ADT 2008 Annual Report Download - page 157

vigorously defend its prior filed tax return positions and determined that no adjustment is required to
the Company’s guarantees and indemnifications liability recorded in conjunction with the Tax Sharing
Agreement as discussed in ‘‘Guarantees’’ within Management’s Discussion and Analysis of Financial
Condition and Results of Operations. Additionally, the IRS is auditing the prior tax returns of the
Company, which include legal entities of Tyco, Covidien and Tyco Electronics for the 2001 to 2004
period. The IRS has not issued any RARs for this period.
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 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 as specified in the Tax Sharing Agreement, intends to vigorously oppose the assertion of any 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. This is a pre-Separation shared tax matter under the Tax Sharing Agreement.
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.
Divestitures
Held for Sale and Reflected as Continuing Operations
During the third quarter of 2008, the Company approved a plan to sell a business in the Safety
Products segment. This business is presented in continuing operations as the criteria for discontinued
operations has not been met. The Company has assessed and determined that the carrying value of this
business is recoverable and will continue to assess recoverability based on current fair value, less cost to
sell, until the business is sold. Fair value used for the impairment assessment was based on existing
market conditions. The Company expects to complete a sale during the first half of fiscal 2009.
Discontinued Operations
The Company continued to assess the strategic fit of its various businesses and has pursued
divestiture of certain businesses which do not align with its long-term strategy.
During 2008, as part of the Company’s portfolio refinement efforts, the Company sold its ETEO
business, Ancon business, NDC business, and a European manufacturer of public address products and
acoustic systems. Additionally, the Company substantially completed the sale of its Infrastructure
Services Business, during the fourth quarter of 2008. These businesses met the held for sale and
discontinued operations criteria and have been included in discontinued operations in all periods
presented.
In May 2008, the Company sold 100% of the stock of ETEO, a Brazilian subsidiary of
Infrastructure Services for $338 million of net cash proceeds and recorded a pre-tax gain of
$232 million, including the effects of the economic hedge of the purchase price discussed below. The
gain was recorded in Income (loss) from discontinued operations, net of income taxes in the Company’s
Consolidated Statement of Operations. ETEO was part of the Company’s Corporate and Other
segment. During September 2007, Tyco entered into an economic hedge of the Brazilian Real
54 2008 Financials