XML 31 R18.htm IDEA: XBRL DOCUMENT v3.4.0.3
Commitments and Contingencies
6 Months Ended
Mar. 25, 2016
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Environmental Matters
Tyco is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of March 25, 2016, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $21 million to $70 million. As of March 25, 2016, Tyco concluded that the best estimate within this range is approximately $31 million, of which $11 million is included in Accrued and other current liabilities and $20 million is included in Other liabilities within the Company's Consolidated Balance Sheet.
As previously disclosed, the majority of the liabilities described above relate to ongoing remediation efforts at a facility in the Company's Global Products segment located in Marinette, Wisconsin, which the Company acquired in 1990 in connection with its acquisition of, among other things, the Ansul product line. As of March 25, 2016, the Company concluded that its remaining remediation and monitoring costs related to the Marinette facility were in the range of approximately $13 million to $45 million. The Company's best estimate within that range is approximately $21 million, of which $9 million is included in Accrued and other current liabilities and $12 million is included in Other liabilities within the Company's Consolidated Balance Sheet. Although the Company has recorded its best estimate of the costs that it will incur to remediate and monitor contamination at the Marinette facility, it is possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could change the Company's expectations with respect to future charges and cash outlays, and such changes could be material to the Company's future results of operations, financial condition or cash flows.
Asbestos Matters
The Company and certain of its subsidiaries, including Grinnell LLC (“Grinnell”), along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. Substantially all cases pending against affiliates of the Company have been filed against Grinnell, and have typically involved product liability claims based primarily on allegations of manufacture, sale or distribution of industrial products that either contained asbestos or were used with asbestos containing components.
During the third quarter of fiscal 2014, the Company, through Grinnell, resolved disputes with certain of its historical insurers and agreed that certain insurance proceeds would be used to establish and fund a qualified settlement fund (“QSF”), within the meaning of the Internal Revenue Code, which would be used for the resolution primarily of Grinnell asbestos liabilities. It is intended that the QSF will receive future insurance payments and proceeds from third party insurers and, in addition, will fund and manage liabilities for certain historical operations of the Company, primarily related to Grinnell. On January 9, 2015, the Company completed a series of restructuring transactions related to the establishment and funding of a dedicated structure pursuant to which a subsidiary of the Company acquired the assets of Grinnell and transferred cash and other assets totaling approximately $278 million (not including $22 million received by the QSF during the quarter ended December 26, 2014 from historic third-party insurers in settlement of coverage disputes) to the structure. As part of the restructuring, subsidiaries in the structure assumed certain liabilities related to historic Grinnell, Scott and Figgie operations, including all historical Grinnell asbestos liabilities, and such subsidiaries purchased additional insurance by, through or from a wholly-owned subsidiary in the structure in order to supplement and enhance existing insurance assets.
The Company consolidates the qualified settlement fund and related entities that were established for the purpose of managing and resolving the liabilities described above. Although the entities in the dedicated structure serve the specific purpose of managing certain liabilities, each entity in the structure is a wholly-owned indirect subsidiary of the Company, and therefore is required to be consolidated under GAAP.
As of March 25, 2016, the Company has determined that there were approximately 3,100 claims pending against its subsidiaries, primarily Grinnell. This amount reflects the Company's current estimate of the number of viable claims made against Grinnell and includes adjustments for claims that are not actively being prosecuted, identify incorrect defendants, are duplicative of other actions or for which the Company is indemnified by third parties.
As of March 25, 2016, the Company's estimated asbestos related net liability recorded within the Company's Consolidated Balance Sheet is $24 million. The net liability within the Consolidated Balance Sheet is comprised of a liability for pending and future claims and related defense costs of $500 million, of which $10 million is recorded in Accrued and other current liabilities, and $490 million is recorded in Other liabilities. The Company also maintains separate cash, investment and other assets within the Consolidated Balance Sheet of $476 million, of which $37 million is recorded in Prepaid expenses and other current assets, and $439 million is recorded in Other assets. Assets include $3 million of cash and $265 million of investments, which have all been designated as restricted. As of September 25, 2015, the Company's estimated net liability recorded within the Company's Consolidated Balance Sheet was $28 million. The net liability was comprised of a liability for pending and future claims and related defense costs of $515 million, of which $23 million was recorded in Accrued and other current liabilities, and $492 million was recorded in Other liabilities. The Company also maintained separate cash, investment and other assets within the Consolidated Balance Sheet of $487 million, of which $38 million was recorded in Prepaid expenses and other current assets, and $449 million was recorded in Other assets. Assets included $11 million of cash and $263 million of investments, which were all designated as restricted.
The Company periodically assesses the sufficiency of its estimated liability for pending and future asbestos claims and defense costs. On a periodic basis, the Company, through the dedicated structure referred to above, evaluates actual experience regarding asbestos claims filed, settled and dismissed, amounts paid in settlements, and the recoverability of its insurance assets. If and when data from actual experience demonstrate a significant unfavorable discernible trend, the Company performs a valuation of its asbestos related liabilities and corresponding insurance assets including a comprehensive review of the underlying assumptions. In addition, the Company evaluates its ability to reasonably estimate claim activity beyond its current look-forward period (through 2056) in order to assess whether such period continues to be appropriate. In addition to claims and litigation experience, the Company considers additional qualitative and quantitative factors such as changes in legislation, the legal environment, the Company’s strategy in managing claims and obtaining insurance, including its defense strategy, and health related trends in the overall population of individuals potentially exposed to asbestos. The Company evaluates all of these factors and determines whether a change in the estimate of its liability for pending and future claims and defense costs or insurance assets is warranted.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on the Company's strategies for resolving its asbestos claims, currently available information, and a number of estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants, the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to the Company's insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of the Company's asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect the Company's liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Company's calculations vary significantly from actual results.
Tax Matters
Tyco and its subsidiaries' income tax returns are examined periodically 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 years preceding the 2007 Separation. The issues and proposed adjustments related to such years are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement and Tyco's liabilities under the 2007 Tax Sharing Agreement are further subject to the sharing provisions in the 2012 Tax Sharing Agreement. Tyco has previously disclosed that in connection with U.S. federal tax audits, the IRS raised a number of issues and proposed tax adjustments for periods beginning with the 1997 tax year. Although Tyco resolved substantially all of the issues and adjustments proposed by the IRS for tax years through 2007, it was not able to resolve matters related to the treatment of certain intercompany debt transactions during the period. As a result, on June 20, 2013, Tyco received Notices of Deficiency from the IRS asserting that several of Tyco's former U.S. subsidiaries owe additional taxes of $883.3 million plus penalties of $154 million based on audits of the 1997 through 2000 tax years of Tyco and its subsidiaries as they existed at that time. In addition, Tyco received Final Partnership Administrative Adjustments for certain U.S. partnerships owned by former U.S. subsidiaries with respect to which an additional tax deficiency of approximately $30 million has been asserted. These amounts excluded interest and did not reflect the roll-forward impact on subsequent audit periods.
On January 15, 2016, Tyco entered into Stipulations of Settled Issues with the IRS intended to resolve all disputes related to the intercompany debt issues described above for the 1997 - 2000 audit cycle currently before the U.S. Tax Court. The Stipulations of Settled Issues are contingent upon the IRS Appeals Division applying the same settlement to all intercompany debt issues on appeal for subsequent audit cycles (2001 - 2007) and, if applicable, review by the United States Congress Joint Committee on Taxation.

If finalized, the tentative resolution would cover all aspects of the controversy before the U.S. Tax Court described above and before the Appeals Division of the IRS, and would result in a total cash payment to the IRS in the range of $475 million to $525 million, which includes all interest and penalties. This payment would be subject to the sharing formula in each Tax Sharing Agreement, and would be shared among Tyco, Covidien and TE Connectivity 27%, 42% and 31%, respectively, with neither ADT nor Pentair being responsible for any payment related to this amount.

Assuming the tentative resolution is finalized, Tyco does not expect to recognize any additional charges related to the resolution, as it had previously recorded sufficient reserves with respect to this controversy and its obligations under the Tax Sharing Agreements. The Company made a payment of $120 million to TE Connectivity and $2 million to Covidien, which was subsequently paid to the IRS, during the second quarter of fiscal 2016 in connection with the tentative resolution. See Note 6.
Other Matters
On March 1, 2016, a putative class action lawsuit, Wandel v. Tyco International plc, et al., Docket No. C-000010-16, was filed in the Superior Court of New Jersey naming Tyco, the individual members of its board of directors, Johnson Controls and Merger Sub as defendants. The complaint alleges that Tyco’s directors breached their fiduciary duties and exercised their powers as directors in a manner oppressive to the public shareholders of Tyco in violation of Irish law by, among other things, failing to take steps to maximize shareholder value and failing to protect against purported conflicts of interest. The complaint further alleges that Tyco, Johnson Controls and Merger Sub aided and abetted Tyco’s directors in the breach of their fiduciary duties. The complaint seeks, among other things, to enjoin the merger. The Company believes that the claims asserted by the complaint are not valid.

In addition to the foregoing, the Company is subject to claims and suits, including from time to time, contractual disputes and product and general liability claims, incidental to present and former operations, acquisitions and dispositions. With respect to many of these claims, the Company either self-insures or maintains insurance through third-parties, with varying deductibles. While the ultimate outcome of these matters cannot be predicted with certainty, the Company believes that the resolution of any such proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows beyond amounts recorded for such matters.