ADT 2007 Annual Report Download - page 155

Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend
its prior filed tax return positions. The Company continues to believe 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 or cash flows. In addition, ultimate resolution of these matters could result in the
Company filing amended U.S. federal income tax returns for years subsequent to the current 1997 to
2000 audit period and could have a material impact on the Company’s effective tax rate in future
reporting periods.
Additionally, 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 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.
Except for earnings that are currently distributed, no additional material provision has been made
for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized
deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings
are expected to be permanently reinvested, the investments are essentially permanent in duration, or
the Company has concluded that no additional tax liability will arise as a result of distribution of such
earnings. A liability could arise if amounts are distributed by such subsidiaries or if such subsidiaries
are ultimately disposed. It is not practicable to estimate the additional income taxes related to
permanently reinvested earnings or the basis differences related to investments in subsidiaries.
Discontinued Operations and Divestitures
Discontinued Operations
During the third quarter of 2007, Tyco completed the Separation and has presented its Healthcare
and Electronics businesses as discontinued operations in all periods presented.
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 fourth quarter of 2007, $72 million was recorded through
shareholders’ equity, primarily related to the cash true-up adjustment and other items, as specified in
the Separation and Distribution Agreement, adjustments to certain pre-Separation tax liabilities, and
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. Additional adjustments are not
expected to be material and will be recorded through shareholder’s equity in subsequent periods as tax
returns are finalized.
During 2007, 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. Additionally,
during the fourth quarter of 2007, the remaining portion of Infrastructure Services met the held for
sale criteria and its results of operations have been included in discontinued operations for all periods
presented. Infrastructure Services provides consulting, engineering, construction management and
operating services for the water, wastewater, environmental, transportation and facilities market. The
Company has assessed the recoverability of these businesses carrying values and will continue to assess
recoverability based on current fair value, less cost to sell, until the businesses are sold. On
September 17, 2007, the Company executed a definitive agreement to sell for approximately
$295 million in cash 100% of the stock of ETEO—Empresa de Transmissao de Energia do Oeste Ltda.,
2007 Financials 63