ADT 2006 Annual Report Download - page 128

contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and
legal fees related to periods prior to disposition. The Company does not have the ability to estimate
the potential liability from such indemnities because they relate to unknown conditions. However, the
Company has no reason to believe that these uncertainties would have a material adverse effect on the
Company’s financial position, results of operations or cash flows.
The Company has recorded liabilities for known indemnifications included as part of
environmental liabilities. See Item I. Business—Environmental Matters for a discussion of these
liabilities.
The Company had an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon
expiration of this lease in October 2006, a subsidiary of the Company has the option to buy these
vessels for approximately $280 million, or return the vessels to the lessor and, under a residual
guarantee, pay any shortfall in sales proceeds to the lessor from a third party in an amount not to
exceed $235 million. As of September 29, 2006, the Company expected this obligation to be
$54 million, which is recorded in the accompanying Consolidated Balance Sheets, based on an estimate
of the fair value of the vessels performed by management with the assistance of a third-party valuation.
In October 2006, the Company exercised its option to buy these vessels for $280 million. See Note 28
to the Consolidated Financial Statements.
In the normal course of business, the Company is liable for contract completion and product
performance. In the opinion of management, such obligations will not significantly affect the
Company’s financial position, results of operations or cash flows.
The Company records estimated product warranty costs at the time of sale. For further
information on estimated product warranty, see Notes 1 and 16 to the Consolidated Financial
Statements.
In 2001, Engineered Products and Services initiated a Voluntary Replacement Program (‘‘VRP’’)
associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain
Model GB fire sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco’s
acquisition. Under this program, the sprinkler heads are being replaced over a 5-7 year period free of
charge to property owners. In the third quarter of 2006, the Company completed a comprehensive
review of reported claims, recent claim rates and cost trends and further assessed the future of the
program. The Company determined that an additional liability was necessary in order to satisfy the
Company’s obligation under the VRP. As a result, the Company recorded a $100 million charge which
was reflected in cost of sales. Settlements during 2006 include cash expenditures of $37 million related
to the VRP.
66 2006 Financials