ADT 2001 Annual Report Download - page 65

63
NET INVESTMENTS
Tyco Industrial uses cross currency swaps and designated por-
tions of foreign-currency denominated debt to hedge the for-
eign-currency exposure of certain net investments in foreign
operations. A net unrealized loss of $39.4 million was included
in the cumulative translation adjustment during Fiscal 2001 in
connection with these hedges.
Tyco Capital uses foreign exchange forward contracts and
cross-currency swaps to hedge its net investments in foreign
operations. A net unrealized loss of $13.4 million was included
in the cumulative translation adjustment during the period
from June 2 through September 30, 2001 in connection with
these hedges.
OTHER
Tyco Industrial uses various options, swaps and forwards not
designated as hedging instruments under SFAS No. 133 to hedge
the impact of the variability in the price of raw materials, such
as copper and other commodities, and the impact of the vari-
ability in foreign exchange rates on accounts and notes receiv-
able, intercompany loan balances and subsidiary earnings
denominated in certain foreign currencies.
9. INCOME TAXES
The provision for income taxes and the reconciliation between
the notional United States federal income taxes at the statutory
rate on consolidated income before taxes and the Company’s
income tax provision are as follows:
YEAR ENDED SEPTEMBER 30,
($ IN MILLIONS) 2001 2000 1999
Notional U.S. federal income
taxes at the statutory rate $2,170.7 $2,262.7 $ 596.8
Adjustments to reconcile to the
Company’s income tax
provision:
U.S. state income tax
provision, net 88.3 46.7 33.6
SFAS 121 impairment 1.2 6.4 43.5
Non-U.S. net earnings (920.4) (495.6) (216.5)
Nondeductible charges 194.7 140.8 139.2
Other (54.6) (35.0) 40.9
Provision for income taxes 1,479.9 1,926.0 637.5
Deferred provision 725.6 721.3 191.2
Current provision $ 754.3 $1,204.7 $ 446.3
The provisions for Fiscal 2001, Fiscal 2000, and Fiscal 1999
include $629.2 million, $648.6 million and $263.9 million,
respectively, for non-U.S. income taxes. The non-U.S. compo-
nent of income before income taxes was $4,398.8 million,
$3,343.6 million and $1,376.3 million for Fiscal 2001, Fiscal 2000
and Fiscal 1999, respectively.
The deferred income tax balance sheet accounts result from
temporary differences between the amount of assets and liabil-
ities recognized for financial reporting and tax purposes. The
components of the net deferred income tax asset are as follows:
SEPTEMBER 30,
($ IN MILLIONS) 2001 2000
Deferred tax assets:
Accrued liabilities and reserves $ 1,522.6 $ 658.6
Tax loss and credit carryforwards 851.8 474.6
Capitalized research and development
and interest 139.6 148.9
Other 135.8 56.1
2,649.8 1,338.2
Deferred tax liabilities:
Property, plant and equipment (844.8) (281.9)
Intangibles (654.5) (251.6)
Undistributed earnings of subsidiaries (126.1) (155.1)
Other (100.9) (163.6)
(1,726.3) (852.2)
Net deferred income tax asset before
valuation allowance 923.5 486.0
Valuation allowance (127.1) (122.4)
Net deferred income tax asset $ 796.4 $ 363.6
At September 30, 2001, the Company had approximately
$586 million of net operating loss carryforwards in certain non-
U.S. jurisdictions. Of these, $222 million have no expiration, and
the remaining $364 million will expire in future years through
2011. U.S. operating loss carryforwards at September 30, 2001
were approximately $1,605 million and will expire in future
years through 2021. A valuation allowance has been provided for
operating loss carryforwards that are not expected to be utilized.
In the normal course, the Company and its subsidiaries’
income tax returns are examined by various regulatory tax author-
ities. In connection with such examinations, substantial tax defi-
ciencies have been proposed. However, the Company is contesting
such proposed deficiencies, and ultimate resolution of such mat-
ters is not expected to have a material adverse effect on the Com-
pany’s financial position, results of operations or liquidity.
10. KEY EMPLOYEE LOAN PROGRAM
Loans are made to employees under the Company’s Key
Employee Loan Program for the payment of taxes upon the vest-
ing of shares granted under our Restricted Share Ownership
Plans. The loans are unsecured and bear interest, payable annu-
ally, at a rate which approximates the Company’s incremental
short-term borrowing rate. Loans are generally repayable in ten
years, except that earlier payments are required under certain
circumstances. During Fiscal 2001, the maximum amount out-
standing under this program was $29.5 million. Loans receivable
under this program were $11.2 million and $11.4 million at
September 30, 2001 and 2000, respectively.