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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-31330
COOPER INDUSTRIES, LTD.
(Exact Name of Registrant as Specified in Its Charter)
BERMUDA 98-0355628
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
600 TRAVIS, SUITE 5800, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
713/209-8400
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
CLASS A COMMON SHARES, $0.01 PAR VALUE THE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE PREFERRED SHARES THE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate value of the registrant's voting and non-voting common equity
held by non-affiliates of the registrant as of June 30, 2002 was
$3,727,136,096.
NUMBER OF REGISTRANT'S CLASS A COMMON SHARES OUTSTANDING AS OF
JANUARY 31, 2003 - 93,246,803
DOCUMENTS INCORPORATED BY REFERENCE
Cooper Industries, Ltd. Proxy Statement to be filed for the Annual
Meeting of Shareholders to be held on April 29, 2003
(Part II - Item 5, Part III - Items 10, 11 and 12)
TABLE OF CONTENTS
Part I PAGE
----
Item 1: Business.................................................................................. 2
Item 2: Properties................................................................................ 2
Item 3: Legal Proceedings......................................................................... 8
Item 4: Submission of Matters to a Vote of Security Holders....................................... 9
Part II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters..................... 10
Item 6: Selected Financial Data................................................................... 11
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 12
Item 7A: Quantitative and Qualitative Disclosures about Market Risk................................ 27
Item 8: Financial Statements and Supplementary Data............................................... 27
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures..................................................................... 27
Part III
Item 10: Directors and Executive Officers of the Registrant........................................ 27
Item 11: Executive Compensation.................................................................... 27
Item 12: Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................................................... 27
Item 13: Certain Relationships and Related Transactions............................................ 27
Item 14: Controls and Procedures................................................................... 27
Part IV
Item 15: Exhibits, Financial Statements Schedules, and Reports on Form 8-K......................... 28
PART I
ITEM 1. BUSINESS; ITEM 2. PROPERTIES
GENERAL
The term "Cooper" refers to the registrant, Cooper Industries, Ltd.,
which was incorporated under the laws of Bermuda on May 22, 2001, and became the
successor-registrant to Cooper Industries, Inc. on May 22, 2002.
Cooper operates in two business segments: Electrical Products and Tools
& Hardware. Cooper manufactures, markets and sells its products and provides
services throughout the world. Cooper has manufacturing facilities in 21
countries and currently employs approximately 28,400 people. On December 31,
2002, the plants and other facilities used by Cooper throughout the world
contained an aggregate of approximately 19,468,600 square feet of space, of
which approximately 73 percent was owned and 27 percent was leased. The charts
on the next page show the number of employees, square footage of facilities
owned and leased and location of manufacturing facilities for each industry
segment. Certain equipment and production facilities have been financed by
industrial revenue bonds issued by local government authorities and are subject
to security arrangements customary in such financings.
2
SQUARE FOOTAGE OF
NUMBER AND NATURE OF FACILITIES PLANTS AND FACILITIES
------------------------------------------------------------ -------------------------
NUMBER OF
SEGMENT EMPLOYEES MANUFACTURING WAREHOUSE SALES OTHER OWNED LEASED
------- ---------- ------------- ---------- ---------- ---------- --------- ----------
Electrical Products 22,006 83 50 110 15 9,947,137 4,552,216
Tools & Hardware 6,232 27 13 19 2 4,186,558 644,846
Other 224 0 0 0 1 0 137,853
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 28,462 110 63 129 18 14,133,695 5,334,915
* Multi-purpose facilities at a single location are listed in each applicable
column.
MANUFACTURING PLANT LOCATIONS
EUROPE
UNITED (OTHER UNITED SOUTH REPUBLIC
SEGMENT STATES THAN UK) KINGDOM MEXICO AMERICA AUSTRALIA CANADA OF CHINA INDIA MALAYSIA
------- ------ -------- ------- ------ ------- --------- ------ -------- ----- --------
Electrical
Products 43 11 10 10 3 1 2 1 1 1
Tools &
Hardware 14 8 0 2 2 1 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 57 19 10 12 5 2 2 1 1 1
3
Operations in the United States are conducted by wholly-owned
subsidiaries of Cooper, organized by the two business segments. Activities
outside the United States contribute significantly to the revenues and operating
earnings of both segments of Cooper. These activities are conducted in major
commercial countries by wholly-owned subsidiaries and jointly-owned companies,
the management of which is structured through Cooper's two business segments. As
a result of these international operations, sales and distribution networks are
maintained throughout most of the industrialized world. Cooper generally
believes that there are no substantial differences in the business risks
associated with these international operations compared with domestic
activities, although Cooper is subject to certain political and economic
uncertainties encountered in activities outside the United States, including
trade barriers, restrictions on foreign exchange and currency fluctuations. As
the U.S. dollar strengthens against foreign currencies at a rate greater than
inflation in those countries, Cooper may experience lower segment revenues and
operating earnings. The five countries in which Cooper generates the most
international revenues are Canada, Germany, France, Mexico and the United
Kingdom. Cooper has operations in India, Malaysia and China and has several
joint ventures with operations in China. Investments in India, Malaysia and
China are subject to greater risks related to economic and political
uncertainties as compared to most countries where Cooper has operations. Exhibit
21.0 contains a list of Cooper's subsidiaries.
Financial information with respect to Cooper's industry segments and
geographic areas is contained in Note 15 of the Notes to Consolidated Financial
Statements. A discussion of acquisitions and divestitures is included in Notes
3, 7 and 16 of the Notes to Consolidated Financial Statements.
With its two business segments, Cooper serves three major markets:
industrial, construction and electrical power distribution. Markets for Cooper's
products and services are worldwide, though the United States is the largest
market. Within the United States, there is no material geographic concentration
by state or region. Cooper experiences substantial competition in both of its
business segments. The number and size of competitors vary considerably
depending on the product line. Cooper cannot specify with exactitude the number
of competitors in each product category or their relative market position.
However, most operating units experience significant competition from both
larger and smaller companies with the key competitive factors being price,
quality, brand name and availability. Cooper considers its reputation as a
manufacturer of a broad line of quality products and premier brands to be an
important factor in its businesses. Cooper believes that it is among the leading
manufacturers in the world of electrical distribution equipment, wiring devices,
support systems, hazardous duty electrical equipment, emergency lighting,
lighting fixtures, fuses, nonpower hand tools and industrial power tools.
Cooper's research and development activities are for purposes of
improving existing products and services and originating new products. During
2002, approximately $54.0 million was spent for research and development
activities as compared with approximately $55.8 million in 2001 and $57.7
million in 2000. Cooper obtains and holds patents on products and designs in the
United States and many foreign countries where operations are conducted or
products are sold. Although in the aggregate Cooper's patents are important in
the operation of its businesses, the loss by expiration or otherwise of any one
patent or license or group of patents or licenses would not materially affect
its business.
Cooper does not presently anticipate that compliance with currently
applicable environmental regulations and controls will significantly change its
competitive position, capital spending or earnings during 2003. Cooper has been
a party to administrative and legal proceedings with governmental agencies that
have arisen under statutory provisions regulating the discharge or potential
discharge of material into the environment. Orders and decrees consented to by
Cooper have contained agreed-upon timetables for fulfilling reporting or
remediation obligations or maintaining specified air and water discharge levels
in connection with permits for the operations of various plants. Cooper believes
it is in compliance with the orders and decrees, and such compliance is not
material to the business or financial condition of Cooper. For additional
information concerning Cooper's accruals for environmental liabilities, see Note
7 of the Notes to Consolidated Financial Statements.
4
Approximately 56% of the United States hourly production work force of
Cooper is employed in 46 manufacturing facilities, distribution centers and
warehouses not covered by labor agreements. Numerous agreements covering
approximately 44% of all hourly production employees exist with 23 bargaining
units at 23 operations in the United States and with various unions at 26
international operations. During 2002, new agreements were concluded covering
hourly production employees at 5 operations in the United States. Cooper
considers its employee relations to be excellent.
Sales backlog at December 31, 2002 was approximately $318 million, all
of which is for delivery during 2003, compared with backlog of approximately
$308 million at December 31, 2001.
Cooper's financial condition and performance are subject to various
risks and uncertainties including, but not limited to: (1) the condition of the
domestic economy and European and Latin American markets; (2) spending on
commercial and residential construction and by utilities; (3) worldwide
energy-related project spending; (4) demand for products in the electronics and
telecommunications markets; (5) changes in raw material and energy costs;
(6) changes in mix of products sold; (7) realization of benefits of cost
reduction programs; (8) industry competition; (9) the timing of facility
consolidations and the magnitude of any disruption from such consolidations;
(10) changes in tax laws, regulations and treaties; (11) the relationship of the
U.S. dollar to the currencies of countries in which Cooper does business;
(12) mergers and acquisitions and their integration into Cooper; (13) the
resolution of Federal-Mogul's bankruptcy proceedings; and (14) risks related to
changing legal and regulatory requirements and changing market, economic and
political conditions in the countries in which we operate.
Cooper's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available, free of charge, at the "Investor Center" tab on Cooper's website
(www.cooperindustries.com) as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities Exchange Commission.
The following describes the business conducted by each of Cooper's
business segments. Additional information regarding the products, markets and
distribution methods for each segment is set forth on the table at the end of
this Item. Information concerning market conditions, as well as information
concerning revenues and operating earnings for each segment, is included under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ELECTRICAL PRODUCTS
The Electrical Products segment manufactures, markets and sells
electrical and circuit protection products, including fittings, support systems,
enclosures, wiring devices, plugs, receptacles, lighting fixtures, fuses,
emergency lighting, fire detection systems and security products for use in
residential, commercial and industrial construction, maintenance and repair
applications. The segment also manufactures, markets and sells products for use
by utilities and in industry for electrical power transmission and distribution,
including distribution switchgear, transformers, transformer terminations and
accessories, capacitors, voltage regulators, surge arresters and other related
power systems components.
The principal raw material requirements include: copper, tin, lead,
plastics, insulating materials, pig iron, aluminum ingots, steel, aluminum and
brass. These raw materials are available from and supplied by numerous sources
located in the United States and abroad.
Demand for electrical products follows general economic conditions and
is generally sensitive to activity in the construction market, industrial
production levels, electronic component production and spending by utilities for
replacements, expansions and efficiency improvements. The segment's product
lines are marketed directly to original equipment manufacturers and utilities
and to a variety of end users through major distributor chains, retail home
centers, hardware outlets and thousands of independent distributors.
5
TOOLS & HARDWARE
The Tools & Hardware segment manufactures, markets and sells hand tools
for industrial, construction and consumer markets; automated assembly systems
for industrial markets; and electric and pneumatic industrial power tools for
general industry, primarily automotive and aerospace manufacturers.
The principal raw material requirements include: flat and bar stock
steel, brass, copper, tin plate, fiberglass, aluminum, iron castings, wood,
plastic pellets and plastic sheet. These materials are available from and
supplied by numerous sources located in the United States and abroad.
Demand for nonpowered hand tools, assembly systems and industrial power
tools is driven by employment levels and industrial activity in major industrial
countries and by consumer spending. In addition, demand for industrial power
tools is influenced by automotive and aerospace production. The segment's
products are sold by a company sales force, independent distributors and
retailers.
6
COOPER INDUSTRIES, LTD.
PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT
ELECTRICAL PRODUCTS
MAJOR PRODUCTS AND BRANDS
ACCESS CABINETS and E2 CABINETS electrical enclosures. IRiS lighting systems.
ARKTITE plugs and receptacles. JSB, LUMINOX and MENVIER emergency lighting and fire
ARROW-HART wiring devices. detection systems.
ATLITE commercial, exit and emergency lighting. KARP, EDISON, MERCURY and B&S electrical fuses.
B-LINE support systems, enclosures, fasteners. KEARNEY fuses, connectors, tools and switches.
BLESSING, CSA, PRETRONICA and UNIVEL emergency lighting and KYLE distribution switchgear.
power systems. LIMITRON electric fuses.
BUSSMANN and BUSS electrical and electronic fuses. LITTLE BROTHER electrical control panels.
CAM-LOK electrical connectors. LOW-PEAK electric fuses.
CAPRI-CODEC cable accessories and flexible conduits. LUMIERE specification grade landscape lighting.
CEAG emergency lighting systems and explosion protected MAGNUM terminal strips and disconnect blocks.
electrical materials. MCGRAW-EDISON and LUMARK indoor and outdoor lighting.
CENT-R-RAIL and REDI-RAIL metal rack units and cable trays. MCGRAW-EDISON and RTE transformer components, cable
CHAMP and HAZARD-GARD HID and fluorescent lighting. accessories and fuses.
COILTRONICS inductors and transformers. METALUX fluorescent lighting.
COMBINED TECHNOLOGIES current-limiting fuses. MINI-LINE molded-to-cable miniature connectors.
CONDULET fittings and outlet bodies. MWS modular wiring systems.
COOPER POWER SYSTEMS distribution transformers, power capacitors, MYERS electrical hubs.
voltage regulators, surge arresters and SCADA master NORTEM electrical construction materials.
stations. NOVA reclosers, sectionalizers and switches.
COOPER WIRING DEVICES circuit protective devices. OPTIMA fuseholders.
CORELITE and NEO-RAY indirect lighting products. PORTFOLIO architectural recessed lighting.
CROMPTON lighting fixtures and specialty lamps. POSI-BREAK electrical connectors.
CROUSE-HINDS and CEAG electrical construction materials and POSI-LOK electrical panel units.
CROUSE-HINDS aviation lighting products. POWER-LOCK wiring devices, receptacles, caps and covers.
CUBEFUSE fuses, fuse holders and fuse boxes. POWERPLUS panel boards.
DLS electrical wiring and control systems. POWERSTOR carbon aerogel supercapacitors.
DOMEX electrical construction materials. REGALSAFE signaling and life saving apparatus.
DURA-COPPER and DURA-GREEN epoxy coatings. REGENT security lighting systems.
EAGLE wiring devices, sockets and switches. ROYER wiring devices, sockets and switches.
EDISON and EDISON PRO relays and fusegear. SCANTRONIC and MENVIER security systems.
EDISON SERIES METERING residential and commercial meter bases. SHAPER specification and commercial grade lighting
ELETROMEC DIN style fuses. fixtures.
EMERALD consumer recessed and track lighting. SHOCK SENTRY sockets, connectors, and wall plates.
EMSA power transformers. SPECONE controls, lighting, plugs and receptacles.
ENKLOSURES electrical enclosures. STREETWORKS outdoor lighting.
ENVIROTEMP dielectric fluids. SURE-LITES exit and emergency lighting.
FAIL-SAFE high abuse, clean room and vandal-resistant lighting SURGBLOC electrical voltage receptacles and surge
fixtures. suppressors.
FULLEON, NUGELEC and TRANSMOULD fire detection systems. THEPITT electrical outlet and switch boxes.
FUSETRON electric fuses and protectors. TRANSX transient voltage protection devices.
GLOCOIL electric heating elements. ULTRASIL surge arresters.
HALO recessed and track lighting fixtures. VARIGAP and VARISTAR surge arresters
HART-LOCK electrical receptacles, caps, connectors and WILLSHER & QUICK electrical enclosures.
accessories.
TOOLS & HARDWARE
MAJOR PRODUCTS AND BRANDS
AIRETOOL, BUCKEYE, CLECO, COOPER AUTOMATION, DGD, DOLER, DOTCO, LUFKIN measuring tapes.
GARDNER-DENVER*, GARDOTRANS, QUACKENBUSH, ROTOR TOOL and MASTER POWER industrial air tools.
RECOULES industrial power tools and assembly equipment. METRONIX servos and drive controls.
APEX and GETA screwdriver bits, impact sockets and universal NICHOLSON files and saws.
joints. PLUMB hammers.
CAMPBELL chain products. UTICA torque measuring and controls.
CRESCENT pliers and wrenches. WELLER soldering equipment.
DIAMOND farrier tools and horseshoes. WIRE-WRAP solderless connection equipment.
EREM precision cutters and tweezers. WISS and H.K. PORTER cutting products.
KAHNETICS dispensing systems. XCELITE screwdrivers and nutdrivers.
- ------------------
* Gardner-Denver is a registered trademark of Gardner Denver, Inc. and is
used by Cooper Industries under license.
7
COOPER INDUSTRIES, LTD.
PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT - (CONTINUED)
ELECTRICAL PRODUCTS
MAJOR MARKETS
Fuses and circuit protection products are sold to end-users in the
construction, industrial, automotive and consumer markets and to manufacturers
in the electrical, electronic, telecommunications and automotive industries.
Lighting fixtures are utilized in residential construction, industrial,
institutional and commercial building complexes, shopping centers, parking lots,
roadways, and sports facilities. Electrical power products are used by utilities
and significant commercial and industrial power users. Electrical construction
materials are used in commercial, residential and industrial projects, by
utilities, airports and wastewater treatment plants and in the process and
energy industries. Emergency lighting, fire detection and security systems are
installed in residential, commercial and industrial applications. Support
systems and enclosures are used in industrial, commercial and telecommunications
complexes. Wiring devices are used in the construction, renovation, maintenance
and repair of residential, commercial, industrial and institutional buildings.
PRINCIPAL DISTRIBUTION METHODS
Products are sold through distributors for use in general construction,
plant maintenance, utilities, process and energy applications, shopping centers,
parking lots, sports facilities, and data processing and telecommunications
systems; through distributors and direct to manufacturers for use in electronic
equipment for consumer, industrial, government and military applications;
through distributors and direct to retail home centers and hardware outlets; and
direct to original equipment manufacturers of appliances, tools, machinery and
electronic equipment.
TOOLS AND HARDWARE
MAJOR MARKETS
Power tools and assembly systems are used by general industrial
manufacturers, particularly durable goods producers and original equipment
manufacturers, such as those in the aerospace and automobile industries. Hand
tools are used in a variety of industrial, electronics, agricultural,
construction and consumer applications.
PRINCIPAL DISTRIBUTION METHODS
Products are sold through distributors and agents to general industry,
particularly automotive and aircraft; through distributors and wholesalers to
hardware stores, lumberyards and department stores; and direct to original
equipment manufacturers, home centers, specialty stores, department stores, mass
merchandisers and hardware outlets.
ITEM 3. LEGAL PROCEEDINGS
Cooper is subject to various suits, legal proceedings and claims that
arise in the normal course of business. While it is not feasible to predict the
outcome of these matters with certainty, management is of the opinion that their
ultimate disposition should not have a future additional material adverse effect
on Cooper's financial statements.
In October 1998, Cooper sold its Automotive Products business to
Federal-Mogul Corporation ("Federal-Mogul"). These discontinued businesses
(including the Abex product line obtained from Pneumo-Abex Corporation
("Pneumo") in 1994) were operated through subsidiary companies, and the stock of
those
8
subsidiaries was sold to Federal-Mogul pursuant to a Purchase and Sale Agreement
dated August 17, 1998 ("1998 Agreement"). In conjunction with the sale,
Federal-Mogul indemnified Cooper for certain liabilities of these subsidiary
companies, including liabilities related to the Abex product line and any
potential liability that Cooper may have to Pneumo pursuant to a 1994 Mutual
Guaranty Agreement between Cooper and Pneumo. On October 1, 2001, Federal-Mogul
and several of its affiliates filed a Chapter 11 bankruptcy petition and
indicated that Federal-Mogul may not honor the indemnification obligations to
Cooper. As of the date of this filing, Federal-Mogul had not yet made a decision
whether to reject the 1998 Agreement, which includes the indemnification to
Cooper. If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of
its future obligations under the 1998 Agreement, including specific indemnities
relating to payment of taxes and certain obligations regarding insurance for its
former Automotive Products businesses. To the extent Cooper is obligated to
Pneumo for any asbestos-related claims arising from the Abex product line ("Abex
Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for
such claims. Based on information provided by representatives of Federal-Mogul
and recent claims experience, from August 28, 1998 through December 31, 2002, a
total of 103,133 Abex Claims were filed, of which 31,991 claims have been
resolved leaving 71,142 Abex Claims pending at December 31, 2002, that are the
responsibility of Federal-Mogul. During the year ended December 31, 2002, 21,791
claims were filed and 14,901 claims were resolved. In addition, during the third
quarter of 2002, the Company completed the transition of case administration to
a new national counsel and record keeping system, as well as an audit of
information received from Federal-Mogul. As a result of the audit, the number of
claims received was adjusted by 6,190 and the number of claims resolved was
adjusted by 116 to reflect claims and settlements that should have been included
in Federal-Mogul's pre-October 2001 records. Since August 28, 1998, the average
indemnity payment for resolved Abex Claims was $1,137 before insurance. A total
of $38.4 million was spent on defense costs for the period August 28, 1998
through December 31, 2002. Historically, existing insurance coverage has
provided 50% to 80% of the total defense and indemnity payments for Abex Claims.
With the assistance of independent advisors, Bates White & Ballentine,
LLC, Cooper completed a thorough analysis of its potential exposure for asbestos
liabilities in the event Federal-Mogul rejects the 1998 Agreement. The analysis
included a review of the twenty-year history of Abex Claims; the average
indemnity payments for resolved claims; the jurisdictions in which claims had
been filed; Bates White & Ballentine, LLC data on the incidence of asbestos
exposure and diseases in various industries; existing insurance coverage
including the insurance recovered by Pneumo and Federal-Mogul for pre-bankruptcy
claims and the contractual indemnities. Assumptions were made regarding future
claim filings and indemnity payments, and, based on the advisor's data, the
expected population of persons exposed to asbestos in particular industries. All
of this data was used to determine a reasonable expectation of future claims,
indemnity payments and insurance coverage. At this time, the manner in which
this issue ultimately will be resolved is not known. Cooper is preserving its
rights as a creditor for breach of Federal-Mogul's indemnification to Cooper and
its rights against all Federal-Mogul subsidiaries. Cooper intends to take all
actions to seek a resolution of the indemnification issues and future handling
of the Abex-related claims within the Federal-Mogul bankruptcy proceedings. At
December 31, 2002, the accrual for potential liabilities related to the
Automotive Products sale and the Federal-Mogul bankruptcy was $84.3 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of the shareholders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cooper Class A common shares (symbol - CBE) are listed on the New York
Stock Exchange. Options for Cooper Class A common shares are listed on the
American Stock Exchange. Cooper Class B common shares are not publicly traded.
Cooper Industries, Inc. is the only holder of Class B common shares. The Class B
common shares were issued to Cooper Industries, Inc. in connection with the
reincorporation merger whereby Cooper Industries, Inc., formerly the publicly
traded parent company, became a wholly-owned subsidiary of Cooper Industries,
Ltd. The holders of Class B common shares are not entitled to vote, except as to
matters for which the Bermuda Companies Act specifically requires voting rights
for otherwise nonvoting shares. Cooper Industries, Ltd. and Cooper Industries,
Inc. have entered into a voting agreement whereby any Class A or Class B common
shares held by Cooper Industries, Inc. will be voted (or abstained from voting)
in the same proportion as the other holders of Class A common shares. Therefore,
Class A and Class B common shares held by Cooper Industries, Inc. do not dilute
the voting power of the Class A common shares held by the public.
As of January 31, 2003 there were 26,509 record holders of Cooper Class
A common shares and one holder of Cooper Class B common shares.
The high and low quarterly sales price for the past two years of Cooper
Class A common shares (and prior to May 22, 2002, Cooper Industries, Inc. Common
Stock, par value $5.00 per share), as reported by Dow Jones & Company, Inc., are
as follows:
QUARTER
------------------------------------------------------------------------------------------
1 2 3 4
------------------- ------------------- ------------------- ---------------------
2002 High $42.55 $47.10 $39.55 $38.50
Low 30.20 37.00 27.14 27.55
2001 High $47.69 $41.17 $60.45 $45.57
Low 32.00 31.61 33.60 34.50
Annual cash dividends declared on Cooper's Class A and Class B common
shares (and prior to May 22, 2002, Cooper Industries, Inc. Common Stock, par
value $5.00 per share) during 2002 and 2001 were $1.40 a share ($.35 a quarter).
On February 12, 2003, the Board of Directors declared a quarterly dividend of
$.35 a share (or $1.40 on an annualized basis), which will be paid on April 1,
2003 to shareholders of record on March 3, 2003. Cooper's subsidiary, Cooper
Industries, Inc., waived the right to receive all dividends on Class A and Class
B common shares held by it in 2002 and in February 2003.
The information required by Item 201(d) of Regulation S-K is set forth
under the caption "Equity Compensation Plan Information" in Cooper's definitive
Proxy Statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with Cooper's 2003 Annual Meeting of
Shareholders and is incorporated herein by reference.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for
Cooper for each of the five years in the period ended December 31, 2002. The
selected historical financial information shown below has been derived from
Cooper's audited consolidated financial statements. This information should be
read in conjunction with Cooper's consolidated financial statements and notes
thereto.
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues.......................................... $ 3,960.5 $ 4,209.5 $ 4,459.9 $ 3,868.9 $ 3,651.2
--------- --------- --------- --------- ---------
Income from continuing operations................. $ 213.7 $ 261.3 $ 357.4 $ 331.9 $ 335.9
Income (charge) from discontinued operations, net
of taxes........................................ -- (30.0) -- -- 87.1
--------- --------- --------- --------- ---------
Net Income...................................... $ 213.7 $ 231.3 $ 357.4 $ 331.9 $ 423.0
========= ========= ========= ========= =========
INCOME PER COMMON SHARE DATA:
Basic -
Income from continuing operations................. $ 2.29 $ 2.78 $ 3.82 $ 3.53 $ 2.97
Income (charge) from discontinued operations...... -- (.32) -- -- .77
--------- --------- --------- --------- ---------
Net Income...................................... $ 2.29 $ 2.46 $ 3.82 $ 3.53 $ 3.74
========= ========= ========= ========= =========
Diluted -
Income from continuing operations................. $ 2.28 $ 2.75 $ 3.80 $ 3.50 $ 2.93
Income (charge) from discontinued operations...... -- (.31) -- -- .76
--------- --------- --------- --------- ---------
Net Income...................................... $ 2.28 $ 2.44 $ 3.80 $ 3.50 $ 3.69
========= ========= ========= ========= =========
BALANCE SHEET DATA (at December 31):
Total assets......................................... $ 4,687.9 $ 4,611.4 $ 4,789.3 $ 4,143.4 $ 3,779.1
Long-term debt, excluding current maturities......... 1,280.7 1,107.0 1,300.8 894.5 774.5
Shareholders' equity................................. 2,002.4 2,023.2 1,904.2 1,743.1 1,563.6
CASH DIVIDENDS PER COMMON
SHARE............................................. $ 1.40 $ 1.40 $ 1.40 $ 1.32 $ 1.32
In October 1998, Cooper sold its Automotive Products segment for $1.9
billion in proceeds. The financial information in the above table excludes the
1998 results of the Automotive Products segment from income from continuing
operations. The discontinued segment's results are presented separately in the
caption "Income (charge) from discontinued operations, net of taxes." A $30
million charge, net of a $20 million income tax benefit was recorded in 2001
related to potential asbestos obligations associated with the Automotive
Products segment. See Note 16 of Notes to Consolidated Financial Statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, includes certain
forward-looking statements. The forward-looking statements reflect Cooper's
expectations, objectives and goals with respect to future events and financial
performance, and are based on assumptions and estimates which Cooper believes
are reasonable. Forward-looking statements include, but are not limited to,
statements regarding the facilities closure and production rationalization plan
and cost-reduction programs, capital expenditures, resolution of income tax
matters, potential liability exposure resulting from Federal-Mogul Corporation's
("Federal-Mogul") bankruptcy filing and any statements regarding future
revenues, costs and expenses, earnings, earnings per share, margins, cash flows
and capital expenditures. Cooper wishes to caution readers not to put undue
reliance on these statements and that actual results could differ materially
from anticipated results. Important factors which may affect the actual results
include, but are not limited to, the resolution of Federal-Mogul's bankruptcy
proceedings, political developments, market and economic conditions, changes in
raw material and energy costs, industry competition, the net effects of Cooper's
cost-reduction programs, the timing and net effects of facility closures and the
magnitude of any disruptions from such closures, changes in financial markets
including foreign currency rate fluctuations and changing legislation and
regulations including changes in tax law, tax treaties or tax regulations. The
forward-looking statements contained in this report are intended to qualify for
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements and Notes to the Consolidated
Financial Statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Cooper believes
the following critical accounting policies involve additional management
judgment due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Cooper recognizes revenues when products are shipped and accruals for
sales returns and other allowances are provided at the time of shipment based
upon past experience. If actual future returns and allowances differ from past
experience, additional allowances may be required. The accrual for sales returns
and other allowances was $27.2 million and $30.9 million at December 31, 2002
and 2001, respectively.
Allowances for excess and obsolete inventory are provided based on
current assessments about future demands, market conditions and related
management initiatives. If market conditions are less favorable than those
projected by management, additional inventory allowances may be required. The
allowance for excess and obsolete inventory was $41.0 million at December 31,
2002 and $35.1 million at December 31, 2001. The increase in the allowance
during 2002 reflects Cooper's assessment of ultimate disposition in
consideration of continued depressed market conditions.
Cooper has a valuation allowance of $21.7 million and $47.0 million at
December 31, 2002 and 2001, respectively, to reduce its deferred tax asset
related to a capital loss carryforward on the 1998 sale of the Automotive
Products segment. The capital loss carryforward is available to offset capital
gains through 2003. The capital loss carryforward deferred tax asset balance was
$21.7 million and $54.9 million at December 31, 2002 and 2001, respectively.
Cooper limited the amount of tax benefits recognizable from this asset based on
an evaluation of the amount of capital loss carryforward that is expected to be
ultimately realized. Cooper has implemented strategies to realize the capital
loss carryforward asset and has transferred the reduction in the valuation
allowance to other deferred taxes. See Note 12 of the Notes to the Consolidated
Financial Statements.
12
Pension assets and liabilities are determined on an actuarial basis and
are affected by the estimated market value of plan assets, estimates of the
expected return on plan assets and discount rates. Actual changes in the fair
market value of plan assets and differences between the actual return on plan
assets and the expected return on plan assets will affect the amount of pension
expense ultimately recognized. Differences between actuarial assumptions and
estimates and actual experience are deferred as unrecognized gains and losses.
Unrecognized gains and losses in excess of a calculated minimum annual amount
are amortized and recognized in net periodic pension cost over the average
remaining service period of active employees.
During 2002, the fair market value of the equity investments included
in the plan assets of one of the largest pension plans decreased 13%, primarily
as a result of the overall downturn in the U.S. stock market. In addition,
interest rates have declined, which resulted in a decrease in the assumed
discount rate used to measure this plan's obligations from 7.75% in 2000 to 7.0%
in 2002. The decrease in the discount rate caused an increase in the accumulated
benefit obligation amount. The accumulated benefit obligation of this plan
exceeded the fair market value of plan assets at December 31, 2002. This
unfunded accumulated benefit obligation, plus the existing prepaid asset
recorded related to this plan was the primary cause of a $33.4 million
net-of-tax minimum pension liability charge included in accumulated other
nonowner changes in equity at December 31, 2002. Total net periodic pension
benefits cost was $16.7 million in 2002, $11.6 million in 2001 and $2.0 million
in 2000 excluding a $3.6 million settlement gain. The increase in net periodic
pension cost in 2002 and 2001 was primarily due to a decrease in the expected
return on plan assets and an increase in recognized actuarial losses. Total net
periodic pension benefits cost is expected to be $26.0 million in 2003. The net
periodic pension benefit cost for 2003 has been estimated assuming a discount
rate of 7.0% and an expected return on plan assets of 8.5%. The $9.3 million
expected increase in net periodic pension cost in 2003 compared to 2002
primarily results from a decrease in the expected return on plan assets and an
increase in recognized actuarial losses. See Note 13 of the Notes to the
Consolidated Financial Statements.
The postretirement benefits other than pensions liability is also
determined on an actuarial basis and is affected by assumptions including the
discount rate and expected trends in health care costs. Changes in the discount
rate and differences between actual and expected health care costs will affect
the recorded amount of postretirement benefits expense. Differences between
assumptions and actual experience are deferred as unrecognized gains and losses.
Unrecognized gains and losses in excess of a minimum annual amount are amortized
and recognized in net periodic postretirement benefit cost over the average
remaining life expectancy of the participants. The decline in interest rates
over the past three years resulted in a decrease in the assumed discount rate
used to measure postretirement benefit obligations from 7.75% in 2000 to 7.0% in
2002. Net periodic postretirement benefit cost is expected to rise slightly to
$5.8 million in 2003 compared to cost of $5.2 million in 2002 and income of $1.3
million and $1.8 million in 2001 and 2000, respectively. The increase in net
periodic postretirement benefit cost in 2002 was primarily due to a decrease in
the amount of recognized actuarial gains. See Note 13 of the Notes to the
Consolidated Financial Statements.
Environmental liabilities are accrued based on estimates of known
environmental remediation exposures. The liabilities include accruals for sites
owned by Cooper and third-party sites where Cooper was determined to be a
potentially responsible party. Third party sites frequently involve multiple
potentially responsible parties and Cooper's potential liability is determined
based on estimates of Cooper's proportionate responsibility for the total
cleanup. The amounts accrued for such sites are based on these estimates as well
as an assessment of the financial capacity of the other potentially responsible
parties. Environmental liability estimates may be affected by changing
determinations of what constitutes an environmental liability or an acceptable
level of cleanup. To the extent that remediation procedures change or the
financial condition of other potentially responsible parties is adversely
affected, Cooper's estimate of its environmental liabilities may change. The
liability for environmental remediation was $42.2 million at December 31, 2002
and $46.3 million at December 31, 2001. See Note 7 of the Notes to the
Consolidated Financial Statements.
13
As discussed in Note 16 of the Notes to the Consolidated Financial
Statements, Cooper has an $84.3 million accrual representing its best estimate
of liabilities related to the sale of the Automotive Products business to
Federal-Mogul in 1998. The liabilities include potential liabilities in the
event Federal-Mogul rejects the 1998 Purchase and Sale Agreement for the sale of
the Automotive Products business, and certain indemnification obligations to
Cooper. The analysis of Cooper's contingent liability exposure for
asbestos-related claims involving Abex products was conducted with assistance
from independent advisors, Bates White & Ballentine, LLC, and assumes future
resolution of the Abex-related asbestos claims within the Federal-Mogul
bankruptcy proceeding. The analysis included a review of the twenty-year history
of Abex claims; the average indemnity payments for resolved claims; the
jurisdictions in which claims had been filed; Bates White & Ballentine, LLC data
on the incidence of asbestos exposure and diseases in various industries;
existing insurance coverage including the insurance recovered by Pneumo-Abex
Corporation and Federal-Mogul for pre-bankruptcy claims and the contractual
indemnities. Assumptions were made regarding future claim filings and indemnity
payments, and, based on advisor's data, the expected population of persons
exposed to asbestos in particular industries. All of this data was used to
determine a reasonable expectation of future claims, indemnity payments and
insurance coverage. At this time, the manner in which this issue ultimately will
be resolved is not known. To the extent additional information arises or
strategies change, it is possible that Cooper's estimate of its contingent
liability may change.
RESULTS OF OPERATIONS
REVENUES
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---------- ---------- ----------
(IN MILLIONS)
Electrical Products........... $ 3,324.9 $ 3,485.5 $ 3,659.2
Tools & Hardware ............. 635.6 724.0 800.7
---------- ---------- ----------
Total Revenues........... $ 3,960.5 $ 4,209.5 $ 4,459.9
========== ========== ==========
See the geographic information included in Note 15 of the Notes to the
Consolidated Financial Statements for a summary of revenues by country.
2002 vs. 2001 Revenues Revenues decreased 6% in 2002 compared to 2001.
Foreign currency translation had an insignificant impact on revenues during 2002
in both segments of our business. Weak industrial markets worldwide affected
demand across all of Cooper's businesses.
Electrical Products segment revenues, which represent 84% of 2002 total
revenues, were 5% below 2001. Continued weakness in the North American economy
affected the markets served by the Electrical Products segment. A contraction in
domestic industrial activity and commercial construction impacted demand and
increased price pressures for the Company's lighting, hazardous-duty and support
systems products. The impact of these weak markets was partially offset by
strong retail channel sales, particularly for the Company's residential lighting
and wiring devices products. An uncertain economic environment for utility
customers reduced sales of electrical distribution equipment. A modest recovery
in the electronics markets led to an increase in sales of circuit protection
products.
The Tools & Hardware segment contributed 16% of total revenues in 2002.
Revenues for 2002 were 12% below 2001. Worldwide demand was weak for both hand
tools and power tools used in general industrial and electronics markets.
Shipments of automotive assembly equipment were lower than last year as a result
of reduced capital spending by automotive companies.
14
2001 vs. 2000 Revenues Revenues decreased 6% in 2001 compared to 2000.
Excluding the effects of acquisitions and a 1% reduction in revenues due to
foreign currency translation, revenues were down 8% from 2000. Weakening global
economies affected demand in virtually all of Cooper's businesses.
Electrical Products segment revenues, which represent 83% of 2001 total
revenues, were 5% below 2000. Excluding acquisitions and a 1% decline related to
a stronger U.S. dollar, segment revenues were down 8% from 2000. Revenues in the
hazardous-duty electrical products business improved modestly, reflecting
increased capital spending in the energy and petrochemical sectors. Sales of
electrical and electronic circuit protection and telecommunications systems
equipment were impacted by the significant slowing in the telecommunications and
electronics markets. Weak industrial markets, coupled with inventory reduction
programs in both distribution and retail market channels, and a slowdown in
construction activity impacted all of the businesses. In addition, utility
spending remained cautious in light of the overall economic uncertainty.
The Tools & Hardware segment contributed 17% of total revenues in 2001.
Revenues were 10% below the prior year as the slowdown in industrial, electronic
and automotive markets reduced demand for the segment's products. The impact of
translation reduced revenues for 2001 by approximately 2%.
SEGMENT OPERATING EARNINGS
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS)
Segment Operating Earnings
(internal management reporting
- excludes nonrecurring charges):
Electrical Products ....................... $ 400.6 $ 437.0 $ 585.0
Tools & Hardware .......................... 27.3 68.6 97.7
-------- -------- --------
Total Segment Operating Earnings ..... $ 427.9 $ 505.6 $ 682.7
======== ======== ========
Nonrecurring Charges:
Electrical Products ....................... $ (24.0) $ (24.0) $ --
Tools & Hardware .......................... (12.7) -- --
-------- -------- --------
Total ................................ $ (36.7) $ (24.0) $ --
======== ======== ========
Segment Operating Earnings (generally
accepted accounting principles - includes
nonrecurring charges):
Electrical Products ....................... $ 376.6 $ 413.0 $ 585.0
Tools & Hardware .......................... 14.6 68.6 97.7
-------- -------- --------
Total Segment Operating Earnings ..... $ 391.2 $ 481.6 $ 682.7
======== ======== ========
15
OTHER INCOME AND EXPENSES
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Segment Operating Earnings(1) ....................... $ 391.2 $ 481.6 $ 682.7
General Corporate:
Nonrecurring Charges ............................ 2.4 50.1 --
Expense ......................................... 34.1 30.4 32.5
--------- --------- ---------
Operating Earnings .................................. 354.7 401.1 650.2
Interest Expense, net ............................... 74.5 84.7 100.3
--------- --------- ---------
Income from Continuing Operations Before Income Taxes 280.2 316.4 549.9
Income Tax Expense .................................. 66.5 55.1 192.5
--------- --------- ---------
Income from Continuing Operations ................... 213.7 261.3 357.4
Charge Related to Discontinued Operations ........... -- (30.0) --
--------- --------- ---------
Net Income .......................................... $ 213.7 $ 231.3 $ 357.4
========= ========= =========
Diluted Earnings Per Share
Income from Continuing Operations ................... $ 2.28 $ 2.75 $ 3.80
Charge from Discontinued Operations ................. -- (.31) --
--------- --------- ---------
Net Income.................................. $ 2.28 $ 2.44 $ 3.80
========= ========= =========
(1) Includes segment nonrecurring charges.
Cooper measures the performance of its businesses exclusive of
nonrecurring charges and financing expenses. All costs directly attributable to
operating businesses are included in segment operating earnings. Corporate
overhead costs, including costs of centrally managed functions, such as
treasury, are not allocated to the businesses. See Note 15 of the Notes to the
Consolidated Financial Statements.
Cooper adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142") on January 1, 2002. In
accordance with SFAS No. 142, goodwill is no longer amortized but is subject to
an annual impairment test. See Note 6 of the Notes to the Consolidated Financial
Statements.
2002 vs. 2001 Segment Operating Earnings Excluding Nonrecurring Charges
Segment operating earnings decreased 15% to $427.9 million from $505.6 million
in 2001.
Electrical Products segment operating earnings decreased 8% to $400.6
million from $437.0 million in 2001. Excluding goodwill amortization, Electrical
Products segment operating earnings for 2001 were $488.5 million. The reduction
from prior year was due to lower revenues reflective of the overall weakness of
industrial and non-residential construction markets, competitive market
conditions, lower absorption of production costs as a result of aggressive
actions to reduce inventory levels and investments in strategic growth programs.
Return on revenues was 12.0% in 2002 compared to 12.5% in 2001.
The Tools & Hardware segment operating earnings were $27.3 million
compared to $68.6 million in 2001. Excluding goodwill amortization, Tools &
Hardware segment operating earnings for 2001 were $77.8 million. The lower
operating earnings primarily reflect the impact of reduced revenues from the
prior year and plant inefficiencies from operating at reduced levels of
manufacturing to achieve planned inventory reductions. Return on revenues was
4.3% in 2002 compared to 9.5% in 2001.
16
2001 Segment Operating Earnings Excluding Nonrecurring Charges vs. 2000
Segment operating earnings decreased 26% to $505.6 million from $682.7 million
in 2000. Excluding the impact of acquisitions, segment earnings decreased 27%
from the prior year.
Electrical Products segment operating earnings declined 25% to $437.0
million from $585.0 million in 2000. Excluding the incremental effect of
acquisitions, segment operating earnings were down 27% compared to the prior
year. The reduction in operating earnings reflects lower sales volume,
competitive market conditions and manufacturing inefficiencies resulting from
adjusting production levels to match demand. As a result, return on revenues was
12.5% in 2001 compared with 16.0% in 2000. Excluding acquisitions, the return on
revenues was 12.9% in 2001 compared with 16.0% in 2000.
The Tools & Hardware segment operating earnings were $68.6 million
compared to $97.7 million in 2000. Segment earnings for 2001 were impacted by
lower revenues and related manufacturing inefficiencies. Return on revenues was
9.5% in 2001 compared to 12.2% in 2000.
NONRECURRING CHARGES
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size the Company's workforce to market conditions, and (3) the
write-off of assets related to production rationalization activities. These
actions were taken as a part of Cooper management's ongoing assessment of
required production capacity in consideration of current demand levels. In
connection with these commitments, certain production capacity and related
assets will be sold, outsourced, discontinued or moved to a lower cost
environment. The Company recorded a provision for these announced actions of
$39.1 million ($15.0 million of which is non-cash), or $29.8 million after taxes
($.32 per diluted common share). Of this amount, $24.0 million ($11.0 million of
which is non-cash) was associated with the Electrical Products segment, $12.7
million ($3.4 million of which was non-cash) was associated with the Tools &
Hardware segment and the remainder was related to General Corporate. Of the
$24.1 million of charges resulting in cash expenditures, $22.0 million remained
to be expended at December 31, 2002.
The following table reflects activity related to the fourth quarter
2002 nonrecurring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
--------- --------- ---------------
($ IN MILLIONS)
2002 Nonrecurring Charge ... 1,206 $ 18.3 $ 20.8
Asset write-offs ........... -- -- (15.0)
Employees terminated ....... (184) -- --
Cash expenditures .......... -- (2.1) --
----- ------- -------
Balance at December 31, 2002 1,022 $ 16.2 $ 5.8
===== ======= =======
A total of 435 salaried and 771 hourly positions are scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions will be
replaced ultimately as a result of the Company's ongoing efforts to relocate
production capacity to lower cost locations. Substantially all of the closure
and rationalization activities will be initiated by the end of 2003 and are
scheduled to be substantially completed by the end of 2004. The majority of the
expenditures related to the 2002 nonrecurring charge are expected to be incurred
during 2003 and will be funded from cash provided by operating activities.
As of December 31, 2002, Cooper anticipates incurring $18.9 million
related to facility exit costs and disruption of operations under the 2002
facility closure and production rationalization plan that could not be accrued.
These costs are principally related to production inefficiencies and equipment
and personnel relocation and will be expensed as incurred. Cooper estimates that
the earnings impact in 2003 from these
17
actions will be approximately $5 million in pretax savings, the majority of
which will benefit the second half of the year. These initial savings will
largely be realized from personnel reductions that will principally impact
selling and administrative expenses. The majority of the cost savings will be
realized beginning in 2004 as the facility closures and rationalizations become
finalized. It is expected that the pretax savings will exceed $35.0 million and
will largely be reflected as lower cost of sales.
During the fourth quarter of 2001, Cooper committed to the
consolidation or closure of certain Electrical Products segment facilities and
recorded a provision for severance and other related costs of these announced
actions of $7.1 million ($1.7 million of which is non-cash). Plans to
consolidate or close facilities arose as a result of Cooper management
continuing to review and modify their assessment of required production and
distribution facilities and capacity, in consideration of depressed demand
levels. In addition, the Company concluded during 2001 that various Electrical
Products segment assets comprising $8.5 million of net book value were fully
impaired as a result of decisions to discontinue or outsource the production
provided by those assets in light of demand for the related products. Also
during the 2001 fourth quarter, Cooper management performed a strategic review
of the operations of the Wiring Devices business. This review focused on the
results to date of the combination of the March 2000 acquisition of Eagle
Electric with Cooper's existing electrical wiring devices operations. Management
concluded that certain products within the combined Wiring Devices business were
essentially duplicative; that other product offerings were forecasted to be
unprofitable; that all product and product packaging should be rebranded to a
single brand; and that certain customer changeover costs incurred would provide
no future benefit to the Wiring Devices business. Cooper recorded a non-cash
charge of $8.4 million to provide for these assimilation and changeover costs.
The 2001 fourth quarter nonrecurring charge for the Electrical Products segment
totaled $24.0 million.
During the fourth quarter of 2001, Cooper reviewed strategies
surrounding certain information technology related investments. These
investments included capitalized costs for software applications, related
hardware and equity investments in technology ventures that were primarily
related to Cooper's efforts regarding the development of electronic sales,
engineering and purchasing capabilities. Cooper concluded that a $14.1 million
General Corporate nonrecurring charge should be recorded to provide for the full
impairment of certain modules of software, hardware and other technology
investments that would not become a functional component of Cooper's overall
information technology infrastructure. Also during the 2001 fourth quarter,
Cooper recorded a General Corporate nonrecurring charge of $36.0 million for the
fees and expenses of financial advisors and legal and other external costs
associated with performing the Company's review of strategic alternatives. On
August 1, 2001, Danaher Corporation ("Danaher") announced it had made an
unsolicited proposal to Cooper for a merger through a stock and cash transaction
subject to conducting due diligence procedures. On August 8, 2001, Cooper's
Board of Directors unanimously rejected Danaher's proposal and authorized
management to explore all strategic alternatives that would maximize shareholder
value including mergers, sales, strategic alliances, acquisitions or other
similar strategic alternatives. On February 13, 2002, Cooper announced that it
completed its strategic alternatives review process. After careful review of all
the available alternatives with management and its financial advisors, Cooper's
Board of Directors concluded that it was in the best interests of Cooper's
shareholders to move forward with its plan to reincorporate in Bermuda. The 2001
fourth quarter general corporate nonrecurring charge totaled $50.1 million.
The nonrecurring charges for 2001 total $74.1 million, or $44.5 million
after taxes ($.47 per diluted share). Of the total $74.1 million, $32.7 million
represented non-cash charges and $14.3 million of the remaining $41.4 million in
charges is accrued at December 31, 2002.
During the fourth quarter of 1998, Cooper initiated and announced a
voluntary and involuntary severance program and committed to consolidate several
facilities. Cooper accrued a total of $26.4 million in severance and $16.1
million in other charges including facility exit costs during the fourth quarter
of 1998. During the first quarter of 1999, Cooper completed the voluntary
severance program and accrued an additional $5.8 million primarily representing
the voluntary severance program premium over the severance provided under
Cooper's established policies. Cooper also accrued $1.5 million related to
severance and
18
other costs for facility closures announced during the first quarter of 1999. At
December 31, 1999, $10.4 million of the severance accrual and $4.7 million of
the facility consolidation accrual remained to be expended.
The following table reflects activity related to the fourth quarter
1998, first quarter 1999 and the fourth quarter 2001 severance, facility
consolidation and closure and financial advisors and other cost accruals.
FACILITIES FINANCIAL
NUMBER OF ACCRUED CONSOLIDATION ADVISORS AND
EMPLOYEES SEVERANCE AND CLOSURE OTHER
--------- --------- ------------- ------------
($ IN MILLIONS)
Balance at December 31, 1999 ..... 918 $ 10.4 $ 4.7 $ --
Employees terminated ............. (311) -- -- --
Cash expenditures ................ -- (5.3) (1.7) --
---- ------- ------ -------
Balance at December 31, 2000 ..... 607 5.1 3.0 --
Employees terminated ............. (607) -- -- --
Cash expenditures ................ -- (5.1) (3.0) --
---- ------- ------ -------
Completion of 1998 and 1999 plans -- -- -- --
==== ======= ====== =======
Facility consolidation and closure 291 3.2 2.2 --
Provision for advisors and other . -- -- -- 36.0
Employees terminated ............. (18) -- -- --
Cash expenditures ................ -- (0.2) (0.1) (6.0)
---- ------- ------ -------
Balance at December 31, 2001 ..... 273 3.0 2.1 30.0
Employees terminated ............. (273) -- -- --
Cash expenditures ................ -- (3.0) (2.1) (15.7)
---- ------- ------ -------
Balance at December 31, 2002 ..... -- $ -- $ -- $ 14.3
==== ======= ====== =======
Cash provided by operating activities is the source for funding the
expenditures. As of December 31, 2001 all employee reduction and facility
consolidation actions related to the fourth quarter 1998 and first quarter 1999
employee reduction and facility consolidation plans were completed and amounts
accrued for these programs have been satisfied. As of December 31, 2002, it is
anticipated that remaining expenditures, if any, related to the fourth quarter
2001 accrual will be completed by June 30, 2003. See Note 2 of the Notes to the
Consolidated Financial Statements for additional information on nonrecurring
charges.
General Corporate Nonrecurring Charges See the "Nonrecurring Charges"
section above and Note 2 of the Notes to Consolidated Financial Statements.
General Corporate Expense General Corporate expenses increased $3.7
million in 2002 compared to 2001. Increases in expenses for pension and other
postretirement benefits were significant contributors to the increase in 2002.
General Corporate expenses decreased $2.1 million in 2001 compared to 2000.
Reductions in personnel, cost reduction efforts and lower employee benefit
related costs were the primary reasons for the reductions.
General Corporate expense is reduced by proceeds receivable under an
agreement with Belden, Inc. ("Belden"). In 1993, Cooper completed an initial
public offering of the stock of Belden, formerly a division of Cooper. Under the
agreement, Belden and Cooper made an election that increased the tax basis of
certain Belden assets. Belden is required to pay Cooper ninety percent of the
amount by which Belden has actually reduced tax payments that would otherwise
have been payable if the increase in the tax basis of assets had not occurred,
as realized on a quarterly basis over substantially fifteen years. If Belden
does not have sufficient future taxable income, it is possible that Belden will
not be able to utilize the tax deductions arising from the increase in the tax
basis of the assets resulting in a tax loss carryforward. Belden is not
obligated to pay Cooper until a tax loss carryforward is utilized. Belden can
carry any loss forward twenty years to offset future taxable income. Cooper has
recognized proceeds of approximately $3.0 million on average per quarter during
the three years in the period ended December 31, 2002. Future proceeds may be
reduced to the extent that Belden does not have sufficient taxable income.
19
Interest Expense, Net Interest expense, net decreased $10.2 million in
2002 compared to 2001 primarily as a result of lower average debt balances and
average interest rates. Average debt balances were $1.40 billion and $1.56
billion and average interest rates were 5.37% and 5.46% for 2002 and 2001,
respectively.
Interest expense, net decreased $15.6 million in 2001 compared to 2000
primarily as a result of lower average debt balances and average interest rates.
Average debt balances were $1.56 billion and $1.59 billion and average interest
rates were 5.46% and 6.48% for 2001 and 2000, respectively. Interest of $1.5
million and $3.9 million was capitalized in 2001 and 2000, respectively.
Income Tax Expense The effective tax rate for 2002 was 23.7%. The
effective tax rate for 2001 was 32.1% before goodwill amortization, nonrecurring
charges and a $50 million tax benefit due to the reversal of reserves as a
result of favorable Appellate level third party court decisions related to
certain income tax return issues. The effective tax rate for 2000 was 33.3%,
before goodwill amortization. The effective tax rate decreased in 2002 primarily
as a result of the reorganization as discussed in Note 1 of the Notes to the
Consolidated Financial Statements. See Notes 6 and 12 of the Notes to the
Consolidated Financial Statements.
Charge Related to Discontinued Operations A $30 million charge, net of
a $20 million income tax benefit, was recorded in 2001 related to potential
asbestos obligations regarding the Automotive Products segment which was sold in
1998. See Note 16 of the Notes to the Consolidated Financial Statements.
Diluted Earnings Per Share Diluted earnings per share from continuing
operations was $2.28 in 2002 compared to $2.75 in 2001 and $3.80 in 2000.
Diluted earnings per share from continuing operations, excluding after-tax
nonrecurring charges of $29.8 million or $.32 cents per share, was $2.60 in
2002. Diluted earnings per share from continuing operations, excluding goodwill
amortization of $50.4 million, net of tax, nonrecurring charges of $44.5
million, net of tax and a $50 million tax benefit due to the reversal of
reserves as a result of favorable Appellate level third party court decisions
related to certain tax return issues, was $3.22 in 2001. Excluding goodwill
amortization of $48.7 million, net of tax, diluted earnings per share was $4.31
in 2000.
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2001 2000
----------------- --------------- ---------------
Cost of Sales:
Electrical Products............................................. 71.2% 70.2% 67.8%
Tools & Hardware................................................ 75.0% 71.1% 68.8%
Selling and Administrative:
Electrical Products............................................. 16.7% 15.8% 14.9%
Tools & Hardware................................................ 20.7% 18.2% 17.8%
2002 vs. 2001 Percentage of Revenues Electrical Products segment cost
of sales, as a percentage of revenues, increased 1% in 2002 compared to 2001.
The increase in the cost of sales percentage was due to pricing pressures and
lower absorption of manufacturing costs as a result of efforts to reduce
inventories. Tools & Hardware segment cost of sales, as a percentage of
revenues, increased 3.9% for 2002 compared to 2001. The increase in the cost of
sales percentage was due to lower absorption of production costs and
inefficiencies associated with adjusting manufacturing levels to achieve planned
inventory reductions.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for 2002 were 16.7% compared to 15.8% for 2001. Total
Electrical Products segment selling and administrative
20
expenses were up slightly, reflecting increased investments in strategic growth
programs, while revenues declined, driving the overall percentage increase.
Tools & Hardware segment selling and administrative expenses, as a percentage of
revenues, for 2002 increased 2.5% over 2001. The increase in selling and
administrative expenses, as a percentage of revenues, was directly attributable
to the reduction in revenues as total expenses were comparable to 2001.
2001 vs. 2000 Percentage of Revenues Electrical Products segment cost
of sales, as a percentage of revenues, increased 2.4% for 2001 compared to 2000.
The increase in the cost of sales percentage was due to competitive market
conditions and manufacturing inefficiencies resulting from adjusting production
levels to meet demand. Tools & Hardware segment cost of sales, as a percentage
of revenues, increased 2.3% for 2001. The increase in the cost of sales
percentage was due to declining sales volumes and the resulting adverse impact
of lower absorption of fixed manufacturing costs.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for 2001 were 15.8% compared to 14.9% for 2000. Total
Electrical Products segment selling and administrative expenses increased 1%;
while revenues fell 5% driving the overall percentage increase. Tools & Hardware
segment selling and administrative expenses, as a percentage of revenues, for
2001 were 18.2% compared to 17.8% for 2000. The increase in selling and
administrative expenses, as a percentage of revenues, was due to the reduction
in revenues despite total expense decreases of 8% during 2001 compared to 2000.
Cooper realizes certain costs and proceeds that are not directly
attributable to the operating segments. These items are reflected as General
Corporate costs in the industry segment data. See Note 15 of the Notes to
Consolidated Financial Statements.
EARNINGS OUTLOOK
The following sets forth Cooper's general business outlook for 2003
based on current expectations.
Cooper expects modest growth in revenues for both the Electrical
Products and Tools & Hardware segments in 2003 through new product introductions
and market penetration. Operating earnings are expected to grow more rapidly
than revenues as a result of cost reduction programs and leveraging of fixed
costs. Diluted earnings per share is expected to range from approximately $2.85
to $3.05 in 2003.
The above statements are forward looking, and actual results may differ
materially. The above statements are based on a number of assumptions, risks and
uncertainties. The primary economic assumptions include, without limitation: (1)
slow growth in the domestic and international economies; (2) no significant
change in raw material or energy costs; (3) realization of benefits of
cost-reduction programs with no major disruptions from those programs currently
underway; and (4) no significant adverse changes in the relationship of the U.S.
dollar to the currencies of countries in which Cooper does business. The
estimates also assume, without limitation, no significant change in competitive
conditions and such other risk factors as are discussed from time to time in
Cooper's periodic filings with the Securities and Exchange Commission.
PRICING AND VOLUME
In each of Cooper's segments, the nature of many of the products sold
is such that an accurate determination of the changes in unit volume of sales is
neither practical nor, in some cases, meaningful. Each segment produces a family
of products, within which there exist considerable variations in size,
configuration and other characteristics.
It is Cooper's judgment that, excluding the year-to-year effects of
acquisitions and divestitures, unit volume decreased in the Electrical Products
segment and decreased in the Tools & Hardware segment in 2002.
During the three-year period ending in 2002, Cooper was unable to
increase prices to fully offset cost increases in selected product offerings in
both segments. Cooper has been able to control costs through
21
strategic sourcing efforts, manufacturing improvements and other actions during
this period so that the inability to increase prices has not significantly
affected profitability in the segments. As discussed above, decreased unit
volume in both the Electrical Products and Tools & Hardware segments in 2002 and
2001 resulted in lower absorption of fixed manufacturing costs.
EFFECT OF INFLATION
During each year, inflation has had a relatively minor effect on
Cooper's results of operations. This is true primarily for three reasons. First,
in recent years, the rate of inflation in Cooper's primary markets has been
fairly low. Second, Cooper makes extensive use of the LIFO method of accounting
for inventories. The LIFO method results in current inventory costs being
matched against current sales dollars, such that inflation affects earnings on a
current basis. Finally, many of the assets and liabilities included in Cooper's
Consolidated Balance Sheets were recorded in connection with business
combinations that are accounted for as purchases. At the time of such
acquisitions, the assets and liabilities are adjusted to fair market value and,
therefore, the cumulative long-term effect of inflation is reduced.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING WORKING CAPITAL
For purposes of this discussion, operating working capital is defined
as receivables and inventories less accounts payable.
Cooper's operating working capital decreased $72 million from $1,047
million in 2001 to $975 million in 2002. This decrease was primarily related to
a $90 million reduction in inventories and a $70 million reduction in accounts
receivable, partially offset by lower accounts payable. Contributing to the
reduction in inventories was a $6 million increase in the allowance for excess
and obsolete inventories reflecting the Company's assessment of ultimate
disposition in consideration of continued depressed market conditions. Operating
working capital turnover decreased from 4.0 turns in 2001 to 3.9 turns in 2002.
The decrease from 2001 reflects the impact of lower shipments.
Cooper's operating working capital decreased $19 million from $1,066
million in 2000 to $1,047 million in 2001. Operating working capital turnover
declined from 4.5 turns in 2000 to 4.0 turns in 2001. Excluding the impact of
recent acquisitions, operating working capital turnover in 2001 was 4.2 turns.
The decrease from 2000 primarily reflects the lower than expected revenues
experienced in 2001.
In 2000, operating working capital increased $149 million compared to
an increase of $135 million in 1999. The increase in operating working capital
for 2000 was due to acquisitions made during the year. Operating working capital
turnover for 2000 was 4.5 turns, declining from 4.6 turns in 1999, also
primarily due to acquisitions.
CASH FLOWS
Net cash provided by operating activities in 2002 totaled $480 million.
These funds, along with a net $95 million of additional debt, partially offset
by capital expenditures of $74 million, dividends of $130 million and share
purchases of $94 million, resulted in an increase in cash of $291 million.
Net cash provided by operating activities in 2001 totaled $422 million.
These funds, along with $41 million in cash received from employee stock plan
activity, were used to fund capital expenditures of $115 million, dividends of
$131 million, share repurchases of $42 million, and a net reduction of debt of
$206 million.
22
Net cash provided by operating activities in 2000 totaled $503 million.
These funds, along with a net $404 million of additional debt, were used to fund
acquisitions of $580 million, capital expenditures of $175 million, share
repurchases of $39 million and dividends of $131 million.
In connection with accounting for acquisitions as purchases, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired businesses
into existing Cooper operations. At December 31, 2002, Cooper had accruals
totaling $29.1 million related to these activities. Cash flows from operating
activities for each of the three years in the period ended December 31, 2002, is
reduced by the amounts expended on the various accruals established in
connection with each acquisition. Cooper spent $7.2 million, $11.0 million and
$3.5 million on these integration activities in 2002, 2001 and 2000,
respectively. See Note 7 of the Notes to the Consolidated Financial Statements
for further information.
Cooper is continuing to focus on initiatives to maximize cash flows.
These actions include elimination of discretionary spending and workforce
reductions. As a result, Cooper currently anticipates a continuance of its
long-term ability to annually generate approximately $200 million in cash flow
available for acquisitions, debt repayment and common stock repurchases.
DEBT AND OTHER CONTRACTUAL OBLIGATIONS
Cooper typically relies on the commercial paper market as its principal
source of short-term financing. As of December 31, 2001, Cooper's outstanding
commercial paper balance was $342 million. At December 31, 2002, Cooper had no
commercial paper outstanding and cash of $302.0 million, principally due to the
issuance of $575 million of long-term debt as described below. The weighted
average interest rate on commercial paper borrowings was 2.19% and 4.37% during
2002 and 2001, respectively.
Cooper's practice is to back up its outstanding commercial paper with a
combination of cash and committed bank credit facilities. As of December 31,
2002, the balance of these committed bank credit facilities was $825 million,
$375 million of which mature on April 30, 2003 and $450 million of which mature
on November 17, 2004. Cooper does not currently intend to renew the facility
maturing on April 30, 2003. Outstanding commercial paper balances, to the extent
not backed up by cash reduce the amount of available borrowings under the
committed bank credit facilities.
The credit facility agreements do not contain a material adverse change
clause. The principal financial covenants in the agreements limit Cooper's
debt-to-total capitalization ratio to 60% and require Cooper to maintain a
minimum earnings before interest expense, income taxes, depreciation and
amortization to interest ratio of 3 to 1. Cooper is in compliance with all
covenants set forth in the credit facility agreements.
Cooper's access to the commercial paper market could be adversely
affected by a change in the credit ratings assigned to its commercial paper.
Should Cooper's access to the commercial paper market be adversely affected due
to a change in its credit ratings, Cooper would rely on a combination of
available cash and its committed bank credit facilities to provide short-term
funding. The committed bank credit facilities do not contain any provision which
makes their availability to Cooper dependent on Cooper's credit ratings.
During June 2002, Cooper's subsidiary, Cooper Industries, Inc. ("Cooper
Ohio"), issued $300 million senior unsecured notes due July 1, 2007 with a 5.25%
interest rate. Proceeds from the notes were used to reduce outstanding
commercial paper balances. During September 2002, Cooper Ohio filed a Form S-4
Registration Statement to exchange the original notes for notes with
substantially identical terms, except that the exchange notes are registered
under the Securities Act of 1933, as amended, and the transfer restrictions and
registration rights applicable to the original notes do not apply to the
exchange notes. The original and exchange notes are fully and unconditionally
guaranteed by Cooper. The exchange offer was completed on November 4, 2002 with
all holders exchanging their notes. Cooper Ohio did not receive any proceeds
from the exchange offer.
23
During 1999, Cooper Ohio completed a shelf registration to issue up to
$500 million of debt securities. On October 28, 2002, Cooper Ohio issued $275
million senior unsecured notes due November 1, 2009, with a 5.5% interest rate.
Proceeds from the notes were used to repay short-term debt and other maturing
indebtedness in 2002 and will be used to pay current maturities of long-term
debt in 2003. The notes are fully and unconditionally guaranteed by Cooper.
After this issuance, $225 million of the shelf registration remains available to
be issued.
In October 2000, Cooper issued Euro 300 million five-year bonds. The
bonds bear interest at 6.25% and mature in October 2005. The proceeds from the
borrowing were primarily used to repay outstanding commercial paper debt.
The following table summarizes Cooper's contractual obligations at
December 31, 2002 and the effect such obligations are expected to have on its
liquidity and cash flows in future periods.
PAYMENTS DUE
----------------------------------------------------------------------------------
LESS THAN ONE TO FOUR TO AFTER
CONTRACTUAL OBLIGATIONS: TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
------------- -------------- -------------- ----------- ------------
(IN MILLIONS)
Long-Term Debt $ 1,434.5 $ 153.8 $ 566.6 $ 318.2 $ 395.9
Short-Term Debt 4.1 4.1 -- -- --
Noncancellable Operating Leases 101.5 29.2 32.1 21.1 19.1
----------- ----------- ----------- ---------- ----------
$ 1,540.1 $ 187.1 $ 598.7 $ 339.3 $ 415.0
=========== =========== =========== ========== ==========
OTHER COMMITMENTS
Cooper executes stand-by letters of credit, performance bonds and other
guarantees in the normal course of business that ensure Cooper's performance or
payments to third parties. The aggregate notional value of these instruments was
$109.8 million at December 31, 2002. Eighty-two percent of these instruments
have an expiration date within one year. In the past, no significant claims have
been made against these financial instruments. Management believes the
likelihood of demand for payment under these instruments is minimal and expects
no material cash outlays to occur in connection with these instruments.
CAPITALIZATION
During the first quarter of 2000, Cooper's Board of Directors
authorized the repurchase of up to five million shares of common stock. As of
December 31, 2002, there were approximately 2.4 million shares available for
repurchase under this authorization.
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-capitalization ratio within
this range. Excess cash flows are utilized to purchase shares of Cooper's Common
stock or fund acquisitions. At December 31, 2002, 2001 and 2000, Cooper's
debt-to-total capitalization ratio was 41.8%, 39.1% and 44.4%, respectively.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures on projects to reduce product costs, improve
product quality, increase manufacturing efficiency and operating flexibility, or
expand production capacity were $74 million in 2002, $115 million in 2001 and
$175 million in 2000. Capital expenditures decreased in 2002 and in 2001, as
Cooper completed several significant projects and focused on maximizing cash
generation from its operations. Accordingly, Cooper's businesses concentrated on
completing open projects and investing only in operationally necessary new
projects. Capital expenditures for 2000 included expenditures for a large
manufacturing facility in Mexico. Capital expenditures are projected to be
approximately $110 million in
24
2003. Projected expenditures for 2003 will focus on development of new products,
the design of new business systems and cost reduction programs.
INTEREST RATE AND FOREIGN CURRENCY RISK
Changes in interest rates and foreign currency exchange rates affect
Cooper's earnings and cash flows. As a result of having sales, purchases and
certain intercompany transactions denominated in currencies other than the
functional currencies used by Cooper's businesses, Cooper is exposed to the
effect of foreign exchange rate changes on its cash flows and earnings. Cooper
enters into foreign currency forward exchange contracts to hedge significant
foreign currency denominated transactions for periods consistent with the terms
of the underlying transactions. Contracts generally have maturities that do not
exceed one year.
The table below provides information about Cooper's financial
instruments at December 31, 2002 that are sensitive to changes in interest
rates. The table presents principal cash flows by expected maturity dates and
weighted average interest rates for debt obligations.
2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- ------ -------- ------- -------- ---------- ------------
($ IN MILLIONS)
Long-term debt:
Fixed rate .......... $ 153.8 $ 0.4 $ 539.2 $ 11.4 $ 300.3 $ 377.9 $ 1,383.0
Average interest rate 5.9% 5.9% 5.9% 5.5% 5.6% 5.7% 5.9%
Variable rate ....... $ -- $ -- $ 27.0 $ 6.5 $ -- $ 18.0 $ 51.5
Average interest rate 2.8% 2.8% 2.5% 2.1% 2.1% 2.1% 2.8%
The table below provides information about Cooper's foreign currency
forward exchange contracts to purchase currencies in excess of $2 million at
December 31, 2002. The contracts mature during 2003. All amounts are presented
in U.S. dollar equivalents. The table presents the notional amounts and the
weighted average contractual exchange rates. These notional amounts are used to
calculate the contractual payments exchanged under the contracts.
2003
--------------------
(IN MILLIONS,
WHERE APPLICABLE)
British Pound Sterling Functional Currency
------------------------------------------
Buy U.S. Dollars / Sell British Pound Sterling
Notional amount............................................................................... $ 3.6
Average contract rate......................................................................... 1.558
Canadian Dollar Functional Currency
-----------------------------------
Buy U.S. Dollars / Sell Canadian Dollars
Notional amount............................................................................... $ 2.3
Average contract rate......................................................................... 0.643
25
The table below provides information about Cooper's financial
instruments at December 31, 2001 that are sensitive to changes in interest
rates. The table presents principal cash flows by expected maturity dates and
weighted average interest rates for debt obligations.
2002 2003 2004 2005 2006 THEREAFTER TOTAL
------- -------- -------- -------- ------- ---------- --------
($ IN MILLIONS)
Long-term debt:
Fixed rate .......... $ 60.9 $ 153.6 $ 0.4 $ 501.2 $ 11.4 $ 107.9 $ 835.4
Average interest rate 6.4% 6.4% 6.5% 6.4% 6.4% 6.4% 6.4%
Variable rate ....... $ -- $ -- $ 280.0 $ 24.7 $ 6.5 $ 21.3 $ 332.5
Average interest rate 2.6% 2.6% 2.6% 2.6% 2.3% 2.3% 2.6%
Information about Cooper's foreign currency forward exchange contracts
to purchase currencies in excess of $5 million at December 31, 2001 is presented
below. The contracts matured during 2002. The notional amount is used to
calculate the contractual payments exchanged under the contracts. The notional
amount represents the U.S. dollar equivalent.
2002
--------------------
(IN MILLIONS,
WHERE APPLICABLE)
U.S. Dollar Functional Currency
-------------------------------
Buy Euros / Sell U.S. Dollars
Notional amount............................................................................... $ 7.4
Average contract rate......................................................................... 0.8992
The following transactions were implemented to partially align Cooper's
interest rate exposure profile with its short term interest rate expectations in
an economically efficient manner that is consistent with its tax position.
During 2002, Cooper sold at a premium U.S. Treasury securities due
August 15, 2003 with a face amount of $750 million. Cooper obtained these
securities pursuant to a repurchase agreement containing provisions that limit
Cooper's interest rate exposure under this agreement to a maximum amount of $7.2
million. During the fourth quarter of 2002, Cooper settled the interest rate
exposure with a cash payment of $7.0 million which was funded with cash provided
by operating activities. During 2001, Cooper sold at a premium U.S. Treasury
securities due November 2002 with a face amount of $1.0 billion. Cooper obtained
these securities pursuant to a repurchase agreement containing provisions that
limit Cooper's interest rate exposure under this agreement to a maximum amount
of $7.0 million. During the second quarter of 2002, Cooper settled the interest
rate exposure with a cash payment of $6.0 million which was funded with cash
provided by operating activities. The repurchase agreements are settled
immediately prior to the maturity of the securities. Settlement of these
transactions does not require any financing by Cooper and the transactions do
not create an asset or liability, other than as described above.
Also during 2001, Cooper purchased at a discount Federal Home Loan
Mortgage Corporation Notes due February 2003 and immediately transferred these
notes pursuant to a securities loan agreement. Subsequently, Cooper eliminated
any interest rate exposure under the securities loan agreement and will receive
a cash payment of approximately $1.9 million upon maturity of the notes. The
securities loan agreement will be settled immediately prior to the maturity of
the notes. Settlement of this transaction will not require any financing by
Cooper and this transaction does not create a liability. The face amount of the
notes was $480 million. In 1999, Cooper entered into a similar executory
contract. Upon settlement of the contract in 2000, Cooper made a cash payment of
$7.3 million, its maximum exposure under the 1999 executory contract.
See Note 17 of the Notes to the Consolidated Financial Statements for
additional information regarding the fair value of Cooper's financial
instruments.
26
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 of the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is included under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Cooper's consolidated financial statements, together with the report
thereon of Ernst & Young LLP and the supplementary financial data are set forth
on pages F-1 through F-40 hereof. (See Item 15 for Index.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the captions
"Election of Directors" and "Executive Officers" in Cooper's Proxy Statement to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in
connection with Cooper's 2003 Annual Meeting of Shareholders (the "Proxy
Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption
"Executive Management Compensation" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth under the captions
"Cooper Stock Ownership", "Security Ownership of Management" and "Equity
Compensation Plan Information" in the Proxy Statement and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report,
Cooper's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of the design and operation of Cooper's disclosure controls
and procedures. Based on that evaluation, Cooper's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
disclosure controls and procedures are effective. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Other Financial Data.
PAGE
----
Report of Management F-1
Report of Independent Auditors F-2
Consolidated Income Statements for each of the three years in the period ended
December 31, 2002 F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2002 F-5
Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended December 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
Financial information with respect to subsidiaries not
consolidated and 50 percent or less owned entities accounted for by the
equity method has not been included because in the aggregate such
subsidiaries and investments do not constitute a significant
subsidiary.
2. Financial Statement Schedules
Financial statement schedules are not included in this Form
10-K Annual Report because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
2.0 Agreement and Plan of Merger among Cooper Industries, Inc.,
Cooper Mergerco, Inc. and Cooper Industries, Ltd.
(incorporated herein by reference to Annex I to Cooper's
Registration Statement on Form S-4, Registration No.
333-62740).
3.1 Memorandum of Association of Cooper Industries, Ltd.
(incorporated herein by reference to Annex II to Cooper's
Registration Statement on Form S-4, Registration No.
333-62740).
3.2 Amended and Restated Bye-Laws of Cooper Industries, Ltd.
(incorporated herein by reference to Annex III to Cooper's
Registration Statement on Form S-4, Registration No.
333-62740).
4.1 Rights Agreement dated as of May 16, 2002 between Cooper
Industries, Ltd. and EquiServe Trust Company, N.A., as Rights
Agent (incorporated herein by reference to Exhibit 4.4 to
Cooper's Registration Statement on Form 8-A, Registration No.
001-31330).
4.2 Form of Voting Agreement between Cooper Industries, Ltd. and
Cooper Industries, Inc. (incorporated herein by reference to
Exhibit 4.2 to Cooper's Registration Statement on Form S-4,
Registration No. 333-62740).
4.3 Form of Indenture dated as of January 15, 1990, between Cooper
and The Chase Manhattan Bank (National Association), as
Trustee (incorporated herein by reference to Exhibit 4(a) to
Cooper's Registration Statement on Form S-3, Registration No.
33-33011).
28
4.4 First Supplemental Indenture dated as of May 15, 2002 between
Cooper Industries, Inc. and JP Morgan Chase Bank, as successor
Trustee to The Chase Manhattan Bank (National Association)
(incorporated herein by reference to Exhibit 4.3 to Cooper's
Form 10-Q for the quarter ended June 30, 2002).
4.5 Second Supplemental Indenture dated as of June 21, 2002 among
Cooper Industries, Inc., Cooper Industries, Ltd. and JP Morgan
Chase Bank, as Trustee (incorporated herein by reference to
Exhibit 4.4 to Cooper's Form 10-Q for the quarter ended June
30, 2002).
4.6 Third Supplemental Indenture dated as of October 28, 2002
among Cooper Industries, Inc., Cooper Industries, Ltd. and JP
Morgan Chase Bank, as Trustee (incorporated herein by
reference to Exhibit 4.1 to Cooper's Form 10-Q for the quarter
ended September 30, 2002).
10.1 Cooper Industries, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Cooper's Form
10-K for the year ended December 31, 1997).
10.2 Cooper Industries, Inc. Directors Retirement Plan
(incorporated by reference to Exhibit 10.3 to Cooper's Form
10-K for the year ended December 31, 1997).
10.3 Cooper Industries, Inc. Executive Restricted Stock Incentive
Plan (incorporated by reference to Exhibit 10.4 to Cooper's
Form 10-K for the year ended December 31, 1997).
10.4 Cooper Industries, Inc. Supplemental Excess Defined Benefit
Plan (August 1, 1998 Restatement) (incorporated by reference
to Exhibit 10(iii) to Cooper's Form 10-Q for the quarter ended
September 30, 1998).
10.5 Cooper Industries, Inc. Supplemental Excess Defined
Contribution Plan (August 1, 1998 Restatement) (incorporated
by reference to Exhibit 10(iv) to Cooper's Form 10-Q for the
quarter ended September 30, 1998).
10.6 Management Incentive Compensation Deferral Plan (incorporated
by reference to Exhibit 10.7 to Cooper's Form 10-K for the
year ended December 31, 1997).
10.7 Crouse-Hinds Company Officers' Disability and Supplemental
Pension Plan (incorporated by reference to Exhibit 10.8 to
Cooper's Form 10-K for the year ended December 31, 1997).
10.8 Cooper Industries, Inc. Amended and Restated Stock Incentive
Plan (incorporated herein by reference to Appendix B to
Cooper's proxy statement for the Annual Meeting of
Shareholders held on April 24, 2001).
10.9 Form of Incentive Stock Option Agreement for Cooper
Industries, Inc. Stock Incentive Plan.
10.10 Form of Nonqualified Stock Option Agreement for Cooper
Industries, Inc. Stock Incentive Plan.
10.11 Form of Cooper Industries, Inc. Executive Stock Incentive
Agreement (incorporated herein by reference to Exhibit 10.12
to Cooper's Form 10-K for the year ended December 31, 1995).
29
10.12 Cooper Industries, Inc. Amended and Restated Management Annual
Incentive Plan (incorporated herein by reference to Appendix C
to Cooper's proxy statement for the Annual Meeting of
Shareholders held on April 24, 2001).
10.13 Cooper Industries, Inc. Amended and Restated Directors' Stock
Plan (incorporated herein by reference to Exhibit 10.13 to
Cooper's Form 10-K for the year ended December 31, 2000).
10.14 Form of Directors' Nonqualified Stock Option Agreement for
Directors' Stock Plan (incorporated herein by reference to
Exhibit 10.18 to Cooper's Form 10-K for the year ended
December 31, 1997).
10.15 Cooper Industries, Inc. Directors' Retainer Fee Stock Plan
(incorporated herein by reference to Exhibit 4.3 to Cooper's
Registration Statement on Form S-8, Registration No.
333-51439).
10.16 Form of Management Continuity Agreement between Cooper
Industries, Ltd. and key management personnel which applies if
there is a Change of Control of Cooper (incorporated herein by
reference to Exhibit 10.1 to Cooper's Form 10-Q for the
quarter ended September 30, 2002).
10.17 Form of Indemnification Agreement between Cooper Industries,
Ltd. and key management personnel (incorporated herein by
reference to Exhibit 10.2 to Cooper's Form 10-Q for the
quarter ended September 30, 2002).
10.18 Purchase and Sale Agreement between Cooper Industries, Inc.
and Federal-Mogul Corporation dated August 17, 1998
(incorporated herein by reference to Exhibit 10(i) of Cooper's
Form 10-Q for the quarter ended September 30, 1998).
12.0 Computation of Ratios of Earnings to Fixed Charges for the
Calendar years 1998 through 2002.
21.0 List of Cooper Industries, Ltd. Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Bates White & Ballentine, LLC.
24.0 Powers of Attorney from members of the Board of Directors of
Cooper Industries, Ltd.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
Cooper will furnish to the Commission supplementally upon request a
copy of any instrument with respect to long-term debt of Cooper.
Copies of the above Exhibits are available to shareholders of record at
a charge of $.25 per page, minimum order of $10.00. Direct requests to:
Cooper Industries, Ltd.
Attn: Corporate Secretary
P.O. Box 4446
Houston, Texas 77210
30
(b) Reports on Form 8-K.
Cooper filed the following reports on Form 8-K during the fourth
quarter of 2002:
o Form 8-K dated October 22, 2002, which included a copy of a
press release regarding Cooper's financial results for the
third quarter of 2002 and furnished "Sales Trends" information
to be posted on Cooper's website.
o Form 8-K dated October 28, 2002, which announced the issuance
of $275 million of Cooper Industries, Inc. 5.50% Senior Notes
due 2009.
o Form 8-K dated November 20, 2002, which furnished "Sales
Trends" information to be posted on Cooper's website.
o Form 8-K dated November 25, 2002, which included a copy of a
press release announcing the appointment of Terry A. Klebe as
Cooper's Chief Financial Officer.
o Form 8-K dated December 20, 2002, which furnished "Sales
Trends" information to be posted on Cooper's website.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COOPER INDUSTRIES, LTD.
Date: February 26, 2003 By: /s/ H. JOHN RILEY, JR.
---------------------------------
(H. John Riley, Jr., Chairman,
President and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ H. JOHN RILEY, JR. Chairman, President and February 26, 2003
- ------------------------------------------ Chief Executive Officer
(H. John Riley, Jr.)
/s/ TERRY A. KLEBE Senior Vice President and February 26, 2003
- ------------------------------------------ Chief Financial Officer
(Terry A. Klebe)
/s/ JEFFREY B. LEVOS Vice President and Controller February 26, 2003
- ------------------------------------------ and Chief Accounting Officer
(Jeffrey B. Levos)
*STEPHEN G. BUTLER Director February 26, 2003
- ------------------------------------------
(Stephen G. Butler)
*LINDA A. HILL Director February 26, 2003
- ------------------------------------------
(Linda A. Hill)
*SIR RALPH H. ROBINS Director February 26, 2003
- ------------------------------------------
(Sir Ralph H. Robins)
*H. LEE SCOTT Director February 26, 2003
- ------------------------------------------
(H. Lee Scott)
*DAN F. SMITH Director February 26, 2003
- ------------------------------------------
(Dan F. Smith)
*GERALD B. SMITH Director February 26, 2003
- ------------------------------------------
(Gerald B. Smith)
*JAMES R. WILSON Director February 26, 2003
- ------------------------------------------
(James R. Wilson)
* By /s/ DIANE K. SCHUMACHER
-----------------------------------------
(Diane K. Schumacher, as Attorney-In-Fact
for each of the persons indicated)
32
Certifications
I, H. John Riley, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Cooper Industries, Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Acts Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 26, 2003 /s/ H. John Riley, Jr.
--------------------------------
H. John Riley, Jr.
Chairman, President and
Chief Executive Officer
33
I, Terry A. Klebe, certify that:
1. I have reviewed this annual report on Form 10-K of Cooper Industries, Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Acts Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 26, 2003 /s/ Terry A. Klebe
-----------------------------
Terry A. Klebe
Senior Vice President and
Chief Financial Officer
34
REPORT OF MANAGEMENT
The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed estimates and judgments of management. Management also
prepared the other information included in the Annual Report on Form 10-K for
the year ended December 31, 2002, and is responsible for its accuracy and
consistency with the Consolidated Financial Statements.
The Consolidated Financial Statements have been audited by an
independent accounting firm, Ernst & Young LLP, which was given unrestricted
access to all financial records and related data, including minutes of meetings
of shareholders, the Board of Directors and committees of the Board. Management
believes that all representations made to the independent auditors during their
audit were valid and appropriate.
Cooper maintains a system of internal control designed to provide
reasonable assurance to Cooper's management and Board of Directors that assets
are safeguarded against loss; transactions are authorized, executed and recorded
in accordance with management's instructions; and accounting records are
reliable for preparing published financial statements. The system of internal
control includes: a documented organizational structure and division of
responsibility; regular management review of financial performance and internal
control activities; comprehensive written policies and procedures (including a
code of conduct to foster a sound ethical climate) that are communicated
throughout Cooper; and the careful selection, training and development of
employees. Cooper's internal audit department monitors the operation of the
internal control system and reports findings and recommendations to management
and the Audit Committee of the Board of Directors. Prompt corrective action is
taken to address control deficiencies and other opportunities for improving the
internal control system.
The Audit Committee of the Board of Directors, which is composed
entirely of directors who are not employees of Cooper, meets periodically with
management, the independent auditors, and the director of internal audit to
discuss the adequacy of internal control and to review accounting, reporting,
auditing and other internal control matters. The internal and independent
auditors have unrestricted access to the Audit Committee.
H. John Riley, Jr. Terry A. Klebe Jeffrey B. Levos
Chairman, President and Senior Vice President and Vice President and Controller
Chief Executive Officer Chief Financial Officer and Chief Accounting Officer
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cooper Industries, Ltd.
We have audited the accompanying consolidated balance sheets of Cooper
Industries, Ltd., the successor company to Cooper Industries, Inc., as of
December 31, 2002 and 2001, and the related consolidated income statements and
statements of shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cooper
Industries, Ltd. at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As discussed in Notes 1 and 6 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 142 in 2002.
ERNST & YOUNG LLP
Houston, Texas
January 23, 2003
F-2
COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues ..................................................... $ 3,960.5 $ 4,209.5 $ 4,459.9
Cost of sales ................................................ 2,830.9 2,943.9 3,018.3
Selling and administrative expenses .......................... 735.8 729.7 732.9
Goodwill amortization ........................................ -- 60.7 58.5
Nonrecurring charges ......................................... 39.1 74.1 --
----------- ----------- -----------
Operating earnings ..................................... 354.7 401.1 650.2
Interest expense, net ........................................ 74.5 84.7 100.3
----------- ----------- -----------
Income from continuing operations before income taxes .. 280.2 316.4 549.9
Income taxes ................................................. 66.5 55.1 192.5
----------- ----------- -----------
Income from continuing operations ...................... 213.7 261.3 357.4
Charge related to discontinued operations, net of income taxes -- (30.0) --
----------- ----------- -----------
Net income ............................................. $ 213.7 $ 231.3 $ 357.4
=========== =========== ===========
Income per Common share
Basic:
Income from continuing operations ................... $ 2.29 $ 2.78 $ 3.82
Charge from discontinued operations ................. -- (.32) --
----------- ----------- -----------
Net income ................................. $ 2.29 $ 2.46 $ 3.82
=========== =========== ===========
Diluted:
Income from continuing operations ................... $ 2.28 $ 2.75 $ 3.80
Charge from discontinued operations ................. -- (.31) --
----------- ----------- -----------
Net income ................................. $ 2.28 $ 2.44 $ 3.80
=========== =========== ===========
Cash dividends per Common share .............................. $ 1.40 $ 1.40 $ 1.40
=========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
2002 2001
--------------- ---------------
ASSETS (in millions)
Cash and cash equivalents.............................................................. $ 302.0 $ 11.5
Receivables............................................................................ 706.7 777.1
Inventories............................................................................ 580.5 670.9
Deferred income taxes and other current assets......................................... 99.8 191.7
--------------- ---------------
Total current assets.......................................................... 1,689.0 1,651.2
--------------- ---------------
Property, plant and equipment, less accumulated depreciation........................... 750.2 826.8
Goodwill............................................................................... 1,996.2 1,958.7
Deferred income taxes and other noncurrent assets...................................... 252.5 174.7
--------------- ---------------
Total assets.................................................................. $ 4,687.9 $ 4,611.4
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt........................................................................ $ 4.1 $ 132.9
Accounts payable....................................................................... 312.2 401.4
Accrued liabilities.................................................................... 489.4 510.9
Current maturities of long-term debt................................................... 153.8 60.9
--------------- ---------------
Total current liabilities..................................................... 959.5 1,106.1
--------------- ---------------
Long-term debt......................................................................... 1,280.7 1,107.0
Postretirement benefits other than pensions............................................ 189.1 196.7
Other long-term liabilities............................................................ 256.2 178.4
--------------- ---------------
Total liabilities............................................................. 2,685.5 2,588.2
--------------- ---------------
Common stock, $.01 and $5.00 par value
at December 31, 2002 and 2001, respectively......................................... 0.9 615.0
Capital in excess of par value......................................................... 422.7 646.0
Retained earnings...................................................................... 1,744.2 2,325.0
Common stock held in treasury, at cost................................................. -- (1,435.0)
Accumulated other nonowner changes in equity........................................... (165.4) (127.8)
--------------- ---------------
Total shareholders' equity.................................................... 2,002.4 2,023.2
--------------- ---------------
Total liabilities and shareholders' equity.................................... $ 4,687.9 $ 4,611.4
=============== ===============
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-4
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
(in millions)
Cash flows from operating activities:
Net income........................................................... $ 213.7 $ 231.3 $ 357.4
Plus: charge related to discontinued operations...................... -- 30.0 --
--------------- --------------- ---------------
Income from continuing operations.................................... 213.7 261.3 357.4
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization...................................... 121.7 186.4 174.4
Deferred income taxes.............................................. 3.7 (35.1) 98.8
Nonrecurring charge payments....................................... (22.9) (14.4) (7.0)
Changes in assets and liabilities: (1)
Receivables..................................................... 81.8 43.1 (8.0)
Inventories..................................................... 89.4 17.3 (51.1)
Accounts payable and accrued liabilities........................ (76.2) (17.1) 12.6
Accrued income taxes............................................ -- -- (52.3)
Other assets and liabilities, net............................... 68.6 (19.1) (22.2)
--------------- --------------- ---------------
Net cash provided by operating activities...................... 479.8 422.4 502.6
--------------- --------------- ---------------
Cash flows from investing activities:
Cash received from (paid for) acquired businesses.................... (1.1) 9.8 (580.4)
Capital expenditures................................................. (73.8) (115.1) (174.9)
Proceeds from sales of property, plant and equipment and other....... 22.0 6.7 16.4
--------------- --------------- ---------------
Net cash used in investing activities.......................... (52.9) (98.6) (738.9)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuances of debt...................................... 608.3 136.9 878.5
Repayments of debt................................................... (513.5) (343.2) (474.9)
Debt issuance costs.................................................. (6.5) -- --
Dividends............................................................ (129.7) (131.3) (130.6)
Acquisition of treasury shares....................................... (37.9) (42.0) (39.3)
Subsidiary purchase of parent shares................................. (56.4) -- --
Activity under employee stock plans and other........................ 3.2 41.0 1.9
--------------- --------------- ---------------
Net cash provided by (used in) financing activities............ (132.5) (338.6) 235.6
--------------- --------------- ---------------
Effect of exchange rate changes on cash and cash equivalents............ (3.9) (0.1) 0.2
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents........................ 290.5 (14.9) (0.5)
Cash and cash equivalents, beginning of year............................ 11.5 26.4 26.9
--------------- --------------- ---------------
Cash and cash equivalents, end of year.................................. $ 302.0 $ 11.5 $ 26.4
=============== =============== ===============
(1) Net of the effects of acquisitions and translation.
The Notes to Consolidated Financial Statements are an integral part of
these statements. See Note 18 for supplemental cash flow information.
F-5
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unearned
Employee
Capital Stock Accumulated
In Excess Ownership Nonowner
Common of Par Retained Treasury Plan Changes in
Stock Value Earnings Stock Compensation Equity Total
---------- ---------- ----------- ---------- ------------- ------------ ---------
(in millions)
Balance December 31, 1999............... $ 615.0 $ 671.7 $ 1,998.1 $(1,449.3) $ (23.0) $ (69.4) $ 1,743.1
---------
Net income.......................... 357.4 357.4
Minimum pension liability adjustment 0.1 0.1
Translation adjustment.............. (51.2) (51.2)
---------
Net income and other nonowner
changes in equity............ 306.3
---------
Common stock dividends.............. (130.6) (130.6)
Purchase of treasury shares......... (39.3) (39.3)
Stock issued under employee stock
plans............................. (4.9) 15.7 10.8
ESOP shares allocated............... (2.5) 14.4 11.9
Other activity...................... (1.0) 0.1 2.9 2.0
-------- --------- --------- --------- -------- --------- ---------
Balance December 31, 2000............... 615.0 663.3 2,225.0 (1,470.0) (8.6) (120.5) 1,904.2
---------
Net income.......................... 231.3 231.3
Minimum pension liability adjustment (0.7) (0.7)
Translation adjustment.............. (6.3) (6.3)
Change in fair value of derivatives. (0.3) (0.3)
---------
Net income and other nonowner
changes in equity............ 224.0
---------
Common stock dividends.............. (131.3) (131.3)
Purchase of treasury shares......... (42.0) (42.0)
Stock issued under employee stock
plans............................. (16.6) 74.4 57.8
ESOP shares allocated............... 8.6 8.6
Other activity...................... (0.7) 2.6 1.9
-------- --------- ---------- --------- -------- --------- ---------
Balance December 31, 2001............... 615.0 646.0 2,325.0 (1,435.0) -- (127.8) 2,023.2
---------
Net income.......................... 213.7 213.7
Minimum pension liability adjustment (33.4) (33.4)
Translation adjustment.............. (4.4) (4.4)
Change in fair value of derivatives. 0.2 0.2
---------
Net income and other nonowner
changes in equity............ 176.1
---------
Common stock dividends.............. (129.7) (129.7)
Purchase of treasury shares......... (37.9) (37.9)
Subsidiary purchase of parent shares (56.4) (56.4)
Share conversion.................... (614.1) (171.0) (664.8) 1,449.9 --
Stock issued under employee stock
plans............................. 4.0 21.6 25.6
Other activity...................... 0.1 1.4 1.5
-------- --------- --------- --------- -------- --------- ---------
Balance December 31, 2002............... $ 0.9 $ 422.7 $ 1,744.2 $ -- $ -- $ (165.4) $ 2,002.4
======== ========= ========= ========= ======== ========= =========
The Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements of Cooper
Industries, Ltd., a Bermuda company ("Cooper"), have been prepared in accordance
with generally accepted accounting principles in the United States. Cooper is
the successor to Cooper Industries, Inc., an Ohio corporation ("Cooper Ohio"),
following a corporate reorganization ("the reorganization") that became
effective on May 22, 2002. The reorganization was effected through the merger of
Cooper Mergerco, Inc., an Ohio corporation, into Cooper Ohio. Cooper Ohio was
the surviving company in the merger and became an indirect, wholly-owned
subsidiary of Cooper. All outstanding shares of Cooper Ohio common stock were
automatically converted to Cooper Class A common shares. Cooper and its
subsidiaries continue to conduct the business previously conducted by Cooper
Ohio and its subsidiaries. The reorganization has been accounted for as a
reorganization of entities under common control and accordingly, did not result
in changes in the historical consolidated carrying amounts of assets,
liabilities and shareholders' equity.
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Cooper and its majority-owned subsidiaries. Affiliated companies are
accounted for on the equity method where Cooper owns 20% to 50% of the affiliate
unless significant economic, political or contractual considerations indicate
that the cost method is appropriate.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows,
Cooper considers all investments purchased with original maturities of three
months or less to be cash equivalents.
ACCOUNTS RECEIVABLE: Cooper provides an allowance for doubtful trade accounts
receivable, determined under the specific identification method. The allowance
was $6.4 million and $6.9 million at December 31, 2002 and 2001, respectively.
INVENTORIES: Inventories are carried at cost or, if lower, net realizable value.
On the basis of current costs, 62% and 61% of inventories at December 31, 2002
and 2001, respectively were carried on the last-in, first-out (LIFO) method. The
remaining inventories are carried on the first-in, first-out (FIFO) method.
Cooper records provisions for potential obsolete and excess inventories. See
Note 4 of the Notes to the Consolidated Financial Statements.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. This method is applied to group asset
accounts, which in general have the following lives: buildings -- 10 to 40
years; machinery and equipment -- 3 to 18 years; and tooling, dies, patterns and
other -- 3 to 10 years.
GOODWILL: On January 1, 2002, Cooper adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") and is
therefore no longer amortizing goodwill. See Note 6 of the Notes to the
Consolidated Financial Statements. Cooper has designated January 1 as the date
of its annual goodwill impairment test. If an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying value, an interim impairment test would be performed between
annual tests. The first step of the SFAS No. 142 two step goodwill impairment
test compares the fair value of a reporting unit with its carrying value. Cooper
has designated seven reporting units, consisting of six units in the Electrical
Products reportable operating segment plus the Tools & Hardware reportable
operating segment. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test shall be performed. Fair
value
F-7
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is determined by estimating the present value of future cash flows. The second
step compares the implied fair value of reporting unit goodwill to the carrying
amount of the goodwill to measure the amount of impairment loss.
Prior to the adoption of SFAS No. 142, with minor exceptions, Cooper
amortized goodwill over 40 years from the respective acquisition dates.
REVENUE RECOGNITION: Cooper recognizes revenues when products are shipped.
Accruals for sales returns and other allowances are provided at the time of
shipment based upon experience. The accrual for sales returns and other
allowances was $27.2 million and $30.9 million at December 31, 2002, and 2001,
respectively. Shipping and handling costs of $118.9 million, $125.5 million and
$124.6 million in 2002, 2001 and 2000, respectively, are reported as a reduction
of revenues in the consolidated income statements.
RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are
charged to earnings as incurred. Research and development expenses were $54.0
million, $55.8 million and $57.7 million in 2002, 2001 and 2000, respectively.
STOCK-BASED COMPENSATION: Cooper follows the intrinsic value method of
accounting for stock-based compensation plans as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Cooper's stock-based compensation plans are described in Note 10 of the Notes to
the Consolidated Financial Statements. No compensation expense is reflected in
net income for Cooper's fixed stock option plans or Employee Stock Purchase
Plan. During 2002, compensation expense of $7.0 million was recognized in the
consolidated financial statements for the performance-based and restricted stock
awards and excess accrued compensation of $8.7 million related to
performance-based awards was reversed to income as it was further determined
that certain performance targets would not be met. Compensation expense of $2.7
million and $5.1 million was recognized in the consolidated financial statements
during 2001 and 2000, respectively for the performance-based and restricted
stock awards.
During the third quarter of 2002, Cooper's Board of Directors approved
the adoption of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"), effective January 1, 2003. SFAS
No. 123 provides an alternative fair value based method for recognizing
stock-based compensation in which compensation expense is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. The fair value based method will result in
the recognition of compensation expense for all of Cooper's stock-based
compensation plans. Cooper will adopt SFAS No. 123 prospectively, with
compensation expense recognized for all awards granted, modified or settled
after the beginning of the fiscal year in which the provisions are first
adopted. The following table presents pro forma net income and earnings per
share as if the fair value based method had been applied to all outstanding and
unvested awards in each period.
F-8
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended December 31
---------------------------------------------------------------------
2002 2001 2000
------------------- ------------------ --------------------
(in millions)
Net income, as reported.......................... $ 213.7 $ 231.3 $ 357.4
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects.................... (1.0) 1.6 3.0
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects........................... (12.9) (8.9) (11.3)
------------------- ------------------ --------------------
Pro forma net income............................. $ 199.8 $ 224.0 $ 349.1
=================== ================== ====================
Earnings per share:
Basic - as reported......................... $ 2.29 $ 2.46 $ 3.82
Basic - pro forma........................... $ 2.14 $ 2.38 $ 3.73
Diluted - as reported....................... $ 2.28 $ 2.44 $ 3.80
Diluted - pro forma......................... $ 2.14 $ 2.37 $ 3.72
IMPACT OF NEW ACCOUNTING STANDARDS: On January 1, 2002, Cooper adopted Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The statement is effective for fiscal years
beginning after December 15, 2001. This statement establishes a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. Additionally, the statement expands
the definition of a discontinued operation from a segment of business to a
component of an entity that has been disposed of or is classified as held for
sale and can be clearly distinguished, operationally and for reporting purposes,
from the rest of the entity. The results of operations of a component classified
as held for sale shall be reported in discontinued operations in the period
incurred. Adoption of this statement did not have an effect on Cooper's
consolidated results of operations or financial position.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force Issue No. 94-3, ("EITF No. 94-3") Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for cost associated with an exit or disposal activity
be recognized at fair value when the liability is incurred, not at the date of
an entity's commitment to an exit plan as previously specified by EITF No. 94-3.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of this statement is
not expected to have a material effect on Cooper's consolidated results of
operations or financial position.
NOTE 2: NONRECURRING CHARGES
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size the Company's workforce to market conditions, and (3) the
write-off of assets related to production rationalization activities. These
actions were taken as a part of Cooper management's ongoing assessment of
required production capacity in consideration of current demand levels. In
connection with these commitments, certain production capacity and related
assets will be sold, outsourced, discontinued or moved to a lower cost
environment. The Company recorded a provision for these announced actions of
$39.1 million ($15.0 million of which is non-cash), or $29.8 million after taxes
($.32 per diluted common share). Of this amount, $24.0 million ($11.0 million of
which is non-cash) was associated with the Electrical Products segment, $12.7
million ($3.4 million of which was non-cash) was associated with the Tools &
Hardware segment and the remainder was related to General Corporate.
F-9
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reflects activity related to the fourth quarter
2002 nonrecurring charge.
Number of Accrued Facilities Closure
Employees Severance and Rationalization
-------------------------- ----------------------- -----------------------
($ in millions)
2002 Nonrecurring Charge............. 1,206 $ 18.3 $ 20.8
Asset write-offs..................... -- -- (15.0)
Employees terminated................. (184) -- --
Cash expenditures.................... -- (2.1) --
-------------------------- ----------------------- -----------------------
Balance at December 31, 2002......... 1,022 $ 16.2 $ 5.8
========================== ======================= =======================
A total of 435 salaried and 771 hourly positions are scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions will be
replaced ultimately as a result of the Company's ongoing efforts to relocate
production capacity to lower cost locations. Substantially all of the closure
and rationalization activities will be initiated by the end of 2003 and are
scheduled to be substantially completed by the end of 2004.
During the fourth quarter of 2001, Cooper committed to the
consolidation or closure of certain Electrical Products segment facilities and
recorded a provision for severance and other related costs of these announced
actions of $7.1 million ($1.7 million of which is non-cash). Plans to
consolidate or close facilities arose as a result of Cooper management
continuing to review and modify their assessment of required production and
distribution facilities and capacity, in consideration of depressed demand
levels. In addition, the Company concluded during 2001 that various Electrical
Products segment assets comprising $8.5 million of net book value were fully
impaired as a result of decisions to discontinue or outsource the production
provided by those assets in light of demand for the related products. Also
during the 2001 fourth quarter, Cooper management performed a strategic review
of the operations of the Wiring Devices business. This review focused on the
results to date of the combination of the March 2000 acquisition of Eagle
Electric with Cooper's existing electrical wiring devices operations. Management
concluded that certain products within the combined Wiring Devices business were
essentially duplicative; that other product offerings were forecasted to be
unprofitable; that all product and product packaging should be rebranded to a
single brand; and that certain customer changeover costs incurred would provide
no future benefit to the Wiring Devices business. Cooper recorded a non-cash
charge of $8.4 million to provide for these assimilation and changeover costs.
The 2001 fourth quarter nonrecurring charge for the Electrical Products segment
totaled $24.0 million.
During the fourth quarter of 2001, Cooper reviewed strategies surrounding
certain information technology related investments. These investments included
capitalized costs for software applications, related hardware and equity
investments in technology ventures that were primarily related to Cooper's
efforts regarding the development of electronic sales, engineering and
purchasing capabilities. Cooper concluded that a $14.1 million General Corporate
nonrecurring charge should be recorded to provide for the full impairment of
certain modules of software, hardware and other technology investments that
would not become a functional component of Cooper's overall information
technology infrastructure. Also during the 2001 fourth quarter, Cooper recorded
a General Corporate nonrecurring charge of $36.0 million for the fees and
expenses of financial advisors and legal and other external costs associated
with performing the Company's review of strategic alternatives. On August 1,
2001, Danaher Corporation ("Danaher") announced it had made an unsolicited
proposal to Cooper for a merger through a stock and cash transaction subject to
conducting due diligence procedures. On August 8, 2001, Cooper's Board of
Directors unanimously rejected Danaher's proposal and authorized management to
explore all strategic alternatives that would maximize shareholder value
including mergers, sales, strategic alliances, acquisitions or other similar
strategic alternatives. On February 13, 2002, Cooper announced that it completed
its strategic alternatives review process. After careful review of all the
available alternatives with management and its financial advisors, Cooper's
Board of Directors concluded that it was in the best interests of Cooper's
shareholders to move forward with its plan to reincorporate in Bermuda. The 2001
fourth quarter General Corporate nonrecurring charge totaled $50.1 million.
F-10
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reflects activity related to the fourth quarter
2001 severance, facility consolidation and closure and financial advisors and
other cost accruals. A total of 77 salaried and 196 hourly positions were
scheduled to be eliminated as a result of these consolidation activities.
Facility Financial
No. of Accrued Consolidation Advisors and
Employees Severance and Closure Others
--------------- --------------- ---------------- --------------
($ in millions)
Facility consolidation and closure........ 291 $ 3.2 $ 2.2 $ --
Provision for advisors and other.......... -- -- -- 36.0
Employees terminated...................... (18) -- -- --
Cash expenditures......................... -- (0.2) (0.1) (6.0)
--------------- --------------- ---------------- --------------
Balance at December 31, 2001.............. 273 3.0 2.1 30.0
Employees terminated...................... (273) -- -- --
Cash expenditures......................... -- (3.0) (2.1) (15.7)
--------------- --------------- ---------------- --------------
Balance at December 31, 2002.............. -- $ -- $ -- $ 14.3
=============== =============== ================ ==============
The nonrecurring charges for 2001 totaled $74.1 million, or $44.5
million after taxes ($.47 per diluted common share). Of the $74.1 million total,
$32.7 million represented non-cash charges and $14.3 million of the remaining
$41.4 million is accrued at December 31, 2002.
See "Nonrecurring Charges" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information related
to the nonrecurring charges.
NOTE 3: ACQUISITIONS AND DIVESTITURES
During 2002, Cooper paid $1.1 million related to previously acquired
businesses. The terms of a previous acquisition agreement provided for
additional consideration to be paid if earnings of the acquired businesses
exceeded certain targeted levels. During 2001, Cooper received purchase price
adjustments of $9.8 million net, primarily related to businesses acquired prior
to 2001. During 2000, Cooper completed two large acquisitions and three small
product-line acquisitions in its Electrical Products segment and one small
acquisition in its Tools & Hardware segment for an aggregate cost of $578.4
million, subject to adjustment as provided in the acquisition agreements. A
total of $378.2 million in goodwill was recorded, including an additional $23.2
million in 2001, with respect to the acquisitions. In March 2000, Cooper
acquired Eagle Electric for a total cost of $124.6 million. Eagle Electric
manufactures and sells electrical wiring devices including switches,
receptacles, plugs and connectors, cords and other electrical accessories to the
residential and commercial markets. In May 2000, Cooper acquired B-Line Systems
for a total cost of $430.6 million. B-Line Systems manufactures and markets
support systems and enclosures for electrical, mechanical and
telecommunications/data applications.
The acquisitions have been accounted for as purchases and the results
of the acquisitions are included in Cooper's consolidated income statements
since the respective acquisition dates. The pro forma net income and earnings
per share for 2000, assuming the acquisitions had been made at the beginning of
each year, would not be materially different from reported net income and
earnings per share.
F-11
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INVENTORIES
December 31,
----------------------------------
2002 2001
--------------- ---------------
(in millions)
Raw materials.......................................................................... $ 184.3 $ 223.6
Work-in-process........................................................................ 99.5 132.2
Finished goods......................................................................... 389.1 409.1
Perishable tooling and supplies........................................................ 20.8 21.4
--------------- ---------------
693.7 786.3
Allowance for excess and obsolete inventory............................................ (41.0) (35.1)
Excess of current standard costs over LIFO costs....................................... (72.2) (80.3)
--------------- ---------------
Net inventories............................................................... $ 580.5 $ 670.9
=============== ===============
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
December 31,
----------------------------------
2002 2001
--------------- ---------------
(in millions)
Property, plant and equipment:
Land and land improvements......................................................... $ 55.8 $ 53.0
Buildings.......................................................................... 445.1 428.1
Machinery and equipment............................................................ 788.6 812.7
Tooling, dies and patterns......................................................... 219.9 213.6
All other.......................................................................... 302.0 289.2
Construction in progress........................................................... 50.3 99.2
--------------- ---------------
1,861.7 1,895.8
Accumulated depreciation........................................................... (1,111.5) (1,069.0)
--------------- ---------------
$ 750.2 $ 826.8
=============== ===============
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the year ended December 31, 2002,
by segment, were as follows:
Electrical Tools &
Products Hardware Total
------------------ ------------------ ------------------
(in millions)
Balance January 1, 2002................................. $ 1,655.8 $ 302.9 $ 1,958.7
Additions to Goodwill................................... 1.1 -- 1.1
Reversal of excess accrued liabilities.................. (0.4) (1.4) (1.8)
Translation adjustments................................. 41.9 (3.7) 38.2
------------------ ------------------ ------------------
Balance December 31, 2002............................... $ 1,698.4 $ 297.8 $ 1,996.2
================== ================== ==================
F-12
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 1, 2002, Cooper adopted SFAS No. 142 and is therefore no
longer amortizing goodwill. Under SFAS No. 142, goodwill is subject to an annual
impairment test. See Note 1 of the Notes to the Consolidated Financial
Statements. Cooper completed transitional step one of the goodwill impairment
test during the second quarter of 2002. The results of step one did not require
the completion of step two of the transitional test for any reporting units.
The following table reconciles reported income from continuing
operations, net income and earnings per share to that which would have resulted
for the years ended December 31, 2001 and 2000 if SFAS No. 142 had been adopted
effective January 1, 2000 (in millions, except per share amounts):
Year Ended December 31,
-----------------------------------------
2001 2000
------------------- ------------------
Income from Continuing Operations:
Reported income from continuing operations............................. $ 261.3 $ 357.4
Goodwill amortization, net of taxes.................................... 50.4 48.7
------------------- ------------------
Adjusted income from continuing operations............................. $ 311.7 $ 406.1
=================== ==================
Net Income:
Reported net income.................................................... $ 231.3 $ 357.4
Goodwill amortization, net of taxes.................................... 50.4 48.7
------------------- ------------------
Adjusted net income.................................................... $ 281.7 $ 406.1
=================== ==================
Income per Common Share:
Basic:
Reported income from continuing operations........................ $ 2.78 $ 3.82
Goodwill amortization, net of taxes............................... .54 .52
------------------- ------------------
Adjusted income from continuing operations........................ $ 3.32 $ 4.34
=================== ==================
Reported net income............................................... $ 2.46 $ 3.82
Goodwill amortization, net of taxes............................... .54 .52
------------------- ------------------
Adjusted net income............................................... $ 3.00 $ 4.34
=================== ==================
Diluted:
Reported income from continuing operations........................ $ 2.75 $ 3.80
Goodwill amortization, net of taxes............................... .53 .51
------------------- ------------------
Adjusted income from continuing operations........................ $ 3.28 $ 4.31
=================== ==================
Reported net income............................................... $ 2.44 $ 3.80
Goodwill amortization, net of taxes............................... .53 .51
------------------- ------------------
Adjusted net income............................................... $ 2.97 $ 4.31
================== ==================
Other intangible assets primarily consist of patents and trademarks.
The gross carrying value of other intangible assets was $11.6 million and $11.3
million at December 31, 2002 and 2001, respectively. Accumulated amortization of
other intangible assets was $8.2 million and $7.4 million at December 31, 2002
and 2001, respectively. Subsequent to the adoption of SFAS No. 142, other
intangible assets continue to be amortized over their remaining useful lives
which were evaluated and determined to remain appropriate. Amortization expense
of other intangible assets was $0.8 million for each of the years ended December
31, 2002, 2001 and 2000. Annual amortization expense is expected to be $0.6
million in 2003, $0.5 million in 2004 and $0.4 million in 2005, 2006 and 2007.
F-13
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: ACCRUED LIABILITIES
December 31,
----------------------------------
2002 2001
--------------- ----------------
(in millions)
Salaries, wages and employee benefit plans............................................... $ 209.2 $ 199.7
Commissions and customer incentives...................................................... 79.4 68.6
Product and environmental liability accruals............................................. 33.8 35.7
Facility integration of acquired businesses.............................................. 29.1 39.3
Other (individual items less than 5% of total current liabilities)....................... 137.9 167.6
--------------- ----------------
$ 489.4 $ 510.9
=============== ================
At December 31, 2002, Cooper had accruals of $13.6 million with respect
to potential product liability claims and $42.2 million with respect to
potential environmental liabilities, including $22.0 million classified as a
long-term liability, based on Cooper's current estimate of the most likely
amount of losses that it believes will be incurred.
The product liability accrual consists of $4.0 million of known claims
with respect to ongoing operations, $3.9 million of known claims for previously
divested operations and $5.7 million which represents an estimate of claims that
have been incurred but not yet reported. While Cooper is generally self-insured
with respect to product liability claims, Cooper has insurance coverage for
individual 2002 claims above $5.0 million.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$7.0 million related to sites owned by Cooper and $35.2 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a potentially responsible party. Third-party
sites usually involve multiple contributors where Cooper's liability will be
determined based on an estimate of Cooper's proportionate responsibility for the
total cleanup. The amount actually accrued for such sites is based on these
estimates as well as an assessment of the financial capacity of the other
potentially responsible parties.
It has been Cooper's consistent practice to include the entire product
liability accrual and a significant portion of the environmental liability
accrual as current liabilities, although only approximately 15-25% of the
balance classified as current is normally spent on an annual basis. The annual
effect on earnings for product liability is essentially equal to the amounts
disbursed. In the case of the environmental liability, the annual expense is
considerably smaller than the disbursements, since the vast majority of Cooper's
environmental liability has been recorded in connection with acquired companies.
The change in the accrual balances from year to year reflects the effect of
acquisitions and divestitures as well as normal expensing and funding.
Cooper has not utilized any form of discounting in establishing its
product or environmental liability accruals. While both product liability and
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Cooper has taken a proactive approach and has managed the
costs in both of these areas over the years. Cooper does not believe that the
nature of its products, its production processes, or the materials or other
factors involved in the manufacturing process subject Cooper to unusual risks or
exposures for product or environmental liability. Cooper's greatest exposure to
inaccuracy in its estimates is with respect to the constantly changing
definitions of what constitutes an environmental liability or an acceptable
level of cleanup.
In connection with acquisitions accounted for using the purchase method
of accounting, Cooper records, to the extent appropriate, accruals for the costs
of closing duplicate facilities, severing redundant personnel and
F-14
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
integrating the acquired business into existing Cooper operations. Significant
accruals include plant shut-down and realignment costs. The following table
summarizes the accrual balances and activity during each of the last three
years:
2002 2001 2000
--------------- --------------- ---------------
(in millions)
ACTIVITY DURING EACH YEAR:
Balance, beginning of year............................................ $ 39.3 $ 37.5 $ 10.8
Spending.............................................................. (7.2) (11.0) (3.5)
Acquisitions - initial allocation..................................... -- -- 28.6
Acquisitions - final allocation adjustment............................ -- 12.9 2.2
Reversal of excess accruals........................................... (2.4) -- --
Translation........................................................... (0.6) (0.1) (0.6)
--------------- --------------- ---------------
Balance, end of year.................................................. $ 29.1 $ 39.3 $ 37.5
=============== =============== ===============
BALANCE BY CATEGORY OF ACCRUAL:
Plant shut-down and realignment....................................... $ 28.9 $ 38.8 $ 36.5
Other realignment and integration..................................... 0.2 0.5 1.0
--------------- --------------- ---------------
$ 29.1 $ 39.3 $ 37.5
=============== =============== ===============
Plant shut-down and realignment includes the costs to terminate
personnel, shut down the facilities, terminate leases and similar costs. At
December 31, 2002 and 2001, respectively, $27.7 million and $32.5 million of the
plant shut-down and realignment balance is related to the Eagle Electric
acquisition. Other realignment and integration costs include costs to exit
product lines and miscellaneous costs.
During the three years ended December 31, 2002, the annual spending was
primarily related to downsizing and consolidating facilities. The 2000
acquisitions-initial allocation amount is related to the Eagle Electric
acquisition and includes approximately $24.2 million for severance and related
costs to terminate personnel and $4.4 million of one-time additional costs
associated with shutting down manufacturing operations and vacating existing
facilities. Acquisitions-final allocation adjustment represents adjustments to
goodwill for finalization of the purchase price allocations recorded in the
previous year. The 2001 acquisitions - final allocation adjustment of $12.9
million represents adjustments to goodwill for finalization of the purchase
price allocations regarding severance and related costs to terminate personnel
and facility shut-down costs in connection with the Eagle Electric and B-Line
Systems acquisitions. Reversal of excess accruals represents the excess of plant
shut-down and realignment accruals over the ultimate amount expended on certain
completed activities. The excess plant shut-down and realignment accrual of $2.4
million and related deferred tax asset balance was reversed in 2002 with a
corresponding reduction in goodwill. See Note 6 of the Notes to the Consolidated
Financial Statements.
Involuntary termination benefits of $4.2 million and $2.8 million were
paid as 296 and 219 hourly positions were eliminated during 2002 and 2001,
respectively, and 20 salaried positions were eliminated in 2001. A total of
1,063 additional hourly positions are expected to be eliminated as a result of
planned facilities shut-downs. The remaining terminations and facility shut-down
activities are expected to be completed by the end of 2006.
F-15
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LONG-TERM DEBT AND LEASE COMMITMENTS
December 31,
----------------------------------
2002 2001
--------------- ----------------
(in millions)
2.54% commercial paper................................................................... $ -- $ 280.0
6.41% - 6.98% second series medium-term notes, due through 2010.......................... 242.3 302.1
5.89% - 6.45% third series medium-term notes, due through 2008........................... 250.0 250.0
5.25% senior unsecured notes, due July 2007.............................................. 300.0 --
5.50% senior unsecured notes, due November 2009.......................................... 275.0 --
6.25% Euro bonds maturing in October 2005................................................ 309.0 270.2
3.48%* Pound Sterling notes payable maturing at various dates through 2005............... 27.7 26.3
Other.................................................................................... 30.5 39.3
--------------- ----------------
1,434.5 1,167.9
Current maturities....................................................................... (153.8) (60.9)
--------------- ----------------
Long-term portion........................................................................ $ 1,280.7 $ 1,107.0
=============== ================
* The weighted average interest rate on the Pound Sterling notes was 3.76%
at December 31, 2001.
Cooper has U.S. committed credit facilities of $825 million, $375
million of which mature in 2003 and $450 million of which mature in 2004. At
December 31, 2002, all of Cooper's $825 million U.S. committed credit facilities
was available. At December 31, 2001, $648 million of Cooper's total $990 million
U.S. committed credit facilities was available, after considering commercial
paper backup. The agreements for the credit facilities require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization and a minimum earnings before interest,
income taxes, depreciation and amortization to interest ratio. Retained earnings
are unrestricted as to the payment of dividends, except to the extent that
payment would cause a violation of the prescribed limit on the debt-to-total
capitalization ratio.
During June 2002, Cooper Ohio issued $300 million senior unsecured
notes due July 1, 2007 with a 5.25% interest rate. Proceeds from the notes were
used to repay commercial paper obligations. During September 2002, Cooper Ohio
filed a Form S-4 Registration Statement to exchange the original notes for notes
with substantially identical terms, except that the exchange notes are
registered under the Securities Act of 1933, as amended, and the transfer
restrictions and registration rights applicable to the original notes do not
apply to the exchange notes. The original and exchange notes are fully and
unconditionally guaranteed by Cooper. The exchange offer was completed on
November 4, 2002 with all holders exchanging their notes. Cooper Ohio did not
receive any proceeds from the exchange offer.
During 1999, Cooper Ohio completed a shelf registration statement to
issue up to $500 million of debt securities. On October 28, 2002, Cooper Ohio
issued $275 million senior unsecured notes due November 1, 2009, with a 5.5%
interest rate. Proceeds from the notes were used to repay short-term debt and
other maturing indebtedness in 2002 and will be used to pay current maturities
of long-term debt in 2003. The notes are fully and unconditionally guaranteed by
Cooper. After this issuance, $225 million of the shelf registration remains
available to be issued.
Interest rates on Cooper's commercial paper were generally 2.5% and
2.6% below the U.S. prime rate during 2002 and 2001, respectively. Total
interest paid during 2002, 2001 and 2000 was $65 million, $85 million and $96
million, respectively.
F-16
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commercial paper of $280 million at December 31, 2001 was classified as
long-term debt reflecting Cooper's intention to refinance this amount during the
twelve-month period following the balance sheet date.
Maturities of long-term debt for the five years subsequent to December
31, 2002 are $153.8 million, $0.4 million, $566.2 million, $17.9 million and
$300.3 million, respectively. The future net minimum lease payments under
capital leases are not significant.
Cooper has entered into various operating lease agreements, primarily
for manufacturing, warehouse and sales office facilities and equipment.
Generally, the leases include renewal provisions and rental payments may be
adjusted for increases in taxes, insurance and maintenance related to the
property. Rent expense for all operating leases was $44.0 million, $40.1 million
and $37.1 million during 2002, 2001 and 2000, respectively.
At December 31, 2002, minimum annual rental commitments under
noncancellable operating leases that have an initial or remaining lease term in
excess of one year were $20.6 million in 2003, $19.1 million in 2004, $13.0
million in 2005, $10.7 million in 2006, $10.4 million in 2007 and $19.1 million
thereafter.
NOTE 9: COMMON AND PREFERRED STOCK
Effective May 22, 2002, Cooper became the successor to Cooper Ohio
following a reorganization. The reorganization was effected through the merger
of Cooper Mergerco, Inc. into Cooper Ohio (see Note 1). Upon consummation of the
merger, 93,099,157 issued and outstanding Cooper Ohio common shares, $5 par
value, automatically became 93,099,157 Cooper Class A common shares, $.01 par
value. The decrease in the par value of the common shares of $464.5 million was
recorded as a decrease to common stock and an increase to capital in excess of
par value on the consolidated balance sheet. On May 22, 2002, 29,893,919 Cooper
Ohio treasury shares were retired due to the reorganization. The treasury stock
retirement was recorded by eliminating the $1,449.9 million treasury stock
balance and reducing common stock, $5 par value $149.6 million, capital in
excess of par value $635.5 million and retained earnings $664.8 million on the
consolidated balance sheet.
Cooper's authorized share capital is U.S. $4,100,000 consisting of
250,000,000 Class A common shares, par value of $.01 per share, 150,000,000
Class B common shares, par value $.01 per share and 10,000,000 preferred shares,
par value $.01 per share, which preferred shares may be designated and created
as shares of any other classes or series of shares with the respective rights
and restrictions determined by action of the Board of Directors. No preferred
shares were outstanding at December 31, 2002.
At December 31, 2001 and 2000, Cooper was authorized to issue
250,000,000 shares of $5 par value common stock, 1,340,750 shares of preferred
stock with no par value, 10,000,000 shares of $2.00 par value preferred stock
and 2,821,079 shares of $1.00 par value preferred stock. At December 31, 2001
and 2000, no preferred shares were issued or outstanding.
At December 31, 2002, 91,709,144 Class A common shares, $.01 par value
were issued and outstanding (excluding the 1,519,214 Class A common shares held
by Cooper Ohio discussed below) compared to 93,761,587 and 93,413,244 common
shares, $5 par value at December 31, 2001 and 2000, respectively. In 2002, prior
to the reorganization, Cooper Ohio repurchased 1,000,000 shares of its common
stock at a cost of $37.9 million and issued 337,570 common shares primarily in
connection with employee benefit plans. In addition, subsequent to the
reorganization, Cooper issued 129,201 Class A common shares primarily in
connection with employee benefits plans. During the third and fourth quarters of
2002, Cooper Ohio purchased 1,804,250 Cooper Class A common shares for $56.4
million. The share purchases are recorded by Cooper Ohio as an investment in its
parent company that is eliminated in consolidation. During 2002, 285,036 of the
Cooper Class A common shares held by Cooper Ohio were issued primarily to
satisfy the matching obligation under the Cooper Ohio Retirement Savings and
Stock Ownership Plan, leaving 1,519,214 Cooper Class A common shares held by
Cooper Ohio at December 31, 2002.
F-17
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2001, Cooper purchased 1,000,000
shares of treasury stock at an average price of $41.95 per share and 1,348,343
shares were issued primarily in connection with employee stock plans. During the
year ended December 31, 2000, Cooper purchased 1,138,500 shares of treasury
stock at an average price of $34.52 per share and 352,124 shares were issued
primarily in connection with employee stock plans.
As part of the reorganization, Cooper Ohio transferred the shares of
certain subsidiaries to Cooper in exchange for Cooper Class B common shares.
Cooper Ohio's investment in the Class B common shares is eliminated in
consolidation. The Cooper Class B common shares are not entitled to vote, except
as to matters for which Bermuda law specifically requires voting rights for
otherwise nonvoting shares. Cooper and Cooper Ohio entered into a voting
agreement which provides that in those limited circumstances where the Class B
common shares have the right to vote, Cooper Ohio shall vote the Class B common
shares and any Class A common shares that may be held by Cooper Ohio in the same
proportion as the holders of Cooper Class A common shares. If at any time a
dividend is declared or paid on the Cooper Class A common shares, a like
dividend shall be declared and paid on Cooper Class B common shares in an equal
amount per share. During 2002, Cooper Ohio waived its rights to receive the
regular quarterly dividend declared of $.35 per share (an aggregate of $40.6
million) on both the Cooper Class A and Class B common shares held by Cooper
Ohio.
Under the terms of the Dividend Reinvestment Plan, any holder of common
stock may elect to have cash dividends and up to $24,000 per year in cash
payments invested in common stock without incurring any brokerage commissions or
service charges. At December 31, 2002, Cooper had 14,917,114 shares reserved for
the Dividend Reinvestment Plan, grants and exercises of stock options,
performance-based stock awards, restricted stock awards and subscriptions under
the Employee Stock Purchase Plan and other plans.
During May 2002, Cooper adopted a Shareholder Rights Plan to replace
the rights attached to the common stock of Cooper Ohio. The Board of Directors
authorized the issuance of one right for each common share outstanding on May
22, 2002. Each Right entitles the holder to buy one one-hundredth of a share of
Series A Participating Preferred Stock at a purchase price of $225 per one
one-hundredth of a share or, in certain circumstances common shares having a
value of twice the purchase price. Each Right becomes exercisable only in
certain circumstances constituting a potential change of control on a basis
considered inadequate by the Board of Directors. The Rights expire August 5,
2007 and, at Cooper's option, may be redeemed prior to expiration for $.01 per
Right.
NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Under Cooper stock option plans, officers, directors and key employees
may be granted options to purchase Cooper's common stock at no less than 100% of
the market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the date
of grant and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards and restricted stock awards to
certain key executives.
F-18
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of Cooper's fixed stock option plans for
officers and employees as of December 31, 2002 and activity during the three
years ended December 31, 2002 is presented below:
2002 2001 2000
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ------------ -----------
Outstanding at beginning of year............... 4,740,658 $44.07 3,810,497 $43.28 2,748,601 $45.94
Granted........................................ 2,806,425 $35.21 1,740,000 $45.19 1,425,800 $37.94
Exercised...................................... (41,096) $38.52 (625,260) $42.33 (6,500) $39.06
Canceled....................................... (187,084) $42.78 (184,579) $44.09 (357,404) $42.57
------------ ------------ ------------
Outstanding at end of year..................... 7,318,903 $40.74 4,740,658 $44.07 3,810,497 $43.28
============ ============ ============
Options exercisable at end of year............. 3,033,777 1,866,391 1,608,117
Options available for grant at end of year..... 2,359,814 5,116,955 1,916,174
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- -------------------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of At Contractual Exercise At Exercise
Exercise Prices 12/31/02 Life Price 12/31/02 Price
- ------------------------ ----------------- --------------- --------------- ---------------- -----------------
$29.46 - $35.21 2,900,025 9.1 $ 35.17 46,666 $ 34.84
$37.94 - $39.06 1,350,270 6.3 $ 38.13 934,881 $ 38.22
$41.31 - $43.47 714,494 6.0 $ 43.43 704,494 $ 43.46
$45.06 - $46.10 1,835,135 7.3 $ 45.92 828,757 $ 45.69
$54.28 - $56.63 518,979 4.6 $ 56.61 518,979 $ 56.61
----------------- ----------------
7,318,903 3,033,777
================= ================
During 2002, options to purchase 9,000 shares of common stock were
granted to nonemployee directors at an exercise price of $41.08. No nonemployee
director options were exercised in 2002. During 2001, options to purchase 10,000
shares of common stock were granted to nonemployee directors at an exercise
price of $33.66 and options for 4,000 shares were exercised at $42.13 to $49.03
per share. During 2000, options to purchase 9,000 shares of common stock were
granted to nonemployee directors at an exercise price of $35.19 and options for
4,000 shares were exercised at $17.31 per share. At December 31, 2002, options
under the director plans for 32,000 common shares were exercisable at $33.66 to
$63.78 per share, and 118,850 shares were reserved for future grants.
Participants in the Employee Stock Purchase Plan receive an option to
purchase common stock at a price that is the lesser of 85% of the market value
on the offering date or 85% of the market value on the purchase date. On
September 10, 2001, a total of 311,452 shares were sold to employees at $44.63
per share. At December 31, 2002, subscriptions for 589,772 shares of common
stock were outstanding at $34.07 per share or, if lower, 85% of the average
market price on September 8, 2003, which is the purchase date. At December 31,
2002, an aggregate of 2,423,976 shares of common stock were reserved for future
issuance.
F-19
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cooper follows the intrinsic value method of accounting for stock-based
compensation plans as prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense is recognized for performance-based and restricted stock
awards. No compensation expense is recognized under Cooper's fixed stock option
plans or Employee Stock Purchase Plan. If compensation expense for all of
Cooper's stock-based compensation plans was recognized using the alternative
fair value method of accounting under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, diluted earnings per
share would have decreased by approximately 6.1% in 2002, 2.9% in 2001 and 2.1%
in 2000. See Note 1 of the Notes to the Consolidated Financial Statements. The
fair value was estimated on the date of grant, using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 2002, 2001 and 2000 respectively: dividend yield of 3.9%, 3.5% and
3.5%, expected volatility of 33.0%, 27.5% and 26.4%, risk free interest rates of
4.8%, 5.1% and 6.7% and expected lives of 7 years for 2002, 2001 and 2000.
NOTE 11: ACCUMULATED NONOWNER CHANGES IN EQUITY
Minimum Loss On Cumulative
Pension Derivative Translation
Liability Instruments Adjustment Total
------------- --------------- -------------- ------------
(in millions)
Balance December 31, 1999................................ $ (2.8) $ -- $ (66.6) $ (69.4)
Current year other nonowner changes in equity............ 0.1 -- (51.2) (51.1)
------------- ------------- -------------- ------------
Balance December 31, 2000................................ (2.7) -- (117.8) (120.5)
Current year other nonowner changes in equity............ (0.7) (0.3) (6.3) (7.3)
------------- ------------- -------------- ------------
Balance December 31, 2001................................ (3.4) (0.3) (124.1) (127.8)
Current year other nonowner changes in equity............ (33.4) 0.2 (4.4) (37.6)
------------- ------------- -------------- ------------
Balance December 31, 2002................................ $ (36.8) $ (0.1) $ (128.5) $ (165.4)
============= ============= ============== ============
2002 2001 2000
--------------------------------- ------------------------------- -------------------------------
Before Tax Before Tax Before Tax
Tax (Expense) Net Tax (Expense) Net Tax (Expense) Net
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
---------- ---------- ---------- --------- --------- --------- --------- ----------- --------
(in millions)
Minimum pension
liability adjustment.. $ (55.7) $ 22.3 $ (33.4) $ (1.1) $ 0.4 $ (0.7) $ 0.1 $ -- $ 0.1
---------- ---------- ---------- --------- --------- --------- --------- ----------- --------
Change in fair value
of derivatives........ 0.1 -- 0.1 (1.0) 0.4 (0.6) -- -- --
Reclassification to
earnings.............. 0.2 (0.1) 0.1 0.5 (0.2) 0.3 -- -- --
---------- ---------- ---------- --------- --------- --------- --------- ----------- --------
0.3 (0.1) 0.2 (0.5) 0.2 (0.3) -- -- --
---------- ---------- ---------- --------- --------- --------- --------- ----------- --------
Translation adjustment.. (6.8) 2.4 (4.4) (9.7) 3.4 (6.3) (78.8) 27.6 (51.2)
---------- ---------- ---------- --------- --------- --------- --------- ----------- --------
Other nonowner
changes in equity..... $ (62.2) $ 24.6 $ (37.6) $ (11.3) $ 4.0 $ (7.3) $ (78.7) $ 27.6 $ (51.1)
========== ========== ========== ========= ========= ========= ========= =========== ========
F-20
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: INCOME TAXES
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
($ in millions)
Components of income from continuing operations before income taxes:
U.S. operations.................................................. $ 81.4 $ 211.9 $ 433.7
Foreign operations............................................... 198.8 104.5 116.2
--------------- --------------- ---------------
Income from continuing operations before income taxes.......... $ 280.2 $ 316.4 $ 549.9
=============== =============== ===============
Components of income tax expense:
Current:
U.S. Federal..................................................... $ 8.0 $ 60.8 $ 64.0
U.S. state and local............................................. 5.4 6.2 1.3
Foreign.......................................................... 49.4 23.2 28.4
--------------- --------------- ---------------
62.8 90.2 93.7
--------------- --------------- ---------------
Deferred:
U.S. Federal..................................................... 30.5 (43.9) 72.8
U.S. state and local............................................. 3.3 2.5 19.4
Foreign.......................................................... (30.1) 6.3 6.6
--------------- --------------- ---------------
3.7 (35.1) 98.8
--------------- --------------- ---------------
Income tax expense............................................. $ 66.5 $ 55.1 $ 192.5
=============== =============== ===============
Total income taxes paid............................................... $ 27.9 $ 100.8 $ 132.3
=============== =============== ===============
Effective tax rate reconciliation:
U.S. Federal statutory rate...................................... 35.0% 35.0% 35.0%
State and local income taxes..................................... 2.0 1.4 2.2
Non U.S. Operations.............................................. (11.5) (3.5) (1.2)
Nondeductible goodwill........................................... -- 4.3 2.4
Foreign Sales Corporation........................................ (1.4) (1.4) (0.8)
Tax credits...................................................... (0.2) (0.2) (1.4)
Reduction in tax reserves........................................ -- (15.8) --
Other ........................................................... (0.2) (2.4) (1.2)
--------------- --------------- ---------------
Effective tax rate attributable to continuing operations....... 23.7% 17.4% 35.0%
=============== =============== ===============
A $50 million U.S. Federal tax benefit was recorded in 2001 as a result
of favorable Appellate level third party court decisions related to certain
income tax return issues. These court decisions validated Cooper's tax return
treatment of similar transactions executed in 1997 and prior years that were
being contested by the Internal Revenue Service. In light of the Fifth Circuit
Court decision, issued in December 2001, Cooper concluded that the tax reserve
related to these transactions was no longer required.
F-21
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31,
----------------------------------
2002 2001
--------------- ----------------
(in millions)
Components of deferred tax assets and liabilities:
Deferred tax assets:
Postretirement and other employee welfare benefits................................ $ 85.1 $ 66.4
Accrued liabilities............................................................... 143.7 153.1
Minimum pension liability......................................................... 24.5 2.2
Capital loss carryforward (1)..................................................... 21.7 54.9
Other............................................................................. 99.4 58.5
--------------- ----------------
Total deferred tax assets..................................................... 374.4 335.1
--------------- ----------------
Valuation allowance (1)............................................................. (21.7) (47.0)
--------------- ----------------
Deferred tax liabilities:
Property, plant and equipment and intangibles..................................... (154.1) (126.9)
Inventories....................................................................... (25.1) (24.9)
Employee stock ownership plan..................................................... (7.1) (24.3)
Pension plans..................................................................... (43.1) (32.4)
Other............................................................................. -- (0.1)
--------------- ----------------
Total deferred tax liabilities................................................ (229.4) (208.6)
--------------- ----------------
Net deferred tax asset ....................................................... $ 123.3 $ 79.5
=============== ================
(1) Cooper incurred a capital loss on the 1998 sale of the Automotive Products segment. Cooper limited the amount of
tax benefits recognized based on an evaluation of the amount of capital loss carryforward that is expected to be
realized. Cooper has implemented strategies to realize the capital loss carryforward asset and has transferred the
reduction in the valuation allowance to other deferred taxes. The capital loss carryforward is available to offset
capital gains through 2003.
The U.S. Federal portion of the above provision includes U.S. tax
expected to be payable on the foreign portion of Cooper's income before income
taxes when such earnings are remitted. Cooper's liabilities at December 31, 2002
and 2001 include the additional U.S. tax estimated to be payable on
substantially all unremitted earnings of foreign subsidiaries.
NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS
Cooper and its subsidiaries have numerous defined benefit pension plans
and other postretirement benefit plans. The benefits provided under Cooper's
various postretirement benefit plans other than pensions, all of which are
unfunded, include retiree medical care, dental care, prescriptions and life
insurance, with medical care accounting for approximately 90% of the total.
Current employees, unless grandfathered under plans assumed in acquisitions, are
not provided postretirement benefits other than pensions. The vast majority of
the annual other postretirement benefit expense is related to employees who are
already retired.
F-22
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other
Pension Benefits Postretirement Benefits
------------------------------- ----------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(in millions)
Change in benefit obligation:
Benefit obligation at January 1....................... $ 622.3 $ 584.3 $ 141.4 $ 112.2
Service cost.......................................... 16.0 16.2 0.2 0.2
Interest cost......................................... 42.9 42.5 9.7 8.2
Benefit payments...................................... (46.6) (44.4) (12.8) (13.3)
Actuarial (gain) loss................................. (12.4) 23.1 0.5 34.0
Exchange rate changes................................. 9.6 (1.8) -- --
Acquisitions.......................................... 14.8 -- -- --
Other................................................. 3.5 2.4 -- 0.1
--------------- --------------- --------------- ---------------
Benefit obligation at December 31.......................... 650.1 622.3 139.0 141.4
--------------- --------------- --------------- ---------------
Change in plan assets:
Fair value of plan assets at January 1................ 570.4 616.1 -- --
Actual return on plan assets.......................... (46.8) (3.6) -- --
Employer contributions................................ 43.7 5.4 12.8 13.3
Benefit payments...................................... (44.9) (44.4) (12.8) (13.3)
Exchange rate changes................................. 3.5 (0.8) -- --
Acquisitions.......................................... 10.9 -- -- --
Other................................................. (2.5) (2.3) -- --
--------------- --------------- --------------- ---------------
Fair value of plan assets at December 31................... 534.3 570.4 -- --
--------------- --------------- --------------- ---------------
Funded status.............................................. (115.8) (51.9) (139.0) (141.4)
Unrecognized actuarial (gain) loss......................... 167.4 85.2 (49.1) (53.5)
Unrecognized prior service cost............................ 8.1 2.9 (1.0) (1.8)
Other...................................................... 0.3 0.4 -- --
--------------- --------------- --------------- ---------------
Net amount recognized...................................... $ 60.0 $ 36.6 $ (189.1) $ (196.7)
=============== =============== =============== ===============
Amounts recognized in the balance sheet consist of:
Prepaid benefit asset................................. $ 102.7 $ 103.2 $ -- $ --
Accrued benefit liability............................. (108.1) (73.4) (189.1) (196.7)
Intangible asset...................................... 4.1 1.2 -- --
Accumulated other nonowner changes in equity.......... 61.3 5.6 -- --
--------------- --------------- --------------- ---------------
Net amount recognized...................................... $ 60.0 $ 36.6 $ (189.1) $ (196.7)
=============== =============== =============== ===============
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets of defined benefit pension plans with accumulated
benefit obligations in excess of plan assets were $434.5 million, $416.8 million
and $317.8 million, respectively as of December 31, 2002. At December 31, 2001,
the projected benefit obligation and accumulated benefit obligation of defined
benefit pension plans with accumulated benefit obligations in excess of plan
assets (which represented unfunded plans) were $69.6 million and $65.2 million,
respectively.
F-23
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension Benefits Other Postretirement Benefits
------------------------------------ ------------------------------------
2002 2001 2000 2002 2001 2000
----------- ------------------------ ----------- ----------- ------------
Components of net periodic benefit cost: (in millions)
Service cost................................... $ 16.0 $ 16.2 $ 14.9 $ 0.2 $ 0.2 $ 0.1
Interest cost.................................. 42.9 42.5 41.0 9.7 8.2 8.8
Expected return on plan assets................. (46.3) (49.7) (52.1) -- -- --
Amortization of unrecognized
transition (asset) obligation.............. 0.2 0.2 0.2 -- -- --
Amortization of prior service cost............. 0.6 0.3 -- (0.8) (1.2) (1.4)
Recognized actuarial (gain) loss............... 3.3 2.1 (2.0) (3.9) (8.5) (9.3)
Settlement gain................................ -- -- (3.6) -- -- --
---------- ---------- --------- ---------- --------- ---------
Net periodic benefit cost...................... $ 16.7 $ 11.6 $ (1.6) $ 5.2 $ (1.3) $ (1.8)
========== ========== ========= ========== ========= =========
Other
Pension Benefits Postretirement Benefits
------------------------------------- -----------------------------
2002 2001 2002 2001
------------------ ----------------- ------------- -------------
Weighted average assumptions as of December 31:
Discount rate......................................... 6.00% - 7.00% 6.00% - 7.25% 7.00% 7.25%
Expected return on plan assets........................ 6.50% - 8.50% 7.00% - 8.50% -- --
Rate of compensation increase......................... 2.75% - 4.25% 3.00% - 4.50% -- --
For other postretirement benefit measurement purposes, a 9.05% annual
increase in the per capita cost of covered health care benefits was assumed for
2003. The rate was assumed to decrease gradually to 5.25% for 2007 and remain at
that level thereafter. A one-percentage-point change in the assumed health care
cost trend rates would have the following effects:
-------------------- ---------------------
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------------- ---------------------
(in millions)
Effect on total of service and interest cost components....................... $ 0.6 $ (0.5)
Effect on the postretirement benefit obligation............................... $ 9.6 $ (8.6)
During 2002, 2001 and 2000, expense with respect to domestic and
foreign defined contribution plans (primarily related to various groups of
hourly employees) totaled $15.5 million, $16.4 million and $17.6 million,
respectively.
F-24
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS
All full-time domestic employees, except for certain bargaining unit
employees, are eligible to participate in the Cooper Ohio Retirement Savings and
Stock Ownership Plan ("CO-SAV"). Under the terms of the CO-SAV plan, employee
savings deferrals are partially matched with Company common stock. After the
reorganization, employee savings deferrals were partially matched with
contributions by Cooper Ohio of Cooper Class A common stock. Prior to the
reorganization, Cooper Ohio either contributed treasury stock or allocated
Employee Stock Ownership Plan ("ESOP") shares to CO-SAV participants.
The ESOP purchased Cooper Ohio common stock which was financed through
external borrowings and loans from Cooper Ohio. The external ESOP debt matured
in July 1999 and was fully repaid. The purchases funded by loans from Cooper
Ohio to the ESOP were treated as eliminated intercompany loans for financial
statement purposes. Cooper Ohio contributed $8.4 million and $9.6 million in
cash to the ESOP during 2001 and 2000, respectively, to fund the principal and
interest payments on the loans. As the debt was repaid, unallocated ESOP shares
were allocated to CO-SAV participants to satisfy Cooper Ohio's matching
obligation or to replace dividends on allocated shares with Cooper Ohio common
shares. The intercompany loans were paid in full during 2001. At December 31,
2001, all shares purchased by the ESOP have been allocated to CO-SAV
participants' accounts.
Shares purchased by the ESOP in 1994 were accounted for in accordance
with Statement of Position 93-6, Employers' Accounting for Employee Stock
Ownership Plans ("SOP 93-6"). SOP 93-6 was effective for fiscal years beginning
after December 15, 1993. Compensation expense was recognized at the fair market
value of the shares committed to be allocated which was equal to the amount of
Cooper Ohio's CO-SAV matching obligation. Unearned employee stock ownership
plan compensation, a component of shareholders' equity, was credited as shares
were committed to be allocated based on the cost of the shares to the ESOP. The
difference between the fair market value and cost of the shares committed to be
allocated was recorded as an adjustment to capital in excess of par value.
Dividends paid on unallocated shares were recorded as a reduction of ESOP debt,
accrued interest or accrued employee benefits. Unallocated shares were not
treated as outstanding in the earnings per share computation.
Shares purchased by the ESOP prior to 1994 were accounted for in
accordance with Statement of Position 76-3, Accounting Practices for Certain
Employee Stock Ownership Plans and Emerging Issues Task Force Issue 89-8,
Expense Recognition for Employee Stock Ownership Plans. Compensation expense was
equal to Cooper Ohio's CO-SAV matching obligation, adjusted for the difference
between the fair market value and cost of the shares committed to be allocated.
Compensation expense was reduced by the amount of dividends paid on unallocated
ESOP shares available for future matching. All shares issued to the ESOP were
considered outstanding for purposes of computing earnings per share.
Compensation expense for the CO-SAV plan and the ESOP was $19.3
million, $23.0 million and $20.2 million in 2002, 2001 and 2000, respectively.
F-25
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
INDUSTRY SEGMENTS
Cooper's operations consist of two segments: Electrical Products and
Tools & Hardware. Markets for Cooper's products and services are worldwide, with
the United States being the largest market.
The Electrical Products segment manufactures, markets and sells
electrical and circuit protection products, including fittings, support systems,
enclosures, wiring devices, plugs, receptacles, lighting fixtures, fuses,
emergency lighting, fire detection systems and security products for use in
residential, commercial and industrial construction, maintenance and repair
applications. The segment also manufactures, markets and sells products for use
by utilities and in industry for electrical power transmission and distribution.
The Tools & Hardware segment manufactures, markets and sells hand tools
for industrial, construction and consumer markets; automated assembly systems
for industrial markets and electric and pneumatic industrial power tools for
general industry, primarily automotive and aerospace manufacturers.
The performance of businesses is evaluated at the segment level and
resources are allocated among the segments. The Cooper executive responsible for
the segments further allocates resources among the various division operating
units that compose the segments and, in international markets, determines the
integration of product lines and operations across division operating units. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1. Cooper manages cash, debt
and income taxes centrally. Accordingly, Cooper evaluates performance of its
segments and operating units based on operating earnings exclusive of financing
activities and income taxes. Nonrecurring items are excluded from the
evaluations. The segments are managed separately because they manufacture and
distribute distinct products. Intersegment sales and related receivables for
each of the years presented were insignificant.
Financial information by industry segment was as follows:
Revenues Operating Earnings Total Assets
------------------------------- ------------------------------- -------------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------------- ------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
---------- ---------- --------- ---------- -------- ---------- -------- ---------- ----------
(in millions)
Electrical Products......... $3,324.9 $3,485.5 $3,659.2 $ 400.6 $ 437.0 $ 585.0 $3,394.0 $3,482.9 $3,660.9
Tools & Hardware............ 635.6 724.0 800.7 27.3 68.6 97.7 724.2 816.3 844.8
--------- --------- -------- -------- ------- ------- -------- -------- --------
Total management reporting. $3,960.5 $4,209.5 $4,459.9 427.9 505.6 682.7 4,118.2 4,299.2 4,505.7
========= ========= ========
Segment nonrecurring items.. (36.7) (24.0) --
-------- ------- -------
Net segment operating
earnings.................. 391.2 481.6 682.7
General Corporate:
Nonrecurring charges.... (2.4) (50.1) --
Expense................. (34.1) (30.4) (32.5)
-------- ------- -------
Operating earnings.......... 354.7 401.1 650.2
Interest expense, net....... (74.5) (84.7) (100.3)
-------- ------- -------
Consolidated income from
continuing operations
before income taxes........ $ 280.2 $ 316.4 $ 549.9
======== ======= =======
Corporate assets............ 569.7 312.2 283.6
-------- -------- --------
Consolidated assets......... $4,687.9 $4,611.4 $4,789.3
======== ======== ========
F-26
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Electrical Tools & Consolidated
Products Hardware Corporate Total
------------- ------------- ------------- ----------------
(in millions)
2002
Depreciation........................ $ 89.3 $ 29.1 $ 3.3 $ 121.7
Nonrecurring charges................ 24.0 12.7 2.4 39.1
Capital expenditures................ 57.6 12.2 4.0 73.8
Investment in
unconsolidated affiliates....... 20.9 -- -- 20.9
2001
Depreciation........................ $ 91.9 $ 29.6 $ 4.2 $ 125.7
Goodwill amortization............... 51.5 9.2 -- 60.7
Nonrecurring charges................ 24.0 -- 50.1 74.1
Capital expenditures................ 80.8 25.3 9.0 115.1
Investment in
unconsolidated affiliates....... 17.0 -- -- 17.0
2000
Depreciation........................ $ 83.1 $ 30.7 $ 2.1 $ 115.9
Goodwill amortization............... 49.1 9.4 -- 58.5
Capital expenditures................ 128.9 26.8 19.2 174.9
Investment in
unconsolidated affiliates....... 22.2 -- -- 22.2
On January 1, 2002, Cooper adopted SFAS 142 and is therefore no longer
amortizing goodwill. See Note 6 of the Notes to the Consolidated Financial
Statements.
GEOGRAPHIC INFORMATION
Revenues and long-lived assets by country are summarized below. Revenues
are attributed to geographic areas based on the location of the assets producing
the revenues. Revenues are generally denominated in the currency of the location
of the assets producing the revenues.
Revenues Long-Lived Assets
--------------------------------------------- --------------------------------------------
2002 2001 2000 2002 2001 2000
------------ ------------ ----------- ------------ ------------ -----------
(in millions)
United States............... $3,023.2 $3,240.9 $3,500.4 $2,249.7 $2,254.4 $2,319.2
Germany..................... 191.0 218.8 180.0 137.4 121.3 135.0
United Kingdom.............. 225.7 224.6 232.6 396.5 367.7 404.8
Canada...................... 142.0 149.9 158.5 2.0 2.5 3.4
Mexico...................... 130.4 141.1 150.4 119.8 126.0 100.8
Other foreign countries..... 248.2 234.2 238.0 93.5 88.3 91.0
-------- -------- -------- -------- -------- --------
$3,960.5 $4,209.5 $4,459.9 $2,998.9 $2,960.2 $3,054.2
======== ======== ======== ======== ======== ========
F-27
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
International revenues by destination, based on the location products
were delivered, were as follows by segment:
International Revenues
-------------------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
(in millions)
Electrical Products.............................. $ 832.6 $ 856.1 $ 881.0
Tools & Hardware................................. 281.3 360.7 300.9
-------- -------- --------
$1,113.9 $1,216.8 $1,181.9
======== ======== ========
NOTE 16: CHARGE RELATED TO DISCONTINUED OPERATIONS
In October 1998, Cooper sold its Automotive Products business to
Federal-Mogul Corporation ("Federal-Mogul"). These discontinued businesses
(including the Abex product line obtained from Pneumo-Abex Corporation
("Pneumo") in 1994) were operated through subsidiary companies, and the stock of
those subsidiaries was sold to Federal-Mogul pursuant to a Purchase and Sale
Agreement dated August 17, 1998 ("1998 Agreement"). In conjunction with the
sale, Federal-Mogul indemnified Cooper for certain liabilities of these
subsidiary companies, including liabilities related to the Abex product line and
any potential liability that Cooper may have to Pneumo pursuant to a 1994 Mutual
Guaranty Agreement between Cooper and Pneumo. On October 1, 2001, Federal-Mogul
and several of its affiliates filed a Chapter 11 bankruptcy petition and
indicated that Federal-Mogul may not honor the indemnification obligations to
Cooper. As of the date of this filing, Federal-Mogul had not yet made a decision
whether to reject the 1998 Agreement, which includes the indemnification to
Cooper. If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of
its future obligations under the 1998 Agreement, including specific indemnities
relating to payment of taxes and certain obligations regarding insurance for its
former Automotive Products businesses. To the extent Cooper is obligated to
Pneumo for any asbestos-related claims arising from the Abex product line ("Abex
Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for
such claims. Based on information provided by representatives of Federal-Mogul
and recent claims experience, from August 28, 1998 through December 31, 2002, a
total of 103,133 Abex Claims were filed, of which 31,991 claims have been
resolved leaving 71,142 Abex Claims pending at December 31, 2002, that are the
responsibility of Federal-Mogul. During the year ended December 31, 2002, 21,791
claims were filed and 14,901 claims were resolved. In addition, during the third
quarter of 2002, the Company completed the transition of case administration to
a new national counsel and record keeping system, as well as an audit of
information received from Federal-Mogul. As a result of the audit, the number of
claims received was adjusted by 6,190 and the number of claims resolved was
adjusted by 116 to reflect claims and settlements that should have been included
in Federal-Mogul's pre-October 2001 records. Since August 28, 1998, the average
indemnity payment for resolved Abex Claims was $1,137 before insurance. A total
of $38.4 million was spent on defense costs for the period August 28, 1998
through December 31, 2002. Historically, existing insurance coverage has
provided 50% to 80% of the total defense and indemnity payments for Abex Claims.
With the assistance of independent advisors, Bates White & Ballentine,
LLC, Cooper completed a thorough analysis of its potential exposure for asbestos
liabilities in the event Federal-Mogul rejects the 1998 Agreement. Based on
Cooper's analysis of its contingent liability exposure resulting from
Federal-Mogul's bankruptcy, Cooper concluded that an additional fourth-quarter
2001 discontinued operations provision of $30 million after-tax, or $.32 per
share, was appropriate to reflect the potential net impact of this issue. The
analysis included a review of the twenty-year history of Abex Claims; the
average indemnity payments for resolved claims; the jurisdictions in which
claims had been filed; Bates White & Ballentine, LLC data on the incidence of
asbestos exposure and diseases in various industries; existing insurance
coverage including the insurance recovered by Pneumo and Federal-Mogul for
pre-bankruptcy claims and the contractual indemnities. Assumptions were made
regarding future claim filings and indemnity payments, and, based on the
advisor's data, the expected population of persons exposed to asbestos in
F-28
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
particular industries. All of this data was used to determine a reasonable
expectation of future claims, indemnity payments and insurance coverage. At this
time, the manner in which this issue ultimately will be resolved is not known.
Cooper is preserving its rights as a creditor for breach of Federal-Mogul's
indemnification to Cooper and its rights against all Federal-Mogul subsidiaries.
Cooper intends to take all actions to seek a resolution of the indemnification
issues and future handling of the Abex-related claims within the Federal-Mogul
bankruptcy proceedings. At December 31, 2002, the accrual for potential
liabilities related to the Automotive Products sale and the Federal-Mogul
bankruptcy was $84.3 million.
NOTE 17: FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES, CONCENTRATIONS OF CREDIT
RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, Cooper adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), as amended. SFAS No. 133 requires that all derivatives be
recognized as assets and liabilities and measured at fair value. For derivative
instruments that are not designated as hedges, the gain or loss on the
derivative is recognized in earnings currently. A derivative instrument may be
designated as a hedge of the exposure to changes in the fair value of an asset
or liability or variability in expected future cash flows if the hedging
relationship is expected to be highly effective in offsetting changes in fair
value or cash flows attributable to the hedged risk during the period of
designation. If a derivative is designated as a fair value hedge, the gain or
loss on the derivative and the offsetting loss or gain on the hedged asset,
liability or firm commitment is recognized in earnings. For derivative
instruments designated as a cash flow hedge, the effective portion of the gain
or loss on the derivative instrument is reported as a component of accumulated
nonowner changes in equity and reclassified into earnings in the same period
that the hedged transaction affects earnings. The ineffective portion of the
gain or loss is immediately recognized in earnings. The cumulative effect of
adopting the new standard was not material to Cooper's 2001 consolidated results
of operations, financial position or cash flows.
Hedge accounting is discontinued prospectively when (1) it is determined
that a derivative is no longer effective in offsetting changes in the fair value
or cash flows of a hedged item; (2) the derivative is sold, terminated or
exercised; (3) the hedged item no longer meets the definition of a firm
commitment; or (4) it is unlikely that a forecasted transaction will occur
within two months of the originally specified time period.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because a hedged item no longer meets the
definition of a firm commitment, the derivative will continue to be carried on
the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss currently in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur within two months of the originally specified time period, the
derivative will continue to be carried on the balance sheet at its fair value,
and gains and losses reported in accumulated nonowner changes in equity will be
recognized immediately in earnings.
Cooper enters into foreign currency forward exchange contracts and
commodity futures contracts to reduce the risks of adverse changes in foreign
exchange rates and commodity prices. Cooper does not enter into speculative
derivative transactions.
As a result of having sales, purchases and certain intercompany
transactions denominated in currencies other than the functional currencies used
by Cooper's businesses, Cooper is exposed to the effect of foreign exchange rate
changes on its cash flows and earnings. Cooper enters into foreign currency
forward exchange contracts to hedge significant foreign currency denominated
transactions for periods consistent with the terms of the underlying
transactions. Contracts generally have maturities that do not exceed one year.
F-29
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign currency forward exchange contracts executed to hedge a
recognized asset, liability or firm commitment are accounted for as fair value
hedges. The net gain on contracts designated as fair value hedges was not
material during 2002 or 2001. Foreign currency forward exchange contracts
executed to hedge forecasted transactions are accounted for as cash flow hedges.
The net loss in 2002 and net gain in 2001 on contracts designated as cash flow
hedges was not material. Cooper also enters into certain foreign currency
forward exchange contracts that are not designated as hedges. These contracts
are intended to reduce cash flow volatility related to intercompany financing
transactions.
Cooper enters into commodity futures contracts to reduce the volatility
of price fluctuations on a portion of its forecasted annual raw material
purchases. These instruments are designated as cash flow hedges. The net loss on
commodity futures contracts was not material in 2002 or 2001.
Gains or losses on derivative instruments are reported in the same line
item as the underlying hedged transaction in the consolidated statements of
income. At December 31, 2002, Cooper expects to reclassify $0.1 million of net
losses on derivative instruments designated as cash flow hedges from accumulated
nonowner changes in equity to earnings during the next twelve months. The amount
of discontinued cash flow hedges during 2002 and 2001 was not material.
The table below summarizes, by currency, the U. S. dollar equivalent
contractual amounts of Cooper's forward exchange contracts at December 31, 2002
and 2001.
December 31,
----------------------------------
2002 2001
----------- -----------
(in millions)
Euro.................................................................................... $ 2.5 $ 8.5
U. S. Dollar............................................................................ 7.5 1.9
British Pound Sterling ................................................................. 0.7 0.8
Mexican Peso............................................................................ -- 4.4
Swiss Franc............................................................................. -- 2.9
Norwegian Krone......................................................................... 0.3 1.5
Other................................................................................... 0.6 0.1
----- -----
$11.6 $20.1
===== =====
OTHER INSTRUMENTS
In the normal course of business, Cooper executes stand-by letters of
credit, performance bonds and other guarantees that ensure Cooper's performance
or payment to third parties that are not reflected in the consolidated balance
sheets. The aggregate notional value of these instruments was $109.8 million and
$112.0 million at December 31, 2002 and 2001, respectively. In the past, no
significant claims have been made against these financial instruments.
Management believes the likelihood of demand for payment under these instruments
is minimal and expects no material losses to occur in connection with these
instruments.
The following transactions were implemented to partially align Cooper's
interest rate exposure profile with its short term interest rate expectations in
an economically efficient manner that is consistent with its tax position.
During 2002, Cooper sold at a premium U.S. Treasury securities due August
15, 2003 with a face amount of $750 million. Cooper obtained these securities
pursuant to a repurchase agreement containing provisions that limit Cooper's
interest rate exposure under this agreement to a maximum amount of $7.2 million.
During the fourth quarter of 2002, Cooper settled the interest rate exposure
with a cash payment of $7.0 million. During 2001, Cooper sold at a premium U.S.
Treasury securities due November 2002 with a face amount of $1.0 billion. Cooper
obtained these securities pursuant to a repurchase agreement containing
provisions that limit Cooper's interest rate exposure
F-30
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under this agreement to a maximum amount of $7.0 million. During the second
quarter of 2002, Cooper settled the interest rate exposure with a cash payment
of $6.0 million. The repurchase agreements will be settled immediately prior to
the maturity of the securities. Settlement of these transactions does not
require any financing by Cooper and the transactions do not create an asset or
liability, other than as described above.
Also during 2001, Cooper purchased at a discount Federal Home Loan
Mortgage Corporation Notes due February 2003 and immediately transferred these
notes pursuant to a securities loan agreement. Subsequently, Cooper eliminated
any interest rate exposure under the securities loan agreement and will receive
a cash payment of approximately $1.9 million upon maturity of the notes. The
securities loan agreement will be settled immediately prior to the maturity of
the notes. Settlement of this transaction will not require any financing by
Cooper and this transaction does not create a liability. The face amount of the
notes was $480 million. In 1999, Cooper entered into a similar executory
contract. Upon settlement of the contract in 2000, Cooper made a cash payment of
$7.3 million, its maximum exposure under the 1999 executory contract.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are
limited due to the wide variety of customers as well as their dispersion across
many different geographic areas with no one customer receivable exceeding 6.3%
of accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS OTHER THAN DERIVATIVES
Cooper's financial instruments other than derivative instruments,
consist primarily of cash and cash equivalents, trade receivables, trade
payables and debt instruments. The book values of cash and cash equivalents,
trade receivables and trade payables are considered to be representative of
their respective fair values. Cooper had approximately $1.4 billion and $1.3
billion of debt instruments at December 31, 2002 and 2001, respectively. The
book value of these instruments was approximately equal to fair value at
December 31, 2002 and 2001.
NOTE 18: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information related to acquisitions during the
year ended December 31, 2000 is provided below in millions:
Assets acquired and liabilities assumed or incurred from the acquisition of
businesses:
Fair value of assets acquired............................................ $ 684.0
Liabilities assumed or incurred.......................................... (103.6)
------------------
Cash used to acquire businesses, net of cash acquired................ $ 580.4
==================
F-31
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: NET INCOME PER COMMON SHARE
Basic Diluted
---------------------------------- ----------------------------------
Year Ended December 31, Year Ended December 31,
---------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
----------- ----------- ---------- ----------- ----------- ----------
($ in millions, shares in thousands)
Income from continuing operations................ $ 213.7 $ 261.3 $ 357.4 $ 213.7 $ 261.3 $ 357.4
Charge from discontinued operations.............. -- (30.0) -- -- (30.0) --
---------- --------- ---------- ---------- --------- ----------
Net income applicable to common shares........... $ 213.7 $ 231.3 $ 357.4 $ 213.7 $ 231.3 $ 357.4
========== ========= ========== ========== ========= ==========
Weighted average common shares outstanding....... 93,152 94,008 93,524 93,152 94,008 93,524
========== ========= ==========
Incremental shares from assumed conversions:
Options, performance-based stock awards
and other employee awards................ 517 869 626
---------- --------- ----------
Weighted average common shares and
common share equivalents..................... 93,669 94,877 94,150
========== ========= ==========
Options and employee awards are not considered in the calculations if the effect
would be antidilutive.
F-32
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS
2002 (by quarter)
-------------------------------------------------------------
1 2 3 4
------------- ------------- ------------- --------------
(in millions, except per share data)
Revenues..................................................... $ 975.0 $ 1,001.2 $ 999.3 $ 985.0
Cost of sales................................................ 701.4 716.6 710.3 702.6
Selling and administrative expenses.......................... 185.2 177.8 186.5 186.3
Nonrecurring charges......................................... -- -- -- 39.1
------------- ------------- ------------- --------------
Operating earnings........................................... 88.4 106.8 102.5 57.0
Interest expense, net........................................ 16.9 17.4 19.6 20.6
------------- ------------- ------------- --------------
Income before income taxes................................... 71.5 89.4 82.9 36.4
Income tax expense........................................... 22.7 15.5 19.7 8.6
------------- ------------- ------------- --------------
Net income................................................... $ 48.8 $ 73.9 $ 63.2 $ 27.8
============= ============= ============= ==============
Income per Common share
Basic........................................................ $ .52 $ .79 $ .68 $ .30
Diluted...................................................... $ .52 $ .78 $ .68 $ .30
2001 (by quarter)
-------------------------------------------------------------
1 2 3 4
------------- ------------- ------------- --------------
(in millions, except per share data)
Revenues..................................................... $ 1,095.1 $ 1,073.0 $ 1,051.8 $ 989.6
Cost of sales................................................ 768.9 744.7 730.5 699.8
Selling and administrative expenses.......................... 199.5 186.0 175.3 168.9
Goodwill amortization........................................ 14.8 15.3 15.3 15.3
Nonrecurring charges......................................... -- -- -- 74.1
------------- ------------- ------------- --------------
Operating earnings........................................... 111.9 127.0 130.7 31.5
Interest expense, net........................................ 25.1 22.4 18.8 18.4
------------- ------------- ------------- --------------
Income from continuing operations before income taxes........ 86.8 104.6 111.9 13.1
Income tax expense (benefit)................................. 30.4 36.6 37.6 (49.5)
------------- ------------- ------------- --------------
Income from continuing operations............................ 56.4 68.0 74.3 62.6
Charge related to discontinued operations.................... -- -- -- (30.0)
------------- ------------- ------------- --------------
Net income................................................... $ 56.4 $ 68.0 $ 74.3 $ 32.6
============= ============= ============= ==============
Income per Common share
Basic:
Income from continuing operations ........................... $ .60 $ .72 $ .79 $ .67
Charge from discontinued operations.......................... -- -- -- (.32)
------------- ------------- ------------- --------------
Net income................................................... $ .60 $ .72 $ .79 $ .35
============= ============= ============= ==============
Diluted:
Income from continuing operations............................ $ .60 $ .72 $ .78 $ .66
Charge from discontinued operations.......................... -- -- -- (.32)
------------- ------------- ------------- --------------
Net income................................................... $ .60 $ .72 $ .78 $ .34
============= ============= ============= ==============
F-33
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: CONSOLIDATING FINANCIAL INFORMATION
Cooper fully and unconditionally guarantees the registered debt securities of
Cooper Ohio, a wholly owned indirect subsidiary. The following condensed
consolidating financial information is included so that separate financial
statements of Cooper Ohio are not required to be filed with the Securities and
Exchange Commission. The consolidating financial statements present investments
in subsidiaries using the equity method of accounting. Intercompany investments
in the Class A and Class B common shares are accounted for using the cost
method.
CONSOLIDATING INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2002
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
------------- -------------- ------------- ------------ ------------
Revenues.............................. $ -- $ 280.1 $3,700.8 $ (20.4) $3,960.5
Cost of sales......................... -- 172.1 2,679.2 (20.4) 2,830.9
Selling and administrative expenses... 2.9 83.9 649.0 -- 735.8
Nonrecurring charges.................. -- 5.7 33.4 -- 39.1
Interest expense, net................. 0.1 53.2 21.2 -- 74.5
Equity in earnings of subsidiaries,
net of tax....................... 113.6 338.3 2.7 (454.6) --
Intercompany income (expense)........ 66.0 (383.4) 318.2 (0.8) --
------------- -------------- ------------- ------------ ------------
Income (loss) before income taxes 176.6 (79.9) 638.9 (455.4) 280.2
Income tax expense (benefit).......... -- (120.5) 187.0 -- 66.5
------------- -------------- ------------- ------------ ------------
Net income........................ $176.6 $ 40.6 $ 451.9 $(455.4) $ 213.7
============= ============== ============= ============ ============
YEAR ENDED DECEMBER 31, 2001
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
-------------- -------------- -------------- -------------- ------------
Revenues................................. $ -- $ 308.0 $3,920.4 $ (18.9) $4,209.5
Cost of sales............................ -- 188.4 2,774.4 (18.9) 2,943.9
Selling and administrative expenses...... -- 84.2 645.5 -- 729.7
Goodwill amortization.................... -- 1.3 59.4 -- 60.7
Nonrecurring charges..................... -- 53.7 20.4 -- 74.1
Interest expense, net.................... -- 63.2 21.5 -- 84.7
Equity in earnings of subsidiaries,
net of tax............................ -- 333.1 -- (333.1) --
Intercompany income (expense)............ -- (123.2) 123.2 -- --
------------- ------------ ------------ -------------- ------------
Income from continuing operations
before income taxes................. -- 127.1 522.4 (333.1) 316.4
Income tax expense (benefit)............. -- (134.2) 189.3 -- 55.1
------------- ------------ ------------ -------------- ------------
Income from continuing operations........ -- 261.3 333.1 (333.1) 261.3
Charge related to discontinued
operations, net of income taxes....... -- (30.0) -- -- (30.0)
------------- ------------ ------------ -------------- ------------
Net income............................ $ -- $ 231.3 $ 333.1 $ (333.1) $ 231.3
============= ============ ============ ============== ============
F-34
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2000
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
--------------- --------------- --------------- -------------- -----------
Revenues................................. $ -- $ 301.1 $4,179.4 $ (20.6) $4,459.9
Cost of sales............................ -- 179.7 2,859.2 (20.6) 3,018.3
Selling and administrative expenses...... -- 83.6 649.3 -- 732.9
Goodwill amortization.................... -- 1.3 57.2 -- 58.5
Interest expense, net.................... -- 91.7 8.6 -- 100.3
Equity in earnings of subsidiaries,
net of tax........................... -- 370.5 -- (370.5) --
Intercompany income (expense)............ -- 21.2 (21.2) -- --
--------------- -------------- -------------- ------------- -----------
Income before income taxes........... -- 336.5 583.9 (370.5) 549.9
Income tax expense (benefit)............. -- (20.9) 213.4 -- 192.5
--------------- -------------- -------------- ------------- -----------
Net income........................... $ -- $ 357.4 $ 370.5 $ (370.5) $ 357.4
=============== ============== ============== ============= ===========
F-35
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
---------------- --------------- -------------- -------------- --------------
Cash and cash equivalents................ $ 33.9 $ 244.3 $ 23.8 $ -- $ 302.0
Receivables.............................. 0.2 65.3 641.2 -- 706.7
Intercompany receivables................. 462.9 -- 252.0 (714.9) --
Inventories.............................. -- 19.9 560.6 -- 580.5
Deferred income taxes and other
current assets........................ 1.0 71.9 26.9 -- 99.8
--------------- --------------- -------------- -------------- ------------
Total current assets............... 498.0 401.4 1,504.5 (714.9) 1,689.0
--------------- --------------- -------------- -------------- ------------
Property, plant and equipment, less
accumulated depreciation.............. -- 53.9 696.3 -- 750.2
Goodwill................................. -- 41.4 1,954.8 -- 1,996.2
Investment in subsidiaries............... 2,412.5 5,401.6 (31.7) (7,782.4) --
Investment in parent..................... -- 2,377.8 -- (2,377.8) --
Intercompany notes receivable............ 0.1 80.3 6,305.1 (6,385.5) --
Deferred income taxes and other
noncurrent assets..................... -- 204.2 48.3 -- 252.5
--------------- --------------- -------------- -------------- ------------
Total assets....................... $ 2,910.6 $ 8,560.6 $ 10,477.3 $ (17,260.6) $ 4,687.9
=============== ============= ============== ============== ============
Short-term debt.......................... $ -- $ -- $ 4.1 $ -- $ 4.1
Accounts payable......................... 32.1 40.9 239.2 -- 312.2
Accrued liabilities...................... 0.7 200.7 288.0 -- 489.4
Intercompany payables.................... -- 714.9 -- (714.9) --
Current maturities of long-term debt..... -- 153.2 0.6 -- 153.8
--------------- --------------- -------------- -------------- ------------
Total current liabilities.......... 32.8 1,109.7 531.9 (714.9) 959.5
--------------- --------------- -------------- -------------- ------------
Long-term debt........................... -- 933.4 347.3 -- 1,280.7
Intercompany notes payable............... -- 4,751.8 1,633.7 (6,385.5) --
Other long-term liabilities.............. -- 295.1 150.2 -- 445.3
--------------- --------------- -------------- -------------- ------------
Total liabilities.................. 32.8 7,090.0 2,663.1 (7,100.4) 2,685.5
--------------- --------------- -------------- -------------- ------------
Class A common stock..................... 0.9 -- -- -- 0.9
Class B common stock..................... 0.6 -- -- (0.6) --
Subsidiary common stock.................. -- -- 141.0 (141.0) --
Capital in excess of par value........... 2,799.1 0.5 7,035.6 (9,412.5) 422.7
Retained earnings........................ 112.1 1,635.6 890.0 (893.5) 1,744.2
Accumulated other nonowner changes
in equity............................. (34.9) (165.5) (252.4) 287.4 (165.4)
--------------- --------------- -------------- -------------- ------------
Total shareholders' equity......... 2,877.8 1,470.6 7,814.2 (10,160.2) 2,002.4
--------------- --------------- -------------- -------------- ------------
Total liabilities and
shareholders' equity............ $ 2,910.6 $ 8,560.6 $ 10,477.3 $ (17,260.6) $ 4,687.9
=============== ============= ============== ============== ============
F-36
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
--------------- ------------- -------------- -------------- --------------
Cash and cash equivalents................ $ -- $ 2.8 $ 8.7 $ -- $ 11.5
Receivables.............................. -- 74.2 702.9 -- 777.1
Intercompany receivables................. -- -- 561.9 (561.9) --
Inventories.............................. -- 27.1 643.8 -- 670.9
Deferred income taxes and other
current assets........................ -- 133.2 58.5 -- 191.7
-------------- ------------- -------------- ------------ ------------
Total current assets................ -- 237.3 1,975.8 (561.9) 1,651.2
-------------- ------------- -------------- ------------ ------------
Property, plant and equipment, less
accumulated depreciation.............. -- 65.3 761.5 -- 826.8
Goodwill................................. -- 41.4 1,917.3 -- 1,958.7
Investment in subsidiaries............... -- 7,464.2 -- (7,464.2) --
Intercompany notes receivable............ -- 79.6 3,969.0 (4,048.6) --
Deferred income taxes and other
noncurrent assets..................... -- 178.2 (3.5) -- 174.7
-------------- ------------- -------------- ------------ ------------
Total assets........................ $ -- $ 8,066.0 $ 8,620.1 $(12,074.7) $ 4,611.4
============== ============= ============== ============ ============
Short-term debt.......................... $ -- $ 62.0 $ 70.9 $ -- $ 132.9
Accounts payable......................... -- 118.4 283.0 -- 401.4
Accrued liabilities...................... -- 241.9 269.0 -- 510.9
Intercompany payables.................... -- 561.9 -- (561.9) --
Current maturities of long-term debt..... -- 60.2 0.7 - 60.9
-------------- ------------- -------------- ------------ ------------
Total current liabilities........... -- 1,044.4 623.6 (561.9) 1,106.1
-------------- ------------- -------------- ------------ ------------
Long-term debt........................... -- 799.6 307.4 -- 1,107.0
Intercompany notes payable............... -- 3,969.0 79.6 (4,048.6) --
Other long-term liabilities.............. -- 229.8 145.3 -- 375.1
-------------- ------------- -------------- ------------ ------------
Total liabilities................... -- 6,042.8 1,155.9 (4,610.5) 2,588.2
-------------- ------------- -------------- ------------ ------------
Common stock............................. -- 615.0 141.0 (141.0) 615.0
Capital in excess of par value........... -- 646.0 6,420.8 (6,420.8) 646.0
Retained earnings........................ -- 2,325.0 1,112.3 (1,112.3) 2,325.0
Common stock held in treasury, at cost... -- (1,435.0) -- -- (1,435.0)
Accumulated other nonowner changes
in equity............................. -- (127.8) (209.9) 209.9 (127.8)
-------------- ------------- -------------- ------------ ------------
Total shareholders' equity.......... -- 2,023.2 7,464.2 (7,464.2) 2,023.2
-------------- ------------- -------------- ------------ ------------
Total liabilities and shareholders'
equity........................... $ -- $ 8,066.0 $ 8,620.1 $(12,074.7) $ 4,611.4
============== ============= ============== ============ ============
F-37
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
---------------- ---------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities................... $ 29.7 $ (223.9) $ 674.0 $ -- $ 479.8
Cash flows from investing activities:
Capital expenditures................... -- (6.1) (67.7) -- (73.8)
Investments in affiliates.............. -- (34.0) -- 34.0 --
Loans to affiliates.................... (0.1) (0.7) (29.2) 30.0 --
Dividends from subsidiaries............ 67.0 7.4 -- (74.4) --
Other.................................. -- 2.3 18.6 -- 20.9
--------------- --------------- ------------- ------------ -----------
Net cash provided by (used in)
investing activities............. 66.9 (31.1) (78.3) (10.4) (52.9)
Cash flows from financing activities:
Proceeds from issuances of debt........ -- 575.0 33.3 -- 608.3
Repayments of debt..................... -- (380.4) (133.1) -- (513.5)
Borrowings from affiliates............. -- 29.2 0.8 (30.0) --
Other intercompany financing activities 1.7 435.6 (437.3) -- --
Dividends.............................. (64.4) (65.3) -- -- (129.7)
Dividends paid to affiliates........... -- -- (74.4) 74.4 --
Acquisition of treasury shares......... -- (37.9) -- -- (37.9)
Subsidiary purchase of parent shares... -- (56.4) -- -- (56.4)
Issuance of stock...................... -- -- 34.0 (34.0) --
Employee stock plan activity and other. -- (3.3) -- -- (3.3)
--------------- --------------- ------------- ------------ -----------
Net cash provided by (used in)
financing activities.............. (62.7) 496.5 (576.7) 10.4 (132.5)
Effect of exchange rate changes on
cash and cash equivalents............ -- -- (3.9) -- (3.9)
--------------- --------------- ------------- ------------ -----------
Increase in cash and cash equivalents.. 33.9 241.5 15.1 -- 290.5
Cash and cash equivalents, beginning
of period............................ -- 2.8 8.7 -- 11.5
--------------- --------------- ------------- ------------ -----------
Cash and cash equivalents, end of
period............................... $ 33.9 $ 244.3 $ 23.8 $ -- $ 302.0
=============== =============== ============= ============ ===========
F-38
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
---------------- ---------------- -------------- --------------- -------------
Net cash provided by (used in)
operating activities................... $ -- $ (110.1) $ 532.5 $ -- $ 422.4
Cash flows from investing activities:
Capital expenditures................... -- (13.9) (101.2) -- (115.1)
Investments in affiliates.............. -- (298.5) -- 298.5 --
Loans to affiliates.................... -- 9.7 (292.2) 282.5 --
Dividends from subsidiaries............ -- 16.8 -- (16.8) --
Other.................................. -- -- 16.5 -- 16.5
---------------- ---------------- -------------- --------------- -------------
Net cash used in investing activities -- (285.9) (376.9) 564.2 (98.6)
Cash flows from financing activities:
Proceeds from issuances of debt........ -- 130.0 6.9 -- 136.9
Repayments of debt..................... -- (332.1) (11.1) -- (343.2)
Borrowings from affiliates............. -- 292.2 (9.7) (282.5) --
Other intercompany financing activities -- 441.0 (441.0) -- --
Dividends.............................. -- (131.3) -- -- (131.3)
Dividends paid to parent............... -- -- (16.8) 16.8 --
Acquisition of treasury shares......... -- (42.0) - -- (42.0)
Issuance of stock...................... -- -- 298.5 (298.5) --
Employee stock plan activity and other. -- 41.0 -- -- 41.0
---------------- ---------------- -------------- --------------- -------------
Net cash provided by (used in)
financing activities................ -- 398.8 (173.2) (564.2) (338.6)
Effect of exchange rate changes on
cash and cash equivalents............ -- -- (0.1) -- (0.1)
---------------- ---------------- -------------- --------------- -------------
Increase (decrease) in cash and cash
equivalents.......................... -- 2.8 (17.7) -- (14.9)
Cash and cash equivalents, beginning
of year.............................. -- -- 26.4 -- 26.4
---------------- ---------------- -------------- --------------- -------------
Cash and cash equivalents, end of year. $ -- $ 2.8 $ 8.7 $ -- $ 11.5
================ ================ ============== =============== =============
F-39
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(in millions)
Cooper Other Consolidating
Cooper Ohio Subsidiaries Adjustments Total
------------- -------------- ------------- -------------- -----------
Net cash provided by (used in)
operating activities................... $ -- $ (30.8) $ 533.4 $ -- $ 502.6
Cash flows from investing activities:
Cash paid for acquired businesses...... -- -- (580.4) -- (580.4)
Capital expenditures................... -- (18.3) (156.6) -- (174.9)
Loans to affiliates.................... -- 24.9 (232.1) 207.2 --
Dividends from subsidiaries............ -- 31.5 -- (31.5) --
Other.................................. -- (5.0) 16.4 5.0 16.4
------------- ------------- ---------- ----------- ----------
Net cash provided by (used in)
investing activities............... -- 33.1 (952.7) 180.7 (738.9)
Cash flows from financing activities:
Proceeds from issuances of debt........ -- 615.8 262.7 -- 878.5
Repayments of debt..................... -- (473.3) (1.6) -- (474.9)
Borrowings from affiliates............. -- 232.1 (24.9) (207.2) --
Other intercompany financing
activities........................... -- (211.7) 211.7 -- --
Dividends.............................. -- (130.6) -- -- (130.6)
Dividends paid to parent............... -- -- (31.5) 31.5 --
Acquisition of treasury shares......... -- (39.3) -- -- (39.3)
Employee stock plan activity and other. -- 1.9 5.0 (5.0) 1.9
------------- ------------- ---------- ----------- ----------
Net cash provided by (used in)
financing activities................. -- (5.1) 421.4 (180.7) 235.6
Effect of exchange rate changes on
cash and cash equivalents............ -- -- 0.2 -- 0.2
------------- ------------- ---------- ----------- ----------
Increase (decrease) in cash and cash
equivalents.......................... -- (2.8) 2.3 -- (0.5)
Cash and cash equivalents, beginning
of year.............................. -- 2.8 24.1 -- 26.9
------------- ------------- ---------- ----------- ----------
Cash and cash equivalents, end of year. $ -- $ -- $ 26.4 $ -- $ 26.4
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F-40