ADT 2010 Annual Report Download - page 209

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Guarantees (Continued)
In 2001, a division of Safety Products initiated a Voluntary Replacement Program (‘‘VRP’’)
associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain
O-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco’s
acquisition. Under this program, the sprinkler heads are being replaced free of charge to property
owners. On May 1, 2007, the Consumer Product Safety Commission and the Company announced an
August 31, 2007 deadline for filing claims to participate in the VRP. The Company will fulfill all valid
claims for replacement of qualifying sprinklers received up to August 31, 2007. Settlements during 2010,
2009 and 2008 include cash expenditures of $10 million, $33 million and $49 million, respectively,
related to the VRP. The Company believes the remaining recorded liability is sufficient to cover the
cost required to complete the VRP as of September 24, 2010, which is not material.
13. Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts
receivable, investments, accounts payable, debt and derivative financial instruments. The fair value of
cash and cash equivalents, accounts receivable and accounts payable approximated book value as of
September 24, 2010 and September 25, 2009. The fair value of derivative financial instruments was not
material to any of the periods presented. See below for the fair value of investments and Note 11 for
debt.
Derivative Instruments
In the normal course of business, Tyco is exposed to market risk arising from changes in currency
exchange rates, interest rates and commodity prices. The Company uses derivative financial instruments
to manage exposures to foreign currency, interest rate and commodity price risks. The Company’s
objective for utilizing derivative financial instruments is to manage these risks using the most effective
methods to eliminate or reduce the impacts of these exposures.
For derivative instruments that are designated and qualify as fair value hedges, the Company
documented the relationships between the hedging instruments and hedged items and linked derivatives
designated as fair value hedges to specific debt issuances. For transactions designated as hedges, the
Company also assessed and documented at the hedge’s inception whether the derivatives used in
hedging transactions were effective in offsetting changes in fair values associated with the hedged items.
The fair value hedges did not result in any hedge ineffectiveness for the fiscal year ended
September 24, 2010. The Company does not use derivative financial instruments for trading or
speculative purposes.
All derivative financial instruments are reported on the Consolidated Balance Sheet at fair value
with changes in the fair value of the derivative financial instruments recognized currently in earnings
with the exception of net investment hedges for which changes in fair value are reported in the
cumulative translation component of accumulated other comprehensive income to the extent the hedges
are effective. The ineffective portion of the hedge, if any, is recognized in the Company’s Consolidated
Statement of Operations. The derivative financial instruments and impact of such changes in the fair
value of the derivative financial instruments was not material to the Consolidated Balance Sheets as of
September 24, 2010 and September 25, 2009 or Consolidated Statements of Operations and Statement
of Cash Flows for the fiscal years ended September 24, 2010, September 25, 2009 and September 26,
2008.
2010 Financials 121