ADT 2011 Annual Report Download - page 125

Such an outcome could have important consequences to you. For example, it could:
• require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other corporate purposes, including dividend
payments;
• increase our vulnerability to adverse economic and industry conditions;
• limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in
which we operate;
• restrict our ability to introduce new technologies or exploit business opportunities;
• make it more difficult for us to satisfy our payment obligations with respect to our outstanding
indebtedness; and
• increase the difficulty and/or cost to us of refinancing our indebtedness.
Risks Relating to Tax Matters
We share responsibility for certain of our, Covidien’s and TE Connectivity’s income tax liabilities for tax
periods prior to and including June 29, 2007.
Under the Tax Sharing Agreement entered in connections with the 2007 Separation, we share
responsibility for certain of our, Covidien’s and TE Connectivity’s income tax liabilities that result in
cash payments, based on a sharing formula for periods prior to and including June 29, 2007. More
specifically, we, Covidien and TE Connectivity share 27%, 42% and 31%, respectively, of income tax
liabilities that arise from adjustments made by tax authorities to our, Covidien’s and TE Connectivity’s
U.S. and certain non-U.S. income tax returns, certain income tax liabilities arising from adjustments
made by tax authorities to intercompany transactions or similar adjustments, and certain taxes
attributable to internal transactions undertaken in anticipation of the 2007 Separation. Costs and
expenses associated with the management of these shared tax liabilities will generally be shared equally
among the parties. We are responsible for all of our own taxes that are not shared pursuant to the Tax
Sharing Agreement’s sharing formula. In addition, Covidien and TE Connectivity are responsible for
their tax liabilities that are not subject to the Tax Sharing Agreement’s sharing formula. In connection
with the execution of the Tax Sharing Agreement, we established receivables from Covidien and TE
Connectivity representing the amount we expected to receive for pre-Separation uncertain tax positions.
We also established liabilities representing the fair market value of our share of their estimated
obligations under the Tax Sharing Agreement. As of September 30, 2011, we had recorded $73 million
in other assets and $16 million in prepaid expenses and other current assets representing the
receivables from Covidien and TE Connectivity. We had also recorded $387 million in other liabilities
and $49 million in accrued and other current liabilities representing our estimated obligations to
Covidien and TE Connectivity under the Tax Sharing Agreement.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay
its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party
would be required to pay, equally with any other non-defaulting party, the amounts in default. In
addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an
income tax liability were to default in its payment of such liability to a taxing authority, we could be
legally liable under applicable tax law for such liabilities and required to make additional tax payments.
Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our
agreed-upon share of our, Covidien’s and TE Connectivity’s tax liabilities.
22 2011 Financials