ADT 2006 Annual Report Download - page 80

on these costs to our customers and this could have a material adverse effect on our results of
operations and cash flows.
We monitor these exposures as an integral part of our overall risk management program. In some
cases, we purchase hedges or enter into contracts to insulate our results of operations from these
fluctuations. Nevertheless, changes in currency exchange rates, commodity prices and interest rates may
have a material adverse effect on our results of operations and financial condition.
We are named as a defendant to a variety of litigation in the course of our business that could cause a
material adverse effect on our results of operations and financial condition.
In the ordinary course of business, we are named as a defendant in a significant amount of
litigation, including litigation alleging the infringement of intellectual property rights, litigation alleging
anti-competitive behavior and product liability litigation. In certain circumstances, patent infringement
and anti-trust laws permit successful plaintiffs to recover treble damages. In addition, our Healthcare
business is subject to regulation and potential litigation. The defense of these lawsuits may divert our
management’s attention, and we may incur significant expenses in defending these lawsuits. In addition,
we may be required to pay damage awards or settlements, or become subject to injunctions or other
equitable remedies, that could cause a material adverse effect on our financial condition and results of
operations.
Our Healthcare business is subject to extensive regulation by the government and failure to comply with
those regulations could have a material adverse effect on our results of operations and financial
condition.
The United States Food and Drug Administration regulates the approval, manufacturing and sale
and marketing of many of our healthcare products. Failure to comply with current Good Manufacturing
Practices and other applicable regulations and quality assurance guidelines could lead, and have led, to
temporary manufacturing shutdowns, product recalls, product shortages or delays in product
manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace,
and/or manufacturing quality issues with respect to our products could lead to product recalls,
withdrawals or declining sales.
Our ADT business may experience higher rates of customer attrition, which may reduce our future
revenue and has caused us to change the useful life of accounts, increasing our depreciation and
amortization expense.
Attrition rates for customers in our Worldwide Electronic Security Services business were 13.8%,
14.8% and 15.1% on a trailing 12-month basis as of September 29, 2006, September 30, 2005 and 2004,
respectively. Although the attrition rate has been declining, if attrition rates were to trend upward,
ADT’s recurring revenue and results of operations will be adversely affected. Tyco amortizes the costs
of ADT’s contracts and related customer relationships purchased through the ADT dealer program
based on the estimated life of the customer relationships. Internally generated residential and
commercial account pools are similarly amortized. If the attrition rates were to rise Tyco may be
required to accelerate the amortization of the costs which could cause a material adverse effect on our
financial condition, results of operations and cash flows.
18 2006 Financials