ADT 2008 Annual Report Download - page 154

Other Expense, Net
Other expense, net was $224 million in 2008 and $255 million in 2007. Other expense, net in 2008
primarily relates to the loss of $258 million on extinguishment of debt related to the consent
solicitation and exchange offers and termination of the bridge loan facility offset by income of
$6 million recorded in connection with the settlement of its 3.125% convertible senior debentures and
related financial instruments. See Notes 13 and 15 to the Consolidated Financial Statements. The
Company also recorded other-than-temporary impairments and realized losses on the sale of
investments of $6 million related primarily to investments in corporate debt. Refer to Note 10 to the
Consolidated Financial Statements. Additionally, the Company recorded $40 million of income as a
result of an increase in the receivables due from Covidien and Tyco Electronics under the Tax Sharing
Agreement upon the adoption of Financial Accounting Standards Board (‘‘FASB’’) Interpretation
(‘‘FIN’’) No. 48, ‘‘Accounting for Uncertain Income Taxes—an interpretation of FASB Statement
No. 109.’’ The Company also recorded $6 million of expense for other activity in accordance with the
Tax Sharing Agreements during 2008.
During 2007, other expense, net consisted primarily of a $259 million loss on early extinguishment
of debt incurred in connection with debt tender offers undertaken in connection with the Separation,
for which no tax benefit is available. See Note 13 to the Consolidated Financial Statements. This
charge consists primarily of premiums paid and the write-off of unamortized debt issuance costs and
discounts. The total loss on early extinguishment of debt was $647 million, with $259 million included
in continuing operations and $388 million allocated to Covidien and Tyco Electronics and included in
discontinued operations.
Income Taxes
Effective Income Tax Rate
Our effective income tax rate was 23.4% for 2008. Income taxes during 2008 were positively
impacted by increased profitability in lower tax rate jurisdictions and release of deferred tax valuation
allowances partially offset by enacted tax law changes that negatively impacted the non-U.S. deferred
tax assets. The effective tax rate for 2007 is not meaningful primarily as a result of the class action
settlement charge, net of $2.862 billion and the loss on early extinguishment of debt of $259 million for
which no tax benefit is available. Additionally, taxes for 2007 were negatively impacted by tax costs
related to the Separation of $92 million and were favorably impacted by the release of a deferred tax
valuation allowance related to non-U.S. tax rulings received during the period and reduced reserve
requirements on certain legacy tax matters. Our effective income tax rate for 2006 was 27.1%.
The valuation allowance for deferred tax assets of $745 million and $644 million at September 26,
2008 and September 28, 2007, respectively, relates principally to the uncertainty of the utilization of
certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. We
believe that we will generate sufficient future taxable income to realize the tax benefits related to the
remaining net deferred tax assets on our Consolidated Balance Sheets. The valuation allowance was
calculated in accordance with the provisions of SFAS No. 109, ‘‘Accounting for Income Taxes,’’ which
requires a valuation allowance be established or maintained when it is ‘‘more likely than not’’ that all
or a portion of deferred tax assets will not be realized.
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in a multitude of jurisdictions across our global operations. We recognize
potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.
These tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light
of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the
ultimate resolution may result in a payment that is materially different from our current estimate of the
2008 Financials 51