ADT 2010 Annual Report Download - page 113

asbestos-containing components manufactured by third-parties. Each case typically names between
dozens to hundreds of corporate defendants. While the Company has observed an increase in the
number of these lawsuits over the past several years, including lawsuits by plaintiffs with mesothelioma-
related claims, a large percentage of these suits have not presented viable legal claims and, as a result,
have been dismissed by the courts. The Company’s strategy has been, and continues to be, to mount a
vigorous defense aimed at having unsubstantiated suits dismissed, and, where appropriate, settling suits
before trial. Although a large percentage of litigated suits have been dismissed, the Company cannot
predict the extent to which it will be successful in resolving lawsuits in the future. Of the lawsuits that
have proceeded to trial since 2005, the Company has won or settled all but one case, with that one case
returning an adverse jury verdict for approximately $7.7 million, which included both compensatory and
punitive damages. The Company recently settled the matter while its appeal was pending for
significantly less than the amount awarded by the jury. As of September 24, 2010, there were
approximately 3,500 lawsuits pending against the Company and its subsidiaries. Each lawsuit typically
includes several claims, and the Company has determined that there were approximately 4,700 claims
outstanding as of September 24, 2010, which amount reflects the Company’s current estimate of the
number of active claims made against it or its affiliates, and includes adjustments for claims that are
not actively being prosecuted, identify incorrect defendants or are duplicative of other actions.
For a detailed discussion of asbestos-related matters, see Note 14 of the Consolidated Financial
Statements.
Income Tax Matters
The Company and its subsidiaries’ income tax returns periodically are examined by various tax
authorities. In connection with these examinations, tax authorities, including the IRS, have raised issues
and proposed tax adjustments, in particular, with respect to tax years preceding the Separation. We are
reviewing and contesting certain of the proposed tax adjustments. Although we expect to resolve a
substantial number of the proposed tax adjustments with the IRS, a few significant items are expected
to remain open with respect to the audit of the 1997 through 2004 years. As of the date hereof, it is
unlikely that we will be able to resolve these open items, which primarily involve the treatment of
certain intercompany transactions during the period, through the IRS appeals process. As a result, we
may be required to litigate these matters. 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 United States and other tax jurisdictions based on our estimate of whether, and the extent
to which, additional income 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. We have assessed
our obligations under the Tax Sharing Agreement and determined that the recorded liability is
sufficient to cover the indemnifications made by us under such agreement. However, such amount
could differ materially from amounts that are actually determined to be due, and any such difference
could materially adversely affect our financial position, results of operations, cash flows or the effective
tax rate in future reporting periods.
For a detailed discussion of income tax matters and audits, see Note 6 of the Consolidated
Financial Statements.
Compliance Matters
As previously reported in the Company’s periodic filings, the Company has received and responded
to various allegations and other information that certain improper payments were made by the
Company’s subsidiaries and agents in recent years. For example, two subsidiaries in the Company’s
Flow Control business in Italy have been charged, along with numerous other parties, in connection
with the Milan public prosecutor’s investigation into allegedly improper payments made to certain
Italian entities, and the Company has reported to German authorities potentially improper conduct
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