ADT 2006 Annual Report Download - page 189

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Guarantees
Certain of the Company’s business segments have guaranteed the performance of third-parties and
provided financial guarantees for uncompleted work and financial commitments. The terms of these
guarantees vary with end dates ranging from 2007 through the completion of such transactions. The
guarantees would be triggered in the event of nonperformance and the potential exposure for
nonperformance under the guarantees would not have a material effect on the Company’s financial
position, results of operations or cash flows.
In disposing of assets or businesses, the Company often provides representations, warranties and/or
indemnities to cover various risks including, for example, unknown damage to the assets, environmental
risks involved in the sale of real estate, liability to investigate and remediate environmental
contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and
legal fees related to periods prior to disposition. The Company does not have the ability to estimate
the potential liability from such indemnities because they relate to unknown conditions. However, the
Company has no reason to believe that these uncertainties would have a material adverse effect on the
Company’s financial position, results of operations or cash flows.
The Company has recorded liabilities for known indemnifications included as part of
environmental liabilities. See Note 18 for a discussion of these liabilities.
The Company has guaranteed the fair value of certain vessels not to exceed $235 million, and as of
September 29, 2006 expects the obligation to be $54 million, which is recorded in the accompanying
Consolidated Balance Sheets, based on its estimate of the fair value of the vessels (see Notes 18 and
28).
In the normal course of business, the Company is liable for contract completion and product
performance. In the opinion of management, such obligations will not significantly affect the
Company’s financial position, results of operations or cash flows.
The Company records estimated product warranty costs at the time of sale. For further
information on estimated product warranty, see Note 1.
Following is a roll forward of the Company’s warranty accrual for 2006 ($ in millions):
Balance at September 30, 2005 ......................................... $193
Warranties issued during the year ....................................... 51
Changes in estimates ................................................. 85
Settlements ....................................................... (86)
Currency translation ................................................. 2
Balance at September 29, 2006 ......................................... $245
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
2006 Financials 127