JCI

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended September 28, 2007, for Tyco International Ltd. (Tyco). The reporting period is defined by a major corporate restructuring: the spin-off of the Healthcare (Covidien) and Electronics (Tyco Electronics) businesses on June 29, 2007. Consequently, these former segments are reported as discontinued operations. Tyco now operates five continuing segments: ADT Worldwide, Fire Protection Services, Flow Control, Safety Products, and Electrical and Metal Products. The company also completed a 1-for-4 reverse stock split effective June 29, 2007.

Key Financial Metrics

Note: 2007 results include significant non-recurring charges related to a class action settlement and debt extinguishment.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue from continuing operations increased 8.3% to $18.78 billion, driven by volume growth in Flow Control and ADT Worldwide, partially offset by unfavorable spreads in Electrical and Metal Products.
• Profitability Decline: Operating income swung from a $1.37 billion profit in 2006 to a $1.72 billion loss in 2007. This was primarily due to a $2.86 billion net charge for a securities class action settlement, a $259 million loss on early debt extinguishment, and $105 million in separation costs.
• Debt Reduction: Total debt decreased by approximately $5.1 billion to $4.46 billion following debt tender offers and the assumption of debt by the spun-off entities (Covidien and Tyco Electronics).
• Equity Reduction: Shareholders' equity decreased by $19.8 billion, primarily due to the distribution of assets to shareholders during the spin-off and the net loss for the year.

Guidance, Outlook, and Risks

• Restructuring: Management launched a company-wide restructuring program in Q1 2007, expecting total charges of $350 million to $400 million through the end of 2008 to improve efficiency.
• Capital Allocation: The Board approved a new $1.0 billion share repurchase program in September 2007. A quarterly dividend of $0.15 per share was declared for post-separation shareholders.
• Legal Contingencies:
  • Class Action Settlement: A $2.975 billion settlement regarding securities fraud was preliminarily approved. Tyco's portion of the liability is approximately $808 million, with the remainder shared by Covidien and Tyco Electronics.
  • Indenture Litigation: The Bank of New York (BONY) filed suit alleging the spin-off breached debt indentures, seeking over $4.1 billion. Tyco secured additional bridge loan commitments to cover potential acceleration of debt.
  • Government Investigations: Ongoing investigations by the SEC and DOJ regarding compliance with the Foreign Corrupt Practices Act (FCPA) and past accounting practices.
• Internal Controls: The company disclosed a material weakness in internal controls over financial reporting related to the accounting for income taxes, resulting in an adverse opinion from auditors on internal controls.

Investor Verification Checklist

• Verify the final court approval status of the $2.975 billion securities class action settlement and the final allocation of liability among Tyco, Covidien, and Tyco Electronics.
• Monitor the outcome of the litigation with The Bank of New York regarding the debt indentures and the potential acceleration of $4.1 billion in debt.
• Review the progress of the remediation plan for the material weakness in internal controls over income tax accounting.
• Assess the impact of the ongoing DOJ/SEC investigations into FCPA compliance and potential fines or penalties.
• Track the execution of the $350-$400 million restructuring program and its impact on future operating margins.