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TYC > SEC Filings for TYC > Form 10-K on 16-Nov-2012All Recent SEC Filings

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Form 10-K for TYCO INTERNATIONAL LTD


16-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations should be read together with the Selected Financial Data and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the headings "Risk Factors" and "Forward-Looking Information".

Organization

The Consolidated Financial Statements include the consolidated results of Tyco International Ltd., a company organized under the laws of Switzerland, and its subsidiaries (hereinafter collectively referred to as "we", the "Company" or "Tyco"). The financial statements have been prepared in United States dollars ("USD"), in accordance with accounting principles generally accepted in the United States ("GAAP").

Effective September 28, 2012, Tyco completed the spin-offs of The ADT Corporation ("ADT") and Pentair Ltd. (formerly known as Tyco Flow Control International Ltd. ("Tyco Flow Control")), formerly our North American residential security and flow control businesses, respectively, into separate, publicly traded companies in the form of a distribution to Tyco shareholders. Immediately following the spin-off, Pentair, Inc. was merged with a subsidiary of Tyco Flow Control in a tax-free, all-stock merger ("the Merger"), with Pentair Ltd. ("Pentair") succeeding Pentair Inc. as an independent publicly traded company. The distribution was made on September 28, 2012, to Tyco shareholders of record on September 17, 2012. Each Tyco shareholder received 0.50 of a common share of ADT and approximately 0.24 of a common share of Pentair for each Tyco common share held on the record date. The distribution was structured to be tax-free to Tyco shareholders except to the extent of cash received in lieu of fractional shares. The distributions, the Merger and related transactions are collectively referred to herein as the "2012 Separation". As a result of the distribution, the operations of Tyco's former flow control and North American residential security businesses are now classified as discontinued operations in all periods presented.

After giving effect to the 2012 Separation, we operate and report financial and operating information in the following three segments:


North America Systems Installation & Services ("NA Installation & Services") designs, sells, installs, services and monitors electronic security systems and fire detection and suppression systems for commercial, industrial, retail, institutional and governmental customers in North America.


Rest of World Systems Installation & Services ("ROW Installation & Services") designs, sells, installs, services and monitors electronic security systems and fire detection and suppression systems for commercial, industrial, retail, residential, small business, institutional and governmental customers in the Rest of World ("ROW") regions.


Global Products designs, manufactures and sells fire protection, security and life safety products, including intrusion security, anti-theft devices, breathing apparatus and access control and video management systems, for commercial, industrial, retail, residential, small business, institutional and governmental customers worldwide, including products installed and serviced by our NA and ROW Installation & Services segments.

We also provide general corporate services to our segments which will be reported as a fourth, non-operating segment, Corporate and Other. Additionally, Corporate and Other includes the


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Company's former Electrical and Metal Products business which was divested in the first quarter of 2011.

References to the segment data are to the Company's continuing operations. As discussed above, as a result of the 2012 Separation, the Company reports under a new segment structure beginning in the fourth quarter of fiscal 2012 and accordingly has recast prior period segment amounts. See Note 19 to the Consolidated Financial Statements.

Business Overview

We are a leading global provider of security products and services, fire detection and suppression products and services and life safety products. We utilize our extensive global footprint of over 1,200 locations, including manufacturing facilities, service and distribution centers, monitoring centers and sales offices, to provide solutions and localized expertise to our global customer base. We provide an extensive range of product and service offerings to over 3 million customers in more than 100 countries through multiple channels. Our revenues are broadly diversified across the United States and Canada (collectively "North America"); Central America and South America (collectively "Latin America"); Europe, the Middle East, and Africa (collectively "EMEA") and the Asia- Pacific region. We refer to Latin America, EMEA, and Asia-Pacific region collectively as "Rest of World" or "ROW". The following chart reflects our fiscal 2012 net revenue by region.

Fiscal 2012 Net Revenue by Region

[[Image Removed: GRAPHIC]]

Our end-use customers, to whom we may sell directly or through wholesalers, distributors, commercial builders or contractors, are also broadly diversified and include:


Commercial customers, including residential and commercial property developers, financial institutions, food service businesses and commercial enterprises;


Industrial customers, including companies in the oil and gas, power generation, mining, petrochemical and other industries;


Retail customers, including international, regional and local consumer outlets, from national chains to specialty stores;


Institutional customers, including a broad range of healthcare facilities, academic institutions, museums and foundations;


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Governmental customers, including federal, state and local governments, defense installations, mass transportation networks, public utilities and other government-affiliated entities and applications;


Residential and small business customers outside of North America, including owners of single family homes and local providers of a wide range of goods and services.

As a global business with a varied customer base and an extensive range of products and services, our operations and results are impacted by global, regional and industry specific factors, and by political factors. Our geographic diversity and the diversity in our customer base and our products and services has helped mitigate the impact of any one industry or the economy of any single country on our consolidated operating results, financial condition and cash flows. Due to the global nature of our business and the variety of our customers, products and services, no single factor is predominantly used to forecast Company results. Rather, management monitors a number of factors to develop expectations regarding future results, including the activity of key competitors and customers, order rates for longer lead time projects, and capital expenditure budgets and spending patterns of our customers. We also monitor trends throughout the commercial and residential fire and security markets, including building codes and fire-safety standards. Our commercial installation businesses are impacted by trends in commercial construction starts, while our residential business, which is located outside of North America, is impacted by new housing starts.

Recent Transactions

As a result of the 2012 Separation, we incurred and expect to continue to incur, separation related costs including debt refinancing, tax restructuring, professional services, restructuring and impairment charges and employee-related costs. During 2012, the Company incurred pre-tax costs related to the 2012 Separation of $561 million recorded within continuing operations and $278 million within discontinued operations. Costs incurred within continuing operations in fiscal 2012 include a charge of $453 million due to the early extinguishment of debt, as the Company refinanced its long-term debt as a result of the 2012 Separation. During fiscal 2012, the Company paid $186 million in separation costs, $18 million of which is included within continuing operations. See Note 2 to the Consolidated Financial Statements.

During the fourth quarter of fiscal 2012, we determined that certain aged receivables in our ROW Installation & Services segment related to security contracts in China may not be collectible. After a formal investigation, we determined that certain records relating to those receivables were falsified by district level employees located in one region of China. We have concluded that the revenue recognition practices related to the aged receivables, which dated back to fiscal 2008, were inappropriate. We have evaluated and concluded that the identified amounts were not material to any of our previously issued annual and interim financial statements, including the effects of presenting ADT and Tyco Flow Control as discontinued operations. Although management has determined the amounts individually and in the aggregate are not material to prior periods, in accordance with authoritative accounting literature on considering the effects of prior year misstatements when quantifying misstatements in the current year, the financial statements included herein have been adjusted to correct for the impact of these items.

As a result, we have revised our previously reported operating results to reflect certain immaterial adjustments, primarily related to revenue recognition and cost of goods sold. These adjustments reduced previously reported net revenue by approximately $49 million and $37 million for fiscal 2011 and 2010, respectively, and reduced previously reported operating income by approximately $14 million and $2 million for fiscal 2011 and 2010, respectively. See Note 24 to the Consolidated Financial Statements. Additionally, we reversed approximately $31 million of net revenue and reduced operating


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income by $17 million during fiscal 2012, of which less than $1 million and $7 million of net revenue and operating income, respectively, were recorded during the fourth quarter of fiscal 2012.

Results of Operations

    Consolidated financial information is as follows:

                                                For the Years Ended
                                September 28,      September 30,       September 24,
($ in millions)                     2012               2011                2010
Net revenue                     $       10,403     $       10,557 (1)  $       11,020 (1)
Net revenue decline                       (1.5 )%            (4.2 )%               NA
Organic revenue growth                     2.4 %              4.8 %                NA
Operating income                $          685     $          982 (2)  $          615 (2)
Operating margin                           6.6 %              9.3 %               5.6 %
Interest income                 $           19     $           27      $           25
Interest expense                           209                240                 279
Other expense, net                         454                  5                  76
Income tax (expense) benefit              (348 )             (134 )                17
Equity (loss) income in
earnings of unconsolidated
subsidiaries                               (26 )              (12 )                 -


--------------------------------------------------------------------------------
    (1)


Net revenue includes $347 million and $1.4 billion for 2011 and 2010, respectively, related to the Company's former Electrical and Metal Products business which was sold during the first quarter of fiscal 2011.

(2)
Operating income includes $7 million and $100 million for 2011 and 2010, respectively, related to the Company's former Electrical and Metal Products business, which was sold during the first quarter of fiscal 2011. Additionally, operating income for 2011 includes a $248 million net gain on that sale.

Net Revenue:

Fiscal 2012

Net revenue for the year ended September 28, 2012 decreased by $154 million, or 1.5%, to $10.4 billion as compared to net revenue of $10.6 billion for the year ended September 30, 2011. On an organic basis, net revenue grew by $247 million, or 2.4% year over year, primarily driven by our Global Products segment. Net revenue was unfavorably impacted by the net impact of acquisitions and divestitures of $71 million, or 0.7%, primarily due to the sale of a majority interest the Company's former Electrical and Metal Products business, which contributed $347 million of net revenue during the year ended September 30, 2011, partially offset by the acquisitions of Chemguard and Visonic within the Company's Global Products segment. Unfavorable changes in foreign currency exchange rates impacted net revenue by $226 million, or 2.1%. In addition, because the Company's fiscal year ends on the last Friday in September, fiscal 2012 consisted of 52 weeks as compared to 53 weeks in fiscal 2011. As a result, fiscal year 2011 includes an estimated $98 million of revenue from the additional week.

Fiscal 2011

Net revenue for the year ended September 30, 2011 decreased by $463 million, or 4.2%, to $10.6 billion as compared to net revenue of $11.0 billion for the year ended September 24, 2010. On an organic basis, net revenue grew by $465 million, or 4.8% year over year, primarily driven by our Global Products and NA Installation & Services segments. Net revenue was unfavorably impacted by the net


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impact of acquisitions and divestitures of $1.3 billion, or 11.8%, which was primarily the result of the sale of a majority interest in the Company's former Electrical and Metal Products business, which contributed approximately $1.4 billion of net revenue during the year ended September 24, 2010 and $347 million during the year ended September 30, 2011. Net revenue was also unfavorably impacted by $72 million, or 0.7%, due to the deconsolidation of a joint venture in our ROW Installation & Services segment due to the adoption of an accounting standard. Favorable changes in foreign currency exchange rates impacted net revenue by $306 million, or 2.8%. In addition, because the Company's fiscal year ends on the last Friday in September, fiscal 2011 consisted of 53 weeks, as compared to 52 weeks in fiscal 2010. As a result, fiscal year 2011 includes an estimated $98 million, or 0.9%, of revenue from the additional week.

Operating Income:

Operating income for the year ended September 28, 2012 decreased $297 million, or 30.2%, to $685 million, as compared to operating income of $982 million for the year ended September 30, 2011. Operating income for the year ended September 28, 2012 declined primarily due to the net gain on divestitures of $224 million that was recognized in the prior year, primarily related to a $248 million net gain related to the sale of a majority interest in the Company's former Electrical and Metal products business. Operating income for the year ended September 30, 2011 increased $367 million, or 59.7%, to $982 million, as compared to operating income of $615 million for the year ended September 24, 2010. Operating income for the year ended September 30, 2011 improved due to the net gain on divestitures, pricing initiatives, improvement in mix driven by project selectivity, as well as the benefit of ongoing cost containment and restructuring actions. Items impacting operating income for fiscal 2012, 2011 and 2010 are as follows:

                                                 For the Years Ended
                                 September 28,      September 30,        September 24,
($ in millions)                      2012               2011                 2010
Separation costs included in
SG&A                                $          4     $           -         $          -
Separation costs                              71                 -                    -
Loss (gain) on divestitures                   14              (224 )(1)             (39 )
Restructuring and asset
impairment charges                           104                78                  103
Acquisition and integration
costs                                          9                 5                    -
Notes receivable write-off                     -                 5                    -
Legacy legal items                            (4 )              20                    -
Asbestos related charges                     111                10                   77


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    (1)


Includes a $248 million net gain on the divestiture of a majority interest in the Electrical and Metal Products business.

Interest Income and Expense

Interest income was $19 million in 2012, as compared to $27 million and $25 million in 2011 and 2010, respectively. Interest income decreased in 2012 primarily due to decreased investment yields compared to 2011 and 2010.

Interest expense was $209 million in 2012, as compared to $240 million and $279 million in 2011 and 2010, respectively. The weighted-average interest rate on total debt outstanding as of September 28, 2012, September 30, 2011 and September 24, 2010 was 6.5%, 5.9% and 6.3%, respectively. These decreases in interest expense and fluctuations in the weighted-average interest rate are primarily related to savings realized from the $2.6 billion debt redemptions in 2012 and from the replacement of higher coupon notes with lower coupon notes during 2011. See Note 11 to the Consolidated Financial Statements.


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     Other Expense, Net

    Significant components of Other expense, net for 2012, 2011 and 2010 are as
follows ($ in millions):

                                                                   2012    2011    2010
Loss on extinguishment of debt (see Note 11 to the Consolidated
Financial Statements)                                             $ (453 )  $  -   $ (87 )
2007 Tax Sharing Agreement (loss) gain (see Note 7 to the
Consolidated Financial Statements)                                    (4 )    (7 )     8
Other                                                                  3       2       3

Total                                                             $ (454 )  $ (5 ) $ (76 )

Effective Income Tax Rate

Our effective income tax rate for the year ended September 28, 2012 was not meaningful primarily as a result of separation related charges which were incurred for which no tax benefit was recognized, as well as a valuation allowance of $235 million recorded due to net operating loss carryforwards which we do not expect to realize in future periods. Additionally, our effective income tax rate for the year ended September 28, 2012 was impacted by enacted tax law changes, favorable audit resolutions in multiple jurisdictions and a non-recurring item generating a tax benefit.

Our effective income tax rate was 17.5% and a benefit of 6.0% during the years ended September 30, 2011 and September 24, 2010, respectively. The increase in our effective income tax rate was primarily related to the tax charge recorded in conjunction with the sale of a majority interest in our Electrical and Metal Products business during the first quarter of 2011, a non-recurring transaction generating a tax benefit in 2010 and a release of a deferred tax valuation allowance in 2010. The effective income tax rate was positively impacted by favorable audit resolutions in multiple jurisdictions during 2011. The rate can vary from quarter to quarter due to discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors, such as the geographic mix of income before taxes.

The valuation allowance for deferred tax assets of $1,826 million and $1,149 million as of September 28, 2012 and September 30, 2011, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. Specifically, the valuation allowance includes separation related charges associated with the early extinguishment of debt which further increased a net operating loss carryforward in 2012 which we do not expect to realize in future periods. The valuation allowance was calculated and recorded when we determined that it was more-likely-than-not that all or a portion of our deferred tax assets would not be realized. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our Consolidated Balance Sheets.

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 record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional 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; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Substantially all of these potential tax liabilities are recorded in other liabilities in the Consolidated Balance Sheets as payment is not expected within one year.


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Equity (Loss) Income in Earnings of Unconsolidated Subsidiaries

Equity (loss) income in earnings of unconsolidated subsidiaries in 2012 and 2011 reflects our share of Atkore International Group Inc.'s ("Atkore") net loss which is accounted for under the equity method of accounting. Equity (loss) income in earnings of unconsolidated subsidiaries was nil in 2010.

Segment Results

The following chart reflects our fiscal 2012, 2011 and 2010 % of net revenue by operating segment.

[[Image Removed: GRAPHIC]]

The above chart does not include net revenue related to the Company's former Electrical and Metal Products business which was divested in the first quarter of fiscal 2011 and is included within Corporate & Other. In 2011 and 2010, this represents 3.3% and 12.8%, respectively of net revenue.

The segment discussions that follow describe the significant factors contributing to the changes in results for each of our segments included in continuing operations.

NA Installation & Services

    NA Installation & Services designs, sells, installs, services and monitors
electronic security systems and fire detection and suppression systems for
commercial, industrial, retail, institutional and governmental customers in
North America.

    Financial information for NA Installation & Services for the years ended
September 28, 2012, September 30, 2011 and September 24, 2010 were as follows:

                                                   For the Years Ended
                                    September 28,      September 30,     September 24,
($ in millions)                         2012               2011              2010
Net revenue                          $       3,962      $       4,022     $       3,784
Net revenue (decline) growth                  (1.5 )%             6.3 %              NA
Organic revenue (decline) growth              (0.3 )%             4.4 %              NA
Operating income                     $         374      $         425     $         349
Operating margin                               9.4 %             10.6 %             9.2 %


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The change in net revenue compared to the prior periods is attributable to the following:

                                                     Fiscal 2012     Fiscal 2011
                                                     Compared to     Compared to
    Factors Contributing to Year-Over-Year Change    Fiscal 2011     Fiscal 2010
    Organic revenue (decline) growth                  $       (12 )   $       168
    Acquisitions                                                4               1
    Divestitures/transfer                                       -               -
    Impact of foreign currency                                (10 )            28
    Other                                                     (42 )            41

    Total change                                      $       (60 )   $       238

Organic revenue decline for the year ended September 28, 2012 was driven by slow non-residential market growth as well as installation project selectivity in the North America security business, partially offset by increased service revenue. Organic revenue growth for the year ended September 30, 2011 was driven by increased service revenue coupled with the impact of several large installation projects. Net revenue for the years ended September 28, 2012 and September 30, 2011 was impacted by the 53rd week of revenue during fiscal 2011, which is included within Other above.

Operating Income

Operating income for the year ended September 28, 2012 decreased $51 million, or 12.0%, to $374 million, as compared to operating income of $425 million for the year ended September 30, 2011. Operating income for the year ended September 28, 2012 declined due to restructuring and asset impairment charges related to organizational realignment. Operating income for the year ended September 30, 2011 increased $76 million, or 21.8%, to $425 million, as compared to operating income of $349 million for the year ended September 24, 2010. Operating income for the year ended September 30, 2011 improved due to favorable revenue mix, increased project selectivity and productivity enhancements along with the benefit of restructuring savings. Items impacting operating income for fiscal 2012, 2011 and 2010 are as follows:

                                                   For the Years Ended
                                   September 28,      September 30,      September 24,
($ in millions)                        2012               2011               2010
. . .
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