since the inception of this program, through the second quarter of 2008, the Company has incurred charges of $263 million related to this program.

        The restructuring program includes numerous actions which are designed to improve operating efficiency and strengthen the Company's competitive position in the future. Many of the actions initiated related to improving field efficiencies and consolidating certain administrative functions in the European operations of ADT Worldwide and Fire Protection Services. In addition, Tyco consolidated certain corporate headquarter functions. During the quarter ended March 28, 2008, the Company recognized employee severance and benefits charges related to the closure of a Safety Products manufacturing facility in Puerto Rico. The restructuring actions were largely reductions in workforce and are expected to be completed by the end of calendar year 2008 and into 2009.

2008 Charges and Credits

        Net restructuring and asset impairment charges during the quarter ended March 28, 2008 were $43 million, which include $6 million for the non-cash write down in carrying value of inventory and accelerated depreciation (which was classified in cost of sales and selling, general and administrative) related to assets expected to become obsolete as a result of the restructuring. The remaining charge is comprised of restructuring charges of $40 million, which include $35 million of employee severance and benefits and $5 million of facility exit charges and other cash charges, and $1 million of asset impairments. During the quarter ended March 28, 2008, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $4 million of restructuring reserves as restructuring credits.

9


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

        Net restructuring and asset impairment charges during the six months ended March 28, 2008 were $57 million, which include $9 million for the non-cash write down in carrying value of inventory and accelerated depreciation (which was classified in cost of sales and selling, general and administrative) related to assets expected to become obsolete as a result of the restructuring. The remaining charge is comprised of restructuring charges of $55 million, which include $41 million of employee severance and benefits and $14 million of facility exit charges and other cash charges, and $2 million of asset impairments. During the six months ended March 28, 2008, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $9 million of restructuring reserves as restructuring credits.

2007 Charges and Credits

        Net restructuring and asset impairment charges during the quarter ended March 30, 2007 were $43 million, which includes $1 million for the non-cash write down in carrying value of inventory (cost of sales). The remaining charge is comprised of restructuring charges of $36 million, which include $34 million of employee severance and benefits and $2 million of facility exit charges and other cash charges, and $7 million of asset impairments. During the quarter ended March 30, 2007, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $1 million of restructuring reserves as restructuring credits.

        Net restructuring and asset impairment charges during the six months ended March 30, 2007 were $99 million, which includes $1 million for the non-cash write down in carrying value of inventory (cost of sales). The remaining charge is comprised of restructuring charges of $92 million, which include $88 million of employee severance and benefits and $4 million of facility exit charges and other cash charges, and $8 million of asset impairments. During the six months ended March 30, 2007, the Company completed restructuring activities announced in prior years for amounts less than originally estimated, and accordingly reversed $2 million of restructuring reserves as restructuring credits.

Restructuring Reserves

        Restructuring reserves from September 28, 2007 to March 28, 2008 by the year in which the restructuring action was initiated are as follows ($ in millions):

 
  Year of
Restructuring Action

 
 
  2008
  2007
  Prior
  Total
 
Balance at September 28, 2007   $   $ 115   $ 22   $ 137  
Charges     40     14     1     55  
Reversals         (8 )   (1 )   (9 )
Utilization     (4 )   (70 )   (3 )   (77 )
Currency translation         6         6  
   
 
 
 
 
Balance at March 28, 2008   $ 36   $ 57   $ 19   $ 112  
   
 
 
 
 

10


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

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

 
  March 28,
2008

  September 28,
2007

ADT Worldwide   $ 44   $ 71
Flow Control     7     13
Fire Protection Services     17     22
Electrical and Metal Products     6     6
Safety Products     29     10
Corporate and Other     9     15
   
 
    $ 112   $ 137
   
 

        At March 28, 2008, $88 million of restructuring reserves are included in accrued and other current liabilities and $24 million are included in other liabilities. At September 28, 2007, $113 million of restructuring reserves are included in accrued and other current liabilities and $24 million are included in other liabilities.

4.    Income Taxes

        Tyco adopted the recognition, measurement and disclosure provisions of FIN No. 48 on September 29, 2007. As a result of this adoption, Tyco increased its reserve for uncertain tax positions by $55 million and reduced its deferred tax assets by $24 million with a corresponding $79 million cumulative effect of adoption adjustment to shareholders' equity. As of the adoption date, Tyco had unrecognized tax benefits of $370 million, of which $241 million, if recognized, would affect income tax expense. Also as of the adoption date, Tyco had accrued interest and penalties related to the unrecognized tax benefits of $40 million. Tyco recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

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

Jurisdiction

  Years Open To
Audit

United States   1997-2007
Australia   2004-2007
France   1999-2007
Germany   1998-2007
United Kingdom   2000-2007
Canada   1999-2007

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

11


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Income Taxes (Continued)

Tax Sharing Agreement

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

        Under the Tax Sharing Agreement, with certain exceptions, Tyco generally is responsible for the payment of 27% of any additional U.S. and certain non-U.S. income taxes that are required to be paid to tax authorities as a result of tax audits of Covidien's, Tyco Electronics' or Tyco's subsidiaries' income tax returns for all periods prior to the spin-offs.

        Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco's, Covidien's and Tyco Electronics' income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42% and 31%, respectively, of shared income tax liabilities that arise from adjustments made by tax authorities to Tyco's, Covidien's and Tyco Electronics' U.S. income tax returns. All costs and expenses associated with the management of these shared tax liabilities are shared equally among the parties. Tyco has recorded a receivable from Covidien and Tyco Electronics of $153 million at March 28, 2008 and $103 million at September 28, 2007 which is included in other assets as our estimate of their portion of the Tax Sharing obligations. Other liabilities include $554 million at March 28, 2008 and $543 million at September 28, 2007 for the fair value of Tyco's obligations under the Tax Sharing Agreement, determined in accordance with FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Tyco assesses the shared tax liabilities and related FIN No. 45 liability at each reporting period. The receivable and liability were initially recognized with an offset to shareholders' equity in 2007. In the first quarter of 2008, in connection with the adoption of FIN No. 48, Tyco increased its receivable from Covidien and Tyco Electronics under the Tax Sharing Agreement with a corresponding increase to other income, net by $40 million ($0.08 for both basic and diluted earnings per share), as the Company concluded that this was an indirect effect of adopting a new accounting standard. In addition, $10 million for other activity was recorded through the first quarter of 2008 in accordance with the Tax Sharing Agreement.

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

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

12


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Income Taxes (Continued)


Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax Sharing Agreement's sharing formula.

        If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party's fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of its agreed-upon share of Tyco's, Covidien's and Tyco Electronics' tax liabilities. See Note 14 for further discussion of guarantees and indemnifications extended between Tyco, Covidien and Tyco Electronics.

Other Income Tax Matters

        The Company and its subsidiaries' income tax returns periodically are examined by various tax authorities. In connection with these examinations, tax authorities, including the Internal Revenue Service ("IRS"), have raised issues and proposed tax adjustments. The Company is reviewing and contesting certain of the proposed tax adjustments. Management has assessed the issues related to these adjustments for recognition and measurement under FIN No. 48 and has recorded unrecognized tax benefits in accordance with FIN No. 48.

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

        During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco's U.S. federal income tax returns for the years 1997 through 2000 and issued anticipated Revenue Agents' Reports ("RARs") which reflect the IRS' determination of proposed tax adjustments for the periods under audit. The RARs propose tax audit adjustments to certain of the Company's previously filed tax return positions. The Company agreed with the IRS on adjustments totaling $498 million, with an estimated cash impact to the Company of $458 million, and during the third quarter of 2007, the Company paid $458 million, of which $163 million related to the Company's discontinued operations. The Company appealed other proposed tax audit adjustments totaling approximately $1 billion relating to Tyco, Covidien and Tyco Electronics, and, as Audit Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend its prior filed tax return positions.

        During the second quarter of 2008, the IRS issued additional RARs asserting a withholding tax liability of approximately $106 million associated with the prior proposed tax adjustments related to Tyco, Covidien and Tyco Electronics. The amount related to Tyco is immaterial. The Company, as Audit Managing Party as specified in the Tax Sharing Agreement, intends to vigorously defend its prior filed tax return positions and determined that no adjustment is required to the Company's guarantees

13


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4.    Income Taxes (Continued)


and indemnifications liability recorded in conjunction with the Tax Sharing Agreement discussed in Note 14—Guarantees. Additionally, the IRS is auditing the prior tax returns of the Company which includes legal entities of Tyco, Covidien and Tyco Electronics for the 2001 to 2004 period. The Company will manage the audit as Audit Managing Party.

        In connection with the adoption of FIN No. 48, the Company reassessed its related uncertain tax positions for recognition and measurement and has made any necessary adjustments. These adjustments were not material. The Company believes that the amounts recorded in its financial statements relating to these tax adjustments are sufficient. However, the ultimate resolution of these matters is uncertain and could result in a material impact to the Company's financial position, results of operations, cash flows or effective tax rate in future reporting periods.

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

        Additionally, during 2008 the Company expects 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.

5.    Earnings Per Share

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

 
  Quarter Ended
March 28, 2008

  Quarter Ended
March 30, 2007

 
  Income
  Shares
  Per Share
  Income
  Shares
  Per Share
Basic earnings per share:                                
  Income from continuing operations   $ 273   486   $ 0.56   $ 164   493   $ 0.33
  Share options, restricted share awards and deferred stock units       3             4      
  Exchange of convertible debt                 2   9      
   
 
       
 
     
Diluted earnings per share:                                
  Income from continuing operations, giving effect to dilutive adjustments   $ 273   489   $ 0.56   $ 166   506   $ 0.33
   
 
       
 
     

14


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

5.    Earnings Per Share (Continued)

 
 
  Six Months Ended
March 28, 2008

  Six Months Ended
March 30, 2007

 
  Income
  Shares
  Per Share
  Income
  Shares
  Per Share
Basic earnings per share:                                
  Income from continuing operations   $ 633   489   $ 1.29   $ 322   494   $ 0.65
  Share options, restricted share awards and deferred stock units       4             4      
  Exchange of convertible debt                 4   9      
   
 
       
 
     
Diluted earnings per share:                                
  Income from continuing operations, giving effect to dilutive adjustments   $ 633   493   $ 1.28   $ 326   507   $ 0.64
   
 
       
 
     

        The computation of diluted earnings per share for both the quarter and six months ended March 28, 2008 excludes the effect of the potential exercise of options to purchase approximately 20 million shares and excludes restricted share awards and deferred stock units of approximately 4 million shares because the effect would be anti-dilutive.

        The computation of diluted earnings per share for the quarter and six months ended March 30, 2007 excludes the effect of the potential exercise of options to purchase approximately 13 million shares and 15 million shares, respectively, and excludes restricted share awards and deferred stock units of approximately 1 million shares in both periods because the effect would be anti-dilutive.

6.    Goodwill and Intangible Assets

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

 
  ADT
Worldwide

  Flow
Control

  Fire
Protection
Services

  Electrical
and Metal
Products

  Safety
Products

  Corporate
and Other

  Total
 
Balance at September 28, 2007   $ 5,025   $ 1,975   $ 1,495   $ 1,054   $ 2,082   $ 5   $ 11,636  
Acquisitions     2     11             6         19  
Divestitures             (17 )       (5 )       (22 )
Currency translation     125     125     26     2     11         289  
   
 
 
 
 
 
 
 
Balance at March 28, 2008   $ 5,152   $ 2,111   $ 1,504   $ 1,056   $ 2,094   $ 5   $ 11,922  
   
 
 
 
 
 
 
 

15


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6.    Goodwill and Intangible Assets (Continued)

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

 
  March 28, 2008
  September 28, 2007
 
  Gross
Carrying
Amount

  Accumulated
Amortization

  Weighted Average
Amortization Period

  Gross
Carrying
Amount

  Accumulated
Amortization

  Weighted Average
Amortization Period

Amortizable:                                
  Contracts and related customer relationships   $ 6,024   $ 3,820   14 years   $ 5,808   $ 3,565   14 years
  Intellectual property     550     382   15 years     542     354   15 years
  Other     21     16   15 years     20     14   11 years
   
 
     
 
   
  Total   $ 6,595   $ 4,218   14 years   $ 6,370   $ 3,933   14 years
   
 
     
 
   

Non-Amortizable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Intellectual property   $ 254             $ 255          
  Other     5               5          
   
           
         
  Total   $ 259             $ 260          
   
           
         

        Intangible asset amortization expense for the quarters ended March 28, 2008 and March 30, 2007 was $138 million and $129 million, respectively. Intangible asset amortization expense for the six months ended March 28, 2008 and March 30, 2007 was $263 million and $260 million, respectively.

        The estimated aggregate amortization expense on intangible assets currently owned by the Company is expected to be approximately $250 million for the remainder of 2008, $450 million for 2009, $350 million for 2010, $300 million for 2011, $250 million for 2012 and $200 million for 2013.

7.    Debt

        Debt was as follows ($ in millions):

 
  March 28, 2008
  September 28, 2007
364-day senior bridge loan facility due 2008(2)   $   $ 367
6.125% public notes due 2008(1)     300     300
6.125% public notes due 2009(1)     215     215
6.75% public notes due 2011     516     516
6.375% public notes due 2011     849     849
Revolving senior credit facility due 2012     725     308
6.0% notes due 2013     655     654
3.125% convertible senior debentures due 2023     19     21
7.0% public notes due 2028     437     437
6.875% public notes due 2029     723     723
Other(1)(2)     63     72
   
 
Total debt     4,502     4,462
Less current portion     525     380
   
 
Long-term debt   $ 3,977   $ 4,082
   
 

(1)
These instruments, plus $10 million of the amount shown as other, comprise the current portion of long-term debt as of March 28, 2008.

(2)
This instrument, plus $13 million of the amount shown as other, comprise the current portion of long-term debt as of September 28, 2007.

16


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7.    Debt (Continued)

        On April 25, 2007, Tyco, certain of its subsidiaries and a syndicate of banks entered into a 364-day unsecured bridge loan facility. This facility has a variable interest rate based on LIBOR. The margin over LIBOR payable by Tyco International Finance S.A. ("TIFSA"), a wholly-owned subsidiary of the Company and successor company to Tyco International Group S.A., a wholly-owned subsidiary of the Company organized under the laws of Luxembourg ("TIGSA"), can vary based on changes in its credit rating. On October 1, 2007, the commitments with respect to the unused portion of the Company's unsecured bridge loan facility expired, but were subsequently renewed as described below. As of March 28, 2008, no amounts were outstanding under the bridge loan facility.

        The Company's unsecured revolving credit facility and its letter of credit facility described below provide the lenders under those facilities with the right to demand repayment of outstanding amounts, and to terminate commitments to extend additional credit, if (i) certain of the Company's outstanding public debt is declared due and payable and (ii) the Company does not have sufficient liquidity available under its unsecured bridge loan facility to refinance such debt. As a result, on November 27, 2007, the Company secured additional firm commitments from certain of its lenders under the bridge loan facility. These additional commitments provide the Company with sufficient liquidity to repay the outstanding public debt with borrowings of up to $4.0 billion. The additional commitments expire on, and any borrowings under the facility would mature on, November 25, 2008. The facility may only be used to repay, settle or otherwise extinguish the public debt described above, which is the subject of ongoing litigation between the Company and the trustee for such public debt. In April 2008, the Company reached a preliminary agreement to settle this litigation. For more information, see "Indenture Trustee Litigation" in Note 9.

        In addition to signing the bridge loan facility, on April 25, 2007, Tyco, certain of its subsidiaries and a syndicate of banks entered into a 5-year $1.25 billion unsecured revolving credit facility. This revolving credit facility will be used for working capital, capital expenditures and other corporate purposes. At March 28, 2008, $725 million was outstanding under the unsecured revolving credit facility, with $367 million of the proceeds drawn on the revolver used to repay the bridge loan facility. This facility has a variable interest rate based on LIBOR. The margin over LIBOR payable by TIFSA can vary based on changes in its credit rating.

        On June 21, 2007, Tyco and TIFSA entered into a $500 million letter of credit facility, with Citibank N.A. as administrative agent, that was originally scheduled to expire on December 15, 2007. The facility provides for the issuance of letters of credit supported by a related line of credit facility. TIFSA may only borrow under the line of credit agreement to reimburse the bank for obligations with respect to letters of credit issued under this facility. The covenants under this facility are similar to the covenants under the bridge loan and revolving credit facilities. TIFSA would pay interest on any outstanding borrowings at a variable interest rate, based on the bank's base rate or the Eurodollar rate, as defined. On October 19, 2007, the facility was amended to extend the maturity date to June 15, 2008 and adjust the interest rate spreads and fees applicable to extensions of credit thereunder. Loans under the amended letter of credit agreement will continue to bear interest based on LIBOR plus the applicable margin. As of March 28, 2008, letters of credit of $477 million have been issued under the $500 million credit facility. There were no amounts borrowed under this credit facility at March 28, 2008.

17


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8.    Financial Instruments

        Tyco uses various options, swaps, and forward contracts not designated as hedging instruments, to manage foreign currency exposures on accounts and notes receivable, accounts payable, intercompany loans and forecasted transactions denominated in certain foreign currencies. For derivatives not designated as hedging instruments, the Company records changes in fair value in selling, general and administrative expenses in the income statement in the period of change. The fair value of these instruments totaled $46 million of a net liability at March 28, 2008.

9.    Commitments and Contingencies

        In connection with the Separation, the Company entered into a liability sharing agreement regarding certain class actions that were pending against Tyco prior to the Separation. Subject to the terms and conditions of the Separation and Distribution Agreement, the Company will manage and control all the legal matters related to assumed contingent liabilities as described in the Separation and Distribution Agreement, including the defense or settlement thereof, subject to certain limitations.

        Tyco has assumed 27%, Covidien has assumed 42% and Tyco Electronics has assumed 31% of certain Tyco pre-Separation contingent and other corporate liabilities, which include securities class action litigation, Employee Retirement Income Security Act ("ERISA") class action litigation, certain legacy tax contingencies and any actions with respect to the spin-offs or the distributions made or brought by any third party except for litigation related to our public debt. Any amounts relating to these contingent and other corporate liabilities paid by Tyco after the spin-offs that are subject to the allocation provisions of the Separation and Distribution Agreement will be shared among Tyco, Covidien and Tyco Electronics pursuant to the same allocation ratio. As described in the Separation and Distribution Agreement, Tyco, Tyco Electronics and Covidien are jointly and severally liable for all amounts relating to the previously disclosed securities class action settlement. All costs and expenses that Tyco incurs in connection with the defense of such litigation, other than the amount of any judgment or settlement, which will be allocated in the manner described above, will be borne equally by Covidien, Tyco Electronics and Tyco.

Class Actions and Class Action Settlement

        As a result of actions taken by certain of the Company's former senior corporate management, Tyco, some members of the Company's former senior corporate management, including former members of its Board of Directors and former General Counsel are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws. In addition, Tyco, certain of its 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 are named as defendants in several ERISA class actions. 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. 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.

        As previously reported in our periodic filings, on November 27, 2002 the State of New Jersey, on behalf of several state pension funds, filed a complaint, New Jersey v. Tyco International Ltd., et al., in the United States District Court for the District of New Jersey against Tyco, our former auditors and certain of our former officers and directors, which was subsequently amended. Plaintiffs assert that the defendants violated federal and state securities laws, committed common law fraud, breached fiduciary

18


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


duties, violated certain RICO statutes and otherwise engaged in fraudulent acts by making materially false and misleading statements and omissions concerning, among other things, the following: unauthorized and improper compensation of certain of our former executives; their improper use of our funds for personal benefit and their improper self-dealing in real estate. On April 29, 2008, the Company signed a definitive agreement with the plaintiff to settle this lawsuit. The agreement calls for the Company to make a payment of $73.25 million to the plaintiffs in exchange for the plaintiff's agreement to dismiss the case against the Company and certain of its former directors and a former employee. Pursuant to the Separation and Distribution Agreement, the Company's share of the settlement amount is approximately $20 million, with Covidien and Tyco Electronics responsible for approximately $30 million and $23 million, respectively. The Company has recorded the settlement and related receivables from each of Covidien and Tyco Electronics for their respective shares of the settlement amount in its fiscal second quarter resulting in a net charge to selling, general and administrative expenses for its share of the settlement of approximately $20 million. Payment of the settlement is to be made on or before June 2, 2008. Upon the full execution of the definitive agreement by each of the other defendants party thereto and payment of the $73.25 million, the parties shall file the agreed upon order of dismissal with the Court, the entry of which will dismiss the litigation with prejudice. The Company expects to pay the full amount of the settlement to the State and concurrently receive payment from Covidien and Tyco Electronics.

        On December 19, 2007, the United States District Court for the District of New Hampshire entered a final order approving the settlement of 32 purported securities class action lawsuits. All legal contingencies that could have affected the final order approving the settlement expired on February 21, 2008. The settlement did not purport to resolve all securities cases, and several remain outstanding. In addition, the settlement does not release claims arising under ERISA and the lawsuits arising thereunder.

        Under the terms of the settlement, the plaintiffs agreed to release all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco to the certified class. The deadline for deciding not to participate in the class settlement was September 28, 2007. As of such date, Tyco received opt-out notices from individuals and entities totaling approximately 4% of the shares owned by class members, which includes shares owned by the New Jersey pension funds mentioned above. A number of these individuals and entities have filed claims separately against Tyco. Any judgments resulting from such claims or from claims that are filed in the future would not reduce the settlement amount. Generally, the claims asserted by these plaintiffs include claims similar to those asserted by the settling defendants; namely, violations of the disclosure provisions of federal securities laws. Tyco intends to vigorously defend any litigation resulting from opt-out claims. Other than with respect to the New Jersey v. Tyco International, et al matter described above, it is not possible at this time to predict the final outcome or to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of the asserted or unasserted claims from individuals that have opted-out or from any other legacy securities litigation. Should any of these cases result in an adverse judgment or be settled for a significant amount, they could have a material adverse effect on our financial position, results of operations or cash flows.

        Under the terms of the Separation and Distribution Agreement entered into in connection with the Separation, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full amount of the class action settlement and any judgments resulting from opt-out claims. Additionally, under the Separation and Distribution Agreement, the companies share in the liability and related

19


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


escrow accounts, with Tyco assuming 27%, Covidien 42% and Tyco Electronics 31% of the settlement amount.

        Tyco incurred a charge to expense, for which no tax benefit is available, and a current liability of $2.975 billion in the third quarter of 2007. The Company has also recovered or expects to recover certain of these costs from insurers. As such, the Company recorded $113 million of recoveries in connection with the class action settlement in its Consolidated Statements of Operations for 2007. Based on the Separation and Distribution Agreement, the Company recorded payables to Covidien and Tyco Electronics in 2007 for their portion of the recoveries with an offset to shareholders' equity. Tyco borrowed under its unsecured bridge and credit facilities to fund the liability and placed the proceeds in escrow for the benefit of the class. In connection with the Separation, Covidien and Tyco Electronics assumed their portion of the related borrowing.

        Since all legal contingencies that could have affected the settlement were exhausted on February 21, 2008, the administration and distribution of the settlement funds in escrow are now managed by the counsel of the certified class and Tyco is not subject to any further liability related to the class action settlement. As such, Tyco has extinguished the class action liability and no longer has claim to the escrow account. The escrow accounts earned interest that was payable to the class. As such, interest was also accrued on the class action settlement liability. On February 21, 2008, the class action liability and escrow account balances including interest were each $3.02 billion.

        Based on the Separation and Distribution Agreement, Tyco had a receivable from Covidien and Tyco Electronics for their portion of the liability of $1,257 million and $927 million, respectively at September 28, 2007 and corresponding payables to Covidien and Tyco Electronics for their interest in the escrow accounts. Receivables and payables that pertain to the class action settlement and related escrow accounts with the same counterparty were presented net in the Consolidated Balance Sheet. Tyco's portion of the liability was $808 million at September 28, 2007. These amounts have been extinguished as of March 28, 2008.

Investigations

        The Company and others have received various subpoenas and requests from the Securities and Exchange Commission ("SEC") Division of Enforcement, the United States Department of Labor, state departments of labor, the General Service Administration and others seeking the production of voluminous documents in connection with various investigations into the Company's governance, management, operations, accounting and related controls. The 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of March 28, 2008, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $36 million to $63 million. As of March 28, 2008, Tyco concluded that the best estimate within this range is approximately $39 million, of which $7 million is included in accrued and other current liabilities and $32 million is included in other liabilities on Tyco's Consolidated Balance Sheets. In view of the Company's financial position and reserves for environmental matters, the Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, results of operations or cash flows.

Asbestos Matters

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

        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, as a result, have been dismissed by the courts. The Company will continue to vigorously defend the lawsuits that have been filed against it and its subsidiaries, but cannot predict whether it will be successful in those cases that proceed to trial. When appropriate, the Company settles claims. Although in the past the total amount paid in any year to settle and defend all asbestos claims has been immaterial, Tyco has recently experienced an increase in the number of lawsuits that have proceeded to trial. Of the lawsuits that have proceeded to trial in 2008, Tyco has won or settled all but one case, with that one case returning an adverse jury verdict for approximately $7.7 million, which included both compensatory and punitive damages. Tyco intends to appeal this verdict and believes that the jury verdict will be overturned. As of March 28, 2008, there were approximately 5,800 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 for certain of these claims. 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.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)

Compliance Matters

        Tyco has received and responded to various allegations and other information that certain improper payments were made by Tyco subsidiaries in recent years. As previously reported, we have been informed that two subsidiaries in our Flow Control business in Italy have been named in a request for criminal charges filed by the Milan public prosecutor's office. Tyco has reported to the U.S. Department of Justice ("DOJ") and the SEC the investigative steps and remedial measures that it has taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act ("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 communicate with the DOJ and SEC to provide updates on the baseline review and follow-up investigations, including, as appropriate, briefings concerning additional instances of potential improper payments identified by the Company in the course of its ongoing compliance activities. Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the Company in its response to these allegations. 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 these matters and 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 these matters. However, it is possible that the Company may be required to pay material fines, consent to injunctions on future conduct, or suffer other penalties or adverse impacts, each of which could have a material adverse effect on its financial position, results of operations or cash flows.

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

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

Indenture Trustee Litigation

        On June 4, 2007, The Bank of New York ("BONY"), at that time the indenture trustee under the indenture, dated June 9, 1998 (as supplemented, the "1998 Indenture") and the indenture, dated as of November 12, 2003 (as supplemented, the "2003 Indenture" and together with the 1998 Indenture, the "Indentures"), pursuant to which notes evidencing approximately $3.7 billion in principal amount of indebtedness (the "Notes") were issued, commenced an action against Tyco International Group S.A. ("TIGSA") and Tyco in the United States District Court for the Southern District of New York

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


captioned The Bank of New York v. Tyco International Group S.A. BONY served an amended complaint on October 18, 2007, which added Tyco International Finance S.A. ("TIFSA") as an additional defendant. As amended, the complaint alleges that the Separation of the Electronics and Healthcare businesses and related assets and liabilities of Tyco and its subsidiaries and the distribution of such Electronics and Healthcare businesses and related assets and liabilities to Tyco's shareholders, breached the Indentures and seeks damages in excess of $4.1 billion on behalf of noteholders. The amended complaint also seeks a judgment declaring that BONY was not required to sign supplemental indentures proposed by TIGSA, TIFSA and Tyco in connection with the Separation that added TIFSA as a co-obligor on the Notes issued under the Indentures and transferred TIGSA's obligations under the Indentures to Tyco. BONY also seeks a declaratory judgment that TIGSA is obligated to pay BONY reasonable compensation and to reimburse BONY for all reasonable expenses, including attorneys' fees incurred in connection with the Separation and in resolving the proper interpretation of the Indentures. Tyco and TIFSA filed counterclaims against BONY, alleging that its refusal to sign the supplemental indentures in connection with the Separation and the filing of the amended complaint constituted a breach of the Indentures and a breach of the duty of good faith and fair dealing implied in the Indentures. Tyco and TIFSA seek unspecified damages on these claims. Tyco and TIFSA also seek a declaratory judgment that no default has occurred and that BONY is required to sign the supplemental indentures proposed by TIGSA, TIFSA and Tyco.

        On November 8, 2007, BONY delivered to Tyco a Notice of Events of Default, claiming that the actions taken by Tyco in connection with the Separation constituted events of default under the Indentures. The claims made in the Notice of Events of Default are the same as those alleged by BONY in the litigation, and Tyco continues to believe that no default or event of default has occurred. The Indentures provide for a 90-day cure period following delivery of a Notice of Events of Default. That period has ended, which means the indenture trustee could now claim that it can declare any outstanding amounts under the Indentures immediately due and payable. Tyco, TIGSA and TIFSA would contest such an acceleration. On January 24, 2008, BONY notified Tyco of its resignation as trustee under the Indentures. Wilmington Trust Company (the "Trustee") was later appointed as the successor trustee.

        On March 3, 2008, the Court issued an opinion and order denying BONY's motion for summary judgment. The Court held that the decision in Sharon Steel Corp. v. Chase Manhattan Bank, 691 F.2d 1039 (2d Cir. 1982), the case on which BONY principally relied for purposes of the summary judgment motion, did not apply to the facts of the Separation. The court held that Tyco, TIGSA and TIFSA did not violate the Indentures by virtue of TIGSA having transferred its assets to Tyco, and that, if the Separation were otherwise permitted by the Indentures, BONY's failure to sign the supplemental indentures in connection therewith would not by itself mean that the Separation transactions breached the Indentures. The Court held that the record thus far was insufficient to make a determination as to whether the Separation violated the Indentures by virtue of Tyco's Electronics and Healthcare businesses constituting "substantially all" of Tyco's assets.

        On April 11, 2008, Tyco reached a preliminary agreement with firms that claim to hold or advise the holders of approximately 80% of the Notes to settle this litigation. In exchange for dismissal of the lawsuit and waiver of any alleged default, the agreement calls for Tyco to make an aggregate cash payment of $250 million to the holders of the Notes. Tyco has also agreed to offer to exchange certain series of such indebtedness (Notes that are due in 2028 and 2029) for Notes with maturities in 2019 and 2021, respectively. As a result, Tyco has commenced a consent solicitation seeking a waiver from

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


noteholders under the Indentures of any and all alleged defaults under the Indentures. The consent solicitation would also provide all noteholders with the right to require Tyco to repurchase the debt outstanding under the Indentures at a fixed price under certain circumstances in the event of a change in control. In addition, Tyco has commenced the exchange offer described above only to qualified institutional buyers pursuant to Rule 144A. The new Notes issued in the exchange will have substantially the same terms as the existing Notes (as amended in accordance with the consent solicitation), with the exception of the shortened maturities described above.

        The closing of the transaction is conditioned upon Tyco receiving the consent of holders of at least a majority in principal amount of each outstanding series of Notes. The closing is also subject to other conditions, including the agreement of the Trustee to dismiss the litigation and the entry of an order by the Court dismissing the litigation with prejudice. As of May 5, 2008, Tyco has received irrevocable consents from over 88% of the principal amount of each series of notes, and holders of over 95% of the principal amount of each of the series of Notes due 2028 and 2029 have validly tendered their Notes for exchange. In addition, on April 30, 2008, the Court entered an order dismissing the litigation, and the Company expects to conclude the consent solicitations and exchange offers by the end of May 2008.

ERISA Partial Withdrawal Liability Assessment and Demand

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

        ERISA requires that payment of withdrawal liability be made in full or in quarterly installments commencing upon receipt of a liability assessment from the plan. A plan's assessment of withdrawal liability generally may be challenged only in arbitration, and ERISA requires that quarterly payments must continue to be made during the pendency of the arbitration. If the employer prevails in arbitration (and any subsequent court appeals), its quarterly withdrawal liability payments are refunded with interest. The Fund's total withdrawal liability assessment against SimplexGrinnell is approximately $25 million, and the quarterly withdrawal liability payments are $1.1 million, which payments commenced on August 1, 2007. While the ultimate outcome is uncertain, SimplexGrinnell believes that it has strong arguments that no withdrawal liability is owed to the Fund, and it plans to vigorously defend against the Fund's withdrawal liability assessment and has filed for arbitration. The Company has made no provision for this contingency and believes that its quarterly payments are recoverable.

Other Matters

        On February 11, 2008, Tyco announced that it had entered into an agreement to sell substantially all of the remaining portion of Infrastructure Services to AECOM Technology Corporation for approximately $510 million. The sale agreement provides that certain assets and contingent liabilities related to Infrastructure Services are to be retained by Tyco. Among those assets and contingent liabilities are all costs and expenses related to the ongoing litigation between Earth Tech and the City of Phoenix, which is described below.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)

        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. Earth Tech filed a lawsuit against the City of Phoenix in the Maricopa County Superior Court alleging a total of more than $75 million in damages arising from the City's breach of its contract with Earth Tech. In connection with this matter, the Company has assets under the original contract, which it has assessed as recoverable, of $50 million at March 28, 2008 and September 28, 2007.

        In connection with the foregoing, 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 City alleges that Earth Tech breached its contracts with the City of Phoenix and that Earth Tech did not properly, reasonably or timely manage, supervise or inspect the work under the contracts. The City of Phoenix also claims that Federal Insurance breached the terms and conditions of the performance bond and that Federal Insurance failed to investigate the City's bond claims. The City of Phoenix alleges 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. The Court has granted several of Earth Tech's motions for partial summary judgment, ordering that application of Arizona's Prompt Payment Act was appropriate and that any material inconsistencies in the contract be resolved in favor of the Act's requirements. Earth Tech expects to file additional summary judgment motions related to the Prompt Payment Act. 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.

        Fitzpatrick Contractors Limited v. Tyco Fire and Integrated Solutions (UK) Ltd. On July 18, 2007, Fitzpatrick Contractors Limited ("FCL") commenced an action against Tyco Fire and Integrated Solutions (UK) Ltd. in the High Court of Justice, Queen Bench Division, Technology and Construction Court, United Kingdom, alleging that Tyco entered into a binding contract in 2002 for the design, manufacture and installation of mechanical and electrical works for the refurbishment of a portion of London Transport's Blackwall Tunnel. FCL seeks damages for breach of contract in the amount of approximately $38 million. Tyco intends to defend this action vigorously. While it is not possible at this time to predict the final outcome of this dispute, Tyco does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows. Trial is expected to begin in November 2008.

        Sensormatic Security Corp. v. Sensormatic Electronics Corp., ADT Security Services, Inc. and Wallace Computer Services, Inc.    In April 2002, litigation was commenced in the United States District Court for the District of Maryland by a Sensormatic franchisee, Sensormatic Security Corp. ("SSC"), alleging breach of contract against Sensormatic and tortious interference with contract against ADT and Wallace Computer Services, Inc., a party unrelated to Tyco. The litigation was based on allegedly unpaid commissions under a franchise agreement. The lawsuit also alleges that Sensormatic improperly authorized third parties (including ADT and Wallace) to sell in SSC's exclusive territory of Maryland, Virginia and the District of Columbia. Sensormatic has agreed to indemnify Wallace. SSC seeks an accounting, monetary damages (including punitive damages against ADT and Wallace), and injunctive relief. Sensormatic and ADT have denied SSC's allegations and asserted affirmative defenses. Sensormatic also filed a counterclaim seeking recovery of overpayments made to SSC. Both the trial and appellate court have ruled on a number of motions filed by the parties in this litigation, some of

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9.    Commitments and Contingencies (Continued)


which rulings have been favorable to the plaintiff and some of which have been favorable to ADT and Sensormatic. Trial has been scheduled for December 2008. Sensormatic and ADT will continue to vigorously defend the litigation. While it is not possible at this time to predict the final outcome of this dispute, Tyco has reserved its estimate of loss for this matter, and does not believe this action will have a material adverse effect on its financial position, results of operations or cash flows.

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

10.    Retirement Plans

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

 
  U.S. Plans
 
 
  For the Quarters Ended
  For the Six Months Ended
 
 
  March 28,
2008

  March 30,
2007

  March 28,
2008

  March 30,
2007

 
Service cost   $ 2   $ 2   $ 4   $ 4  
Interest cost     12     12     24     24  
Expected return on plan assets     (15 )   (14 )   (30 )   (28 )
Amortization of net actuarial loss     2     3     4     6  
   
 
 
 
 
  Net periodic benefit cost   $ 1   $ 3   $ 2   $ 6  
   
 
 
 
 
 
 
  Non-U.S. Plans
 
 
  For the Quarters Ended
  For the Six Months Ended
 
 
  March 28,
2008

  March 30,
2007

  March 28,
2008

  March 30,
2007

 
Service cost   $ 12   $ 12   $ 24   $ 24  
Interest cost     21     19     42     38  
Expected return on plan assets     (21 )   (19 )   (42 )   (38 )
Amortization of prior service credit     (1 )   (1 )   (2 )   (2 )
Amortization of net actuarial loss     5     8     10     16  
   
 
 
 
 
  Net periodic benefit cost   $ 16   $ 19   $ 32   $ 38  
   
 
 
 
 

        The Company anticipates that it will contribute at least the minimum required to its pension plans in 2008 of $5 million for U.S. plans and $64 million for non-U.S. plans. During the six months ended March 28, 2008, the Company has contributed $36 million to its U.S. and non-U.S. pension plans.

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

        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.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11. Share Plans

        During the six months ended March 28, 2008, there were no material share-based compensation grants.

        During the six months ended March 30, 2007, the Company issued its annual share-based compensation grants. The number of awards issued for the annual share-based compensation grant were approximately 10 million of which 7 million were share options and 3 million were restricted share awards. These options are exercisable in equal annual installments over a period of four years and the restricted share awards vest in one-third increments over a period of four years beginning in year two. The weighted-average grant-date fair value of the share options and restricted share awards was $15.16 and $48.14, respectively. The weighted-average assumptions used in the Black-Scholes option pricing model included an expected stock price volatility of 32%, a risk free interest rate of 4.3%, an expected annual dividend per share of $0.64 and an expected option life of 5.1 years.

        Grant information has been adjusted for the conversion of Tyco share options to share options of Covidien and Tyco Electronics, the conversion of Tyco restricted share awards to restricted share awards of Covidien and Tyco Electronics, the Separation and the one for four reverse stock split.

12.    Consolidated Segment Data

        The segment data presented have been reclassified to exclude the results of discontinued operations. Selected information by segment is presented in the following tables ($ in millions):

 
  For the Quarters Ended
  For the Six Months Ended
 
  March 28,
2008

  March 30,
2007

  March 28,
2008

  March 30,
2007

Net revenue(1):                        
  ADT Worldwide   $ 1,966   $ 1,887   $ 3,965   $ 3,750
  Flow Control     1,024     878     2,098     1,713
  Fire Protection Services     861     819     1,690     1,607
  Electrical and Metal Products     542     479     1,029     922
  Safety Products     469     424     916     830
  Corporate and Other     4     3     8     7
   
 
 
 
  Net revenue   $ 4,866   $ 4,490   $ 9,706   $ 8,829
   
 
 
 
 
  For the Quarters Ended
  For the Six Months Ended
 
 
  March 28,
2008

  March 30,
2007

  March 28,
2008

  March 30,
2007

 
Operating income:                          
  ADT Worldwide   $ 222   $ 195   $ 471   $ 396  
  Flow Control     143     102     314     210  
  Fire Protection Services     77     62     150     120  
  Electrical and Metal Products     72     26     113     67  
  Safety Products     54     66     140     137  
  Corporate and Other     (125 )   (247 )   (252 )   (477 )
   
 
 
 
 
  Operating income   $ 443   $ 204   $ 936   $ 453  
   
 
 
 
 

(1)
Revenue by operating segment excludes intercompany transactions.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

13.    Supplementary Balance Sheet Information

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

 
  March 28, 2008
  September 28, 2007
 
Purchased materials and manufactured parts   $ 748   $ 620  
Work in process     272     267  
Finished goods     1,005     924  
   
 
 
  Inventories   $ 2,025   $ 1,811  
   
 
 
Land   $ 163   $ 155  
Buildings     772     723  
Subscriber systems     5,232     5,061  
Machinery and equipment     2,347     2,215  
Property under capital leases(1)     53     52  
Construction in progress     158     138  
Accumulated depreciation(2)     (5,112 )   (4,801 )
   
 
 
  Property, plant and equipment, net   $ 3,613   $ 3,543  
   
 
 

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

(2)
Accumulated amortization of capital lease assets was $21 million and $19 million at March 28, 2008 and September 28, 2007, respectively.

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

14.    Guarantees

        Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 2008 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.

        There are certain guarantees or indemnifications extended between Tyco, Covidien and Tyco Electronics in accordance with the terms of the Separation and Distribution Agreement and the Tax Sharing Agreement. The guarantees primarily relate to certain contingent tax liabilities included in the Tax Sharing Agreement. See Note 4 for further discussion of the Tax Sharing Agreement. At the time of the Separation, Tyco recorded a liability necessary to recognize the fair value of such guarantees and indemnifications in accordance with FIN No. 45. To value the initial obligation under FIN No. 45 related to the Tax Sharing Agreement, the Company considered a range of discounted probability-weighted future cash flows, which included an estimated premium to reflect the cost an independent insurance carrier or guarantor would charge to assume such obligation, related to the unresolved (asserted and unasserted) pre-separation shared tax matters of Covidien and Tyco Electronics. The liability necessary to reflect the fair value of the guarantees and indemnifications under the Tax Sharing Agreement is $554 million, which is included in other liabilities on our Consolidated Balance Sheets.

28


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

14.    Guarantees (Continued)

        In addition, Tyco historically provided support in the form of financial and/or performance guarantees to various Covidien and Tyco Electronics operating entities. In connection with the Separation, the Company worked with the guarantee counterparties to cancel or assign these guarantees to Covidien or Tyco Electronics. To the extent these guarantees were not assigned prior to the Separation date, Tyco assumed primary liability on any remaining such support. The estimated fair values of these obligations are $7 million, which are included in other liabilities on our Consolidated Balance Sheets, and were recorded in accordance with FIN No. 45.

        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 is not aware of any potential liabilities related to such indemnities which could have a material adverse effect on the Company's financial position, results of operations or cash flows.

        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.

        Following is a roll forward of the Company's warranty accrual ($ in millions):

 
  For the
Quarter Ended
March 28, 2008

  For the Six
Months Ended
March 28, 2008

 
Balance at beginning of period   $ 153   $ 163  
Warranties issued during the period     3     10  
Changes in estimates     (7 )   (6 )
Settlements     (23 )   (42 )
Currency translation     3     4  
   
 
 
Balance at March 28, 2008   $ 129   $ 129  
   
 
 

        In 2001, a division of Safety Products initiated a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain O-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco's acquisition. Under this program, the sprinkler heads are being replaced free of charge to property owners. On May 1, 2007, the Consumer Product Safety Commission and the Company announced an August 31, 2007 deadline for filing claims to participate in the VRP. The Company will fulfill all valid claims for replacement of qualifying sprinklers. The related warranty reserve reflects the Company's best estimate of the expected costs to complete the program in light of claims received through August 31, 2007 and estimated material and labor costs. Settlements during the quarter and six months ended March 28, 2008 include cash expenditures of $13 million and $25 million, respectively, related to the VRP.

29


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

15.    Tyco International Finance S.A.

        TIFSA, a wholly-owned subsidiary of the Company, has public debt securities outstanding (see Note 7) which are fully and unconditionally guaranteed by Tyco. The following tables present condensed consolidating financial information for Tyco, TIFSA and all other subsidiaries. Condensed financial information for Tyco and TIFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.

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

30


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Quarter Ended March 28, 2008

(in millions)

 
  Tyco International Ltd.
  Tyco International Finance S.A.
  Other Subsidiaries
  Consolidating Adjustments
  Total
 
Net revenue   $   $   $ 4,866   $   $ 4,866  
Cost of product sales             2,196         2,196  
Cost of services             990         990  
Selling, general and administrative expenses     29         1,176         1,205  
Separation costs     5         (10 )       (5 )
Restructuring and asset impairment charges, net             37         37  
   
 
 
 
 
 
  Operating (loss) income     (34 )       477         443  
Interest income     14         11         25  
Interest expense     (14 )   (95 )   (6 )       (115 )
Other (expense) income, net     (1 )   1              
Equity in net income of subsidiaries     690     405         (1,095 )    
Intercompany interest and fees     (382 )   45     337          
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     273     356     819     (1,095 )   353  
Income taxes         24     (103 )       (79 )
Minority interest             (1 )       (1 )
   
 
 
 
 
 
  Income from continuing operations     273     380     715     (1,095 )   273  
Income from discontinued operations, net of income taxes     7     5     7     (12 )   7  
   
 
 
 
 
 
  Net income   $ 280   $ 385   $ 722   $ (1,107 ) $ 280  
   
 
 
 
 
 

31


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Quarter Ended March 30, 2007

(in millions)

 
  Tyco International Ltd.
  Tyco International Group S.A.
  Other Subsidiaries
  Consolidating Adjustments
  Total
 
Net revenue   $   $   $ 4,490   $   $ 4,490  
Cost of product sales             2,058         2,058  
Cost of services             928         928  
Selling, general and administrative expenses     25     12     1,186         1,223  
Separation costs     14         18         32  
Restructuring, asset impairment and divestiture charges, net             45         45  
   
 
 
 
 
 
  Operating (loss) income     (39 )   (12 )   255         204  
Interest income         3     8         11  
Interest expense         (60 )   (4 )       (64 )
Other income, net             1         1  
Equity in net income (loss) of subsidiaries     302     (53 )       (249 )    
Intercompany interest and fees     (99 )   161     (62 )        
   
 
 
 
 
 
  Income from continuing operations before income taxes     164     39     198     (249 )   152  
Income taxes         (27 )   39         12  
   
 
 
 
 
 
  Income from continuing operations     164     12     237     (249 )   164  
Income from discontinued operations, net of income taxes     671     664     767     (1,431 )   671  
   
 
 
 
 
 
  Net income   $ 835   $ 676   $ 1,004   $ (1,680 ) $ 835  
   
 
 
 
 
 

32


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Six Months Ended March 28, 2008

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Finance S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 9,706   $   $ 9,706  
Cost of product sales             4,388         4,388  
Cost of services             1,956         1,956  
Selling, general and administrative expenses     38     1     2,335         2,374  
Separation costs     (14 )       18         4  
Restructuring and asset impairment charges, net             48         48  
   
 
 
 
 
 
  Operating (loss) income     (24 )   (1 )   961         936  
Interest income     47         36         83  
Interest expense     (47 )   (175 )   (10 )       (232 )
Other income, net     50     2             52  
Equity in net income of subsidiaries     1,371     766         (2,137 )    
Intercompany interest and fees     (764 )   87     677          
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     633     679     1,664     (2,137 )   839  
Income taxes         39     (243 )       (204 )
Minority interest             (2 )       (2 )
   
 
 
 
 
 
  Income from continuing operations     633     718     1,419     (2,137 )   633  
Income from discontinued operations, net of income taxes     10     6     10     (16 )   10  
   
 
 
 
 
 
  Net income   $ 643   $ 724   $ 1,429   $ (2,153 ) $ 643  
   
 
 
 
 
 

33


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Six Months Ended March 30, 2007

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Net revenue   $   $   $ 8,829   $   $ 8,829  
Cost of product sales             4,009         4,009  
Cost of services             1,832         1,832  
Selling, general and administrative expenses     40     (5 )   2,342         2,377  
Separation costs     24         33         57  
Restructuring, asset impairment and divestiture charges, net             101         101  
   
 
 
 
 
 
  Operating (loss) income     (64 )   5     512         453  
Interest income         7     18         25  
Interest expense         (120 )   (10 )       (130 )
Other income, net             2         2  
Equity in net income of subsidiaries     864     130         (994 )    
Intercompany interest and fees     (478 )   303     175          
   
 
 
 
 
 
  Income from continuing operations before income taxes and minority interest     322     325     697     (994 )   350  
Income taxes         (58 )   31         (27 )
Minority interest             (1 )       (1 )
   
 
 
 
 
 
  Income from continuing operations     322     267     727     (994 )   322  
Income from discontinued operations, net of income taxes     1,306     1,290     1,491     (2,781 )   1,306  
   
 
 
 
 
 
  Net income   $ 1,628   $ 1,557   $ 2,218   $ (3,775 ) $ 1,628  
   
 
 
 
 
 

34


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING BALANCE SHEET

March 28, 2008

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Finance S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
Assets                              
Current Assets:                              
  Cash and cash equivalents   $ 1   $   $ 1,073   $   $ 1,074
  Accounts receivable, net             3,137         3,137
  Inventories             2,025         2,025
  Intercompany receivables     1,456     457     17,159     (19,072 )  
  Prepaid expenses and other current assets     64     52     1,645         1,761
  Assets of discontinued operations     457     403     983     (860 )   983
   
 
 
 
 
    Total current assets     1,978     912     26,022     (19,932 )   8,980
Property, plant and equipment, net             3,613         3,613
Goodwill             11,922         11,922
Intangible assets, net             2,636         2,636
Investment in subsidiaries     44,235     20,348         (64,583 )  
Intercompany loans receivable         12,090     18,615     (30,705 )  
Other assets     168     15     2,540         2,723
   
 
 
 
 
  Total Assets   $ 46,381   $ 33,365   $ 65,348   $ (115,220 ) $ 29,874
   
 
 
 
 
Liabilities and Shareholders' Equity                              
Current Liabilities:                              
  Loans payable and current maturities of long-term debt   $   $ 515   $ 10   $   $ 525
  Accounts payable     3         1,513         1,516
  Accrued and other current liabilities     160     82     3,074         3,316
  Intercompany payables     7,879     9,343     1,850     (19,072 )  
  Liabilities of discontinued operations             526         526
   
 
 
 
 
    Total current liabilities     8,042     9,940     6,973     (19,072 )   5,883
Long-term debt         3,916     61         3,977
Intercompany loans payable     21,801         8,904     (30,705 )  
Other liabilities     564     14     3,407         3,985
   
 
 
 
 
  Total Liabilities     30,407     13,870     19,345     (49,777 )   13,845
Minority interest             55         55
Shareholders' Equity:                              
  Preference shares             2,500     (2,500 )  
  Common shares     399         (11 )       388
  Other shareholders' equity     15,575     19,495     43,459     (62,943 )   15,586
   
 
 
 
 
  Total Shareholders' Equity     15,974     19,495     45,948     (65,443 )   15,974
   
 
 
 
 
  Total Liabilities and Shareholders' Equity   $ 46,381   $ 33,365   $ 65,348   $ (115,220 ) $ 29,874
   
 
 
 
 

35


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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


CONDENSED CONSOLIDATING BALANCE SHEET

September 28, 2007

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Finance S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
Assets                              
Current Assets:                              
  Cash and cash equivalents   $ 16   $   $ 1,878   $   $ 1,894
  Accounts receivable, net             2,945         2,945
  Inventories             1,811         1,811
  Intercompany receivables     1,445     439     16,683     (18,567 )  
  Class action settlement escrow     2,992                 2,992
  Prepaid expenses and other current assets     27         1,605         1,632
  Assets of discontinued operations     486     427     1,084     (913 )   1,084
   
 
 
 
 
    Total current assets     4,966     866     26,006     (19,480 )   12,358
Property, plant and equipment, net             3,543         3,543
Goodwill             11,636         11,636
Intangible assets, net             2,697         2,697
Investment in subsidiaries     42,918     19,193         (62,111 )  
Intercompany loans receivable         11,811     18,615     (30,426 )  
Other assets     187     36     2,358         2,581
   
 
 
 
 
  Total Assets   $ 48,071   $ 31,906   $ 64,855   $ (112,017 ) $ 32,815
   
 
 
 
 
Liabilities and Shareholders' Equity                              
Current Liabilities:                              
  Loans payable and current maturities of long-term debt   $   $ 367   $ 13   $   $ 380
  Accounts payable     3         1,662         1,665
  Class action settlement liability     2,992                 2,992
  Accrued and other current liabilities     131     77     3,262         3,470
  Intercompany payables     7,694     9,022     1,851     (18,567 )  
  Liabilities of discontinued operations             598         598
   
 
 
 
 
    Total current liabilities     10,820     9,466     7,386     (18,567 )   9,105
Long-term debt         4,015     67         4,082
Intercompany loans payable     21,077         9,349     (30,426 )  
Other liabilities     550     16     3,371         3,937
   
 
 
 
 
  Total Liabilities     32,447     13,497     20,173     (48,993 )   17,124
Minority interest             67         67
Shareholders' Equity:                              
  Preference shares             2,500     (2,500 )  
  Common shares     398         (1 )       397
  Other shareholders' equity     15,226     18,409     42,116     (60,524 )   15,227
   
 
 
 
 
  Total Shareholders' Equity     15,624     18,409     44,615     (63,024 )   15,624
   
 
 
 
 
  Total Liabilities and Shareholders' Equity   $ 48,071   $ 31,906   $ 64,855   $ (112,017 ) $ 32,815
   
 
 
 
 

36


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended March 28, 2008

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Finance S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Cash Flows From Operating Activities:                                
  Net cash (used in) provided by operating activities   $ (3,571 ) $ 243   $ 707   $   $ (2,621 )
  Net cash provided by discontinued operating activities             4         4  
Cash Flows From Investing Activities:                                
Capital expenditures             (356 )       (356 )
Proceeds from disposal of assets             10         10  
Acquisition of businesses, net of cash acquired             (27 )       (27 )
Accounts purchased from ADT dealer network             (187 )       (187 )
Class action settlement escrow     2,960                 2,960  
Intercompany dividend from subsidiary         62         (62 )    
Increase in intercompany loans         (279 )       279      
Other             (9 )       (9 )
   
 
 
 
 
 
  Net cash provided by (used in) investing activities     2,960     (217 )   (569 )   217     2,391  
  Net cash provided by discontinued investing activities             14         14  
Cash Flows From Financing Activities:                                
Net borrowings (repayments) of debt         50     (10 )       40  
Proceeds from exercise of share options     20         1         21  
Dividends paid     (148 )               (148 )
Intercompany dividend to parent             (62 )   62      
Repurchase of common shares by subsidiary             (477 )       (477 )
Net intercompany loan borrowings (repayments)     724         (445 )   (279 )    
Transfer from discontinued operations             19         19  
Other         (76 )   7         (69 )
   
 
 
 
 
 
  Net cash provided by (used in) financing activities     596     (26 )   (967 )   (217 )   (614 )
  Net cash used in discontinued financing activities             (18 )       (18 )
Effect of currency translation on cash             24         24  
   
 
 
 
 
 
Net decrease in cash and cash equivalents     (15 )       (805 )       (820 )
Cash and cash equivalents at beginning of period     16         1,878         1,894  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $ 1   $   $ 1,073   $   $ 1,074  
   
 
 
 
 
 

37


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

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


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended March 30, 2007

(in millions)

 
  Tyco
International
Ltd.

  Tyco
International
Group S.A.

  Other
Subsidiaries

  Consolidating
Adjustments

  Total
 
Cash Flows From Operating Activities:                                
  Net cash (used in) provided by operating activities   $ (652 ) $ 1,084   $ 280   $   $ 712  
  Net cash provided by discontinued operating activities         78     1,618         1,696  
Cash Flows From Investing Activities:                                
Capital expenditures             (299 )       (299 )
Proceeds from disposal of assets             10         10  
Acquisition of businesses, net of cash acquired             (16 )       (16 )
Accounts purchased from ADT dealer network             (176 )       (176 )
Liquidation of rabbi trust investments             271         271  
Increase in intercompany loans         (541 )       541      
Other         (2 )   45         43  
   
 
 
 
 
 
  Net cash used in investing activities         (543 )   (165 )   541     (167 )
  Net cash used in discontinued investing activities         (78 )   (505 )   78     (505 )
Cash Flows From Financing Activities:                                
Net borrowings (repayments) of debt         195     (2 )       193  
Proceeds from exercise of share options     190         22         212  
Dividends paid     (395 )               (395 )
Repurchase of common shares by subsidiary             (668 )       (668 )
Net intercompany loan borrowings (repayments)     859         (318 )   (541 )    
Transfer from discontinued operations             1,083         1,083  
Other             13         13  
   
 
 
 
 
 
  Net cash provided by financing activities     654     195     130     (541 )   438  
  Net cash used in discontinued financing activities             (999 )   (78 )   (1,077 )
Effect of currency translation on cash             21         21  
Effect of currency translation on cash related to discontinued operations             19         19  
   
 
 
 
 
 
Net increase in cash and cash equivalents     2     736     399         1,137  
Less: net increase in cash related to discontinued operations             (133 )       (133 )
Cash and cash equivalents at beginning of period     2     1,158     1,033         2,193  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $ 4   $ 1,894   $ 1,299   $   $ 3,197  
   
 
 
 
 
 

38


TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

16.    Subsequent Events

        On April 11, 2008, Tyco reached a preliminary agreement regarding the Indenture Trustee Litigation. In addition, on April 30, 2008, the Court entered an order dismissing the litigation, and the Company expects to conclude the related consent solicitations and exchange offers by the end of May 2008—see Note 9 Commitments and Contingencies.

        On April 14, 2008, the Company's ADT Security business reached an agreement to acquire FirstService Security, a division of FirstService Corporation, for approximately $187 million. FirstService Security is a leading commercial security systems integrator and provides a full range of integrated security system services, including design, engineering, installation, servicing and monitoring of access control, closed-circuit television and intrusion systems. FirstService Security had total net revenue of more than $200 million during the last twelve months. The transaction is subject to regulatory approval and normal closing conditions.

        On April 29, 2008, the Company signed a definitive agreement with the State of New Jersey to settle the outstanding litigation surrounding several state pension funds—see Note 9 Commitments and Contingencies.

        In May 2008, TIFSA commenced issuing commercial paper to U.S. institutional accredited investors and qualified institutional buyers as part of the Company's ongoing effort to enhance financial flexibility and to potentially decrease the cost of borrowings. Borrowings under the commercial paper program are available for general corporate purposes.

        Since March 28, 2008, the Company repurchased 3.1 million common shares for $145 million under the $1.0 billion share repurchase program approved by the Board of Directors in September 2007.

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