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10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004
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 No.)
600 Travis, Suite 5800 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 209-8400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Number of registrant's common stock outstanding as of April 30, 2004 was
92,504,287 Class A common shares that are held by the public and 1,992,000 Class
A common shares and 55,689,678 Class B common shares that are held by the
issuer's wholly-owned subsidiaries.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
(in millions, where applicable)
Revenues................................................................................. $ 1,064.6 $ 957.8
Cost of sales............................................................................ 742.0 674.7
Selling and administrative expenses...................................................... 208.4 192.3
------------ ------------
Operating earnings................................................................... 114.2 90.8
Interest expense, net.................................................................... 17.1 20.1
------------ ------------
Income before income taxes........................................................... 97.1 70.7
Income taxes............................................................................. 19.4 14.1
------------ ------------
Net income........................................................................... $ 77.7 $ 56.6
============ ============
Income per common share:
Basic............................................................................... $ .83 $ .62
============ ============
Diluted............................................................................. $ .81 $ .61
============ ============
Cash dividends per common share......................................................... $ .35 $ .35
============ ============
The accompanying notes are an integral part of these statements.
-2-
COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ -----------
ASSETS (in millions)
Cash and cash equivalents........................................................ $ 374.7 $ 463.7
Receivables...................................................................... 784.8 738.6
Inventories...................................................................... 570.0 552.0
Deferred income taxes and other current assets................................... 181.8 206.5
------------ -----------
Total current assets.................................................... 1,911.3 1,960.8
------------ -----------
Property, plant and equipment, less accumulated depreciation..................... 699.4 711.4
Goodwill......................................................................... 2,079.9 2,056.6
Deferred income taxes and other noncurrent assets................................ 227.9 236.5
------------ -----------
Total assets............................................................ $ 4,918.5 $ 4,965.3
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt.................................................................. $ 6.5 $ 6.2
Accounts payable................................................................. 355.9 329.1
Accrued liabilities.............................................................. 402.3 433.7
Accrual for discontinued operations.............................................. 230.5 252.5
Current maturities of long-term debt............................................. 0.4 0.4
------------ -----------
Total current liabilities............................................... 995.6 1,021.9
------------ -----------
Long-term debt................................................................... 1,336.7 1,336.7
Postretirement benefits other than pensions...................................... 179.4 181.1
Other long-term liabilities...................................................... 311.3 307.4
------------ -----------
Total liabilities....................................................... 2,823.0 2,847.1
------------ -----------
Common stock, $.01 par value .................................................... 0.9 0.9
Capital in excess of par value................................................... 434.2 518.0
Retained earnings................................................................ 1,807.6 1,762.8
Accumulated other nonowner changes in equity..................................... (147.2) (163.5)
------------ -----------
Total shareholders' equity.............................................. 2,095.5 2,118.2
------------ -----------
Total liabilities and shareholders' equity.............................. $ 4,918.5 $ 4,965.3
============ ===========
The accompanying notes are an integral part of these statements.
-3-
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003
--------------- ---------------
(in millions)
Cash flows from operating activities:
Net income.................................................................. $ 77.7 $ 56.6
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization............................................... 29.4 30.7
Deferred income taxes....................................................... 15.6 31.8
Restructuring charge payments............................................... (2.6) (5.2)
Changes in assets and liabilities: (1)
Receivables............................................................... (43.2) (3.2)
Inventories............................................................... (14.3) (48.4)
Accounts payable and accrued liabilities.................................. (18.6) (1.3)
Other assets and liabilities, net......................................... 18.8 (71.3)
--------------- ---------------
Net cash provided by (used in) operating activities............... 62.8 (10.3)
Cash flows from investing activities:
Capital expenditures........................................................ (16.7) (19.4)
Cash paid for acquired businesses........................................... (10.1) -
Proceeds from sales of property, plant and equipment and other.............. 3.3 3.9
--------------- ---------------
Net cash used in investing activities............................. (23.5) (15.5)
Cash flows from financing activities:
Proceeds from issuances of debt............................................. 1.0 0.3
Repayments of debt.......................................................... (0.8) (166.7)
Dividends................................................................... (32.9) (32.1)
Subsidiary purchase of parent shares........................................ (109.5) (5.4)
Activity under employee stock plans and other............................... 12.2 0.4
--------------- ---------------
Net cash used in financing activities............................. (130.0) (203.5)
Effect of exchange rate changes on cash and cash equivalents.................... 1.7 (1.4)
--------------- ---------------
Decrease in cash and cash equivalents........................................... (89.0) (230.7)
Cash and cash equivalents, beginning of period.................................. 463.7 302.0
--------------- ---------------
Cash and cash equivalents, end of period........................................ $ 374.7 $ 71.3
=============== ===============
(1) Net of the effects of acquisitions and translation.
The accompanying notes are an integral part of these statements.
-4-
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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.
The financial information presented as of any date other than December
31 has been prepared from the books and records without audit. Financial
information as of December 31 has been derived from Cooper's audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods indicated, have been included. For further
information regarding Cooper's accounting policies, refer to the Consolidated
Financial Statements and related notes for the year ended December 31, 2003
included in Part IV of Cooper's 2003 Annual Report on Form 10-K.
NOTE 2. STOCK-BASED COMPENSATION
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 grant
date 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 that generally vest over periods ranging from three to
five years. Cooper also has an Employee Stock Purchase Plan which provides
employees an option to purchase common stock. There is currently no outstanding
offering under the Employee Stock Purchase Plan.
Effective January 1, 2003, Cooper adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), as amended. Cooper utilized the prospective method of adoption. Cooper
accounts for stock-based compensation awards granted, modified or settled prior
to January 1, 2003 using the intrinsic value method of accounting as prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations ("APB No. 25"). 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 of stock options granted was estimated using the
Black-Scholes option-pricing model. The fair value of restricted stock and
performance-based awards granted was measured at the market price on the grant
date. Stock-based compensation expense was $4.3 million and $2.1 million during
the three months ended March 31, 2004 and 2003, respectively.
-5-
The following table presents pro forma income and earnings per share as
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
----------- ----------
(in millions)
Net income, as reported....................................................... $ 77.7 $ 56.6
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects............... 2.5 1.2
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................................ (2.6) (4.7)
----------- -----------
Pro forma net income.......................................................... $ 77.6 $ 53.1
=========== ===========
Earnings per share:
Basic - as reported...................................................... $ .83 $ .62
Basic - pro forma........................................................ $ .83 $ .58
Diluted - as reported.................................................... $ .81 $ .61
Diluted - pro forma...................................................... $ .81 $ .58
NOTE 3. ACQUISITIONS
During March of 2004, Cooper acquired a manufacturer of specification
and commercial grade lighting fixtures, for $10.1 million.
NOTE 4. INVENTORIES
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(in millions)
Raw materials................................................................ $ 187.0 $ 182.8
Work-in-process.............................................................. 126.0 113.9
Finished goods............................................................... 345.8 346.3
Perishable tooling and supplies.............................................. 21.0 20.6
----------- ------------
679.8 663.6
Allowance for excess and obsolete inventory.................................. (49.0) (47.6)
Excess of current standard costs over LIFO costs............................. (60.8) (64.0)
----------- ------------
Net inventories................................................... $ 570.0 $ 552.0
=========== ============
-6-
NOTE 5. LONG-TERM DEBT
At March 31, 2004, $225 million of an existing shelf registration to
issue up to $500 million of debt securities remains available.
NOTE 6. SHAREHOLDERS' EQUITY
At March 31, 2004, 92,287,624 Class A common shares, $.01 par value
were issued and outstanding (excluding the 1,987,000 Class A common shares held
by wholly-owned subsidiaries as discussed below) compared to 93,797,765 Class A
common shares, $.01 par value (excluding the 1,130 Class A common shares held by
wholly-owned subsidiaries) at December 31, 2003. During the first quarter of
2004, Cooper issued 476,859 Class A common shares primarily in connection with
employee incentive and benefit plans and Cooper's dividend reinvestment program.
During the first quarter of 2004, Cooper's wholly-owned subsidiaries purchased
1,987,000 Class A common shares for $109.5 million. The share purchases are
recorded by Cooper's wholly-owned subsidiaries as an investment in its parent
company that is eliminated in consolidation. During the first quarter of 2004,
1,130 Class A common shares held by wholly-owned subsidiaries were issued
primarily to satisfy the matching obligation under the Retirement Savings and
Stock Ownership Plan, leaving 1,987,000 Class A common shares held by
wholly-owned subsidiaries at March 31, 2004.
A wholly-owned subsidiary also owns all the issued and outstanding
Class B common shares. The subsidiary's investment in the Class B common shares
is eliminated in consolidation. If at any time a dividend is declared and paid
on the Class A common shares, a like dividend shall be declared and paid on the
Class B common shares in an equal amount per share. During the first quarter of
2004, Cooper's wholly-owned subsidiaries waived their rights to receive the
regular quarterly dividend of $.35 per share (or an aggregate of $19.8 million)
on all shares held.
NOTE 7. SEGMENT INFORMATION
REVENUES OPERATING EARNINGS
------------------------ ------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
(in millions)
Electrical Products................................... $ 890.7 $ 804.2 $ 120.8 $ 100.3
Tools & Hardware...................................... 173.9 153.6 11.8 6.5
--------- --------- ---------- ----------
Total segments..................................... $ 1,064.6 $ 957.8 132.6 106.8
========= =========
General Corporate expense............................. 18.4 16.0
Interest expense, net................................. 17.1 20.1
---------- ----------
Income before income taxes............................ $ 97.1 $ 70.7
========== ==========
-7-
NOTE 8. PENSION AND OTHER POSTRETIREMENT BENEFITS
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- --------------------
2004 2003 2004 2003
-------- ------- ------ -------
(in millions)
Components of net periodic benefit cost:
Service cost.......................................... $ 4.4 $ 4.5 $ - $ 0.1
Interest cost......................................... 10.1 10.6 2.1 2.3
Expected return on plan assets........................ (11.5) (10.6) - -
Amortization of unrecognized transition obligation.... - 0.1 - -
Amortization of prior service cost.................... 0.2 0.1 - -
Recognized actuarial (gain) loss...................... 1.7 1.9 (0.7) (0.9)
-------- ------- ------ -------
Net periodic benefit cost............................. $ 4.9 $ 6.6 $ 1.4 $ 1.5
======== ======= ====== =======
In accordance with FASB Staff Position 106-1, Cooper has elected to
defer recognition of the effects of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 on the accumulated postretirement benefit
obligation and net postretirement benefit costs until specific accounting
guidance is finalized. Finalization of pending guidance could result in a
reduction in the accumulated postretirement benefit obligation and future net
periodic postretirement benefit cost.
NOTE 9. NET INCOME PER COMMON SHARE
BASIC DILUTED
------------------------ -----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(in millions)
Net income applicable to common stock................. $ 77.7 $ 56.6 $ 77.7 $ 56.6
========= ========= ========= =========
Weighted average common shares outstanding............ 93.5 92.0 93.5 92.0
========= =========
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards................ 2.2 0.4
--------- ---------
Weighted average common shares
and common share equivalents...................... 95.7 92.4
========= =========
Options and employee awards are not considered in the calculations if the effect
would be antidilutive.
-8-
NOTE 10. NET INCOME AND OTHER NONOWNER CHANGES IN EQUITY
The components of net income and other nonowner changes in equity, net
of related taxes, were as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
----------- -----------
(in millions)
Net income........................................................................ $ 77.7 $ 56.6
Foreign currency translation gains (losses)....................................... 14.9 (8.5)
Change in fair value of derivatives............................................... 1.4 (0.1)
----------- -----------
Net income and other nonowner changes in equity................................... $ 94.0 $ 48.0
=========== ===========
NOTE 11. RESTRUCTURING CHARGES
During the fourth quarter of 2003, Cooper recorded net restructuring
charges of $16.9 million, or $13.6 million after taxes ($.14 per diluted common
share). This represented costs associated with restructuring projects undertaken
in 2003 of $18.4 million, partially offset by a $1.5 million adjustment of
estimates for restructuring projects initiated in 2002.
The most significant action included in the charges was an announcement
of the closing of Cooper Wiring Devices' manufacturing operations in New York
City. This action will include the withdrawal from a multiple-employer pension
plan. Cooper recorded a $12.5 million obligation as an estimate of Cooper's
portion of unfunded benefit obligations of the plan. The remaining $5.9 million
charge primarily represents severance for announced employment reductions at
several locations. The 2003 net impact of the charges was $16.4 million on the
Electrical Products segment, $(0.4) million on the Tools & Hardware segment and
$0.9 million related to General Corporate. As of March 31, 2004, Cooper had paid
a total of $3.9 million for these actions, all of which was for severance and
related costs.
A total of 114 salaried and 150 hourly personnel were scheduled to be
eliminated as a result of these actions, and substantially all personnel were
terminated as of March 31, 2004. The majority of the remaining severance
obligation will be paid in the second quarter of 2004. The multiple-employer
pension obligation is expected to be paid over 15 years, beginning in 2005.
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size Cooper'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 were sold, outsourced, discontinued or moved to a lower cost environment.
Cooper recorded a provision for these announced actions of $39.1 million ($15.0
million of which was non-cash), or $29.8 million after taxes ($.32 per diluted
common share). Of this amount, $24.0 million ($11.0 million of which was
non-cash) was associated with the Electrical Products segment, $12.7 million
($3.4 million of which was non-cash) was associated with the Tools & Hardware
segment and the remainder was related to General Corporate.
-9-
The following table reflects activity related to the fourth quarter
2002 restructuring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
--------- --------- ---------------
($ in millions)
2002 Restructuring 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
Employees terminated.............................. (982) - -
Cash expenditures................................. - (14.9) (2.9)
Reversal of excess accruals....................... (9) (0.9) (0.6)
----- -------- --------
Balance at December 31, 2003...................... 31 0.4 2.3
Employees terminated.............................. (31) - -
Cash expenditures................................. - (0.4) (1.0)
----- -------- --------
Balance at March 31, 2004......................... - $ - $ 1.3
===== ======== ========
A total of 435 salaried and 771 hourly positions were scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions were replaced
ultimately as a result of Cooper's ongoing efforts to relocate production
capacity to lower cost locations. Substantially all of the closure and
rationalization activities were initiated and completed by the end of 2003.
See "Restructuring Charges" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
NOTE 12: 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 March 31, 2004, a
total of 120,144 Abex Claims were filed, of which 63,114 claims have been
resolved leaving 57,030 Abex Claims pending at March 31, 2004, that are the
responsibility of Federal-Mogul. During the three months ended March 31, 2004,
5,168 claims were filed and 10,833 claims were resolved. Since August 28, 1998,
the average indemnity payment for resolved Abex Claims was $1,932 before
insurance. A total of $52.3 million was spent on defense costs for the period
August 28, 1998 through March 31, 2004. Historically, existing insurance
coverage has provided 50% to 80% of the total defense and indemnity payments for
Abex Claims.
-10-
With the assistance of independent advisors, Bates White, LLC, in the
fourth quarter of 2001 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, 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. 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.
Cooper's fourth-quarter 2001 analysis of the contingent liability
exposure assumed that the liabilities would be settled within the Federal-Mogul
bankruptcy proceedings. This analysis assumed that representatives of
Federal-Mogul, its bankruptcy committees and the future claimants (the
"Representatives") would reach similar conclusions regarding the potential
future liabilities and insurance recoveries as Cooper did based on the Bates
White, LLC analysis. Throughout 2003, Cooper worked towards resolution of the
indemnification issues and future handling of the Abex-related claims within the
Federal-Mogul bankruptcy proceedings. This included negotiations with the
Representatives regarding participation in Federal-Mogul's proposed 524(g)
asbestos trust. Based on the status of the recent negotiations in 2004, Cooper
concluded that it is probable that Federal-Mogul will reject the 1998 Agreement.
Cooper also concluded that the Representatives would require any negotiated
settlement through the Federal-Mogul bankruptcy to be at the high end of the
Bates White, LLC liability analysis and with substantially lower insurance
recovery assumptions and higher administrative costs.
While Cooper believes that the insurance has significant additional
value, extensive litigation with the insurance carriers may be required to
receive recoveries and there is risk that court decisions could reduce the value
of the recoveries. Additionally, the assumptions on liability payments could
prove inaccurate over time. If Cooper is unable to reach a settlement with the
Representatives and the 1998 Agreement is rejected, Cooper would be required to
reflect an accrual for the total estimated liability and a receivable for the
probable insurance recoveries. Generally accepted accounting principles provide
relatively conservative requirements for the recording of insurance recoveries
and a substantial portion of the potential insurance recoveries would not be
reflected as receivables until future events occur.
During late February and early March 2004, Cooper reassessed the
accrual required based on the current status of the negotiations with the
Representatives and the liability and insurance receivable that would be
required to be recorded if this matter is not settled within the Federal-Mogul
bankruptcy. Cooper concluded that resolution within the Federal-Mogul proposed
524(g) asbestos trust would likely be within the range of the liabilities, net
of insurance recoveries, that Cooper would accrue if this matter were not
settled within the Federal-Mogul bankruptcy. Accordingly, Cooper recorded a
$126.0 million after-tax discontinued operations charge, net of a $70.9 million
income tax benefit, in the fourth quarter of 2003.
Cooper is continuing negotiations with the Representatives. At this
time, the exact manner in which this issue will be resolved is not known. At
March 31, 2004, the accrual for potential liabilities related to the Automotive
Products sale and the Federal-Mogul bankruptcy was $230.5 million.
-11-
NOTE 13. CONSOLIDATING FINANCIAL INFORMATION
Cooper fully and unconditionally guarantees the registered debt
securities of Cooper Industries, Inc. ("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
THREE MONTHS ENDED MARCH 31, 2004
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ---------- ------------ ------------- ---------
Revenues.............................. $ - $ 67.0 $ 1,002.7 $ (5.1) $ 1,064.6
Cost of sales......................... 0.4 43.4 703.3 (5.1) 742.0
Selling and administrative expenses... 2.0 25.9 180.5 - 208.4
Interest expense, net................. (0.2) 11.8 5.5 - 17.1
Equity in earnings of subsidiaries,
net of tax........................ 81.1 123.4 34.7 (239.2) -
Intercompany income (expense) ........ (1.2) (126.3) 127.5 - -
---------- ---------- ------------ ---------- ---------
Income (loss) before income taxes 77.7 (17.0) 275.6 (239.2) 97.1
Income tax expense (benefit).......... - (51.7) 71.1 - 19.4
---------- ---------- ------------ ---------- ---------
Net income........................ $ 77.7 $ 34.7 $ 204.5 $ (239.2) $ 77.7
========== ========== ============ ========== =========
CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ---------- ------------ ------------- ---------
Revenues.............................. $ - $ 67.4 $ 896.7 $ (6.3) $ 957.8
Cost of sales......................... - 44.1 636.9 (6.3) 674.7
Selling and administrative expenses... 2.1 23.9 166.3 - 192.3
Interest expense, net................. - 15.0 5.1 - 20.1
Equity in earnings of subsidiaries,
net of tax........................ 59.0 86.8 13.8 (159.6) -
Intercompany income (expense)......... - (103.2) 103.5 (0.3) -
---------- ---------- ------------ ---------- ---------
Income (loss) before income taxes 56.9 (32.0) 205.7 (159.9) 70.7
Income tax expense (benefit).......... - (45.8) 59.9 - 14.1
---------- ---------- ------------ ---------- ---------
Net income........................ $ 56.9 $ 13.8 $ 145.8 $ (159.9) $ 56.6
========== ========== ============ ========== =========
-12-
CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------- ------------- -----------
Cash and cash equivalents............. $ 101.4 $ 89.3 $ 184.0 $ - $ 374.7
Receivables........................... 0.1 54.2 730.5 - 784.8
Intercompany receivables.............. 469.1 - 703.8 (1,172.9) -
Inventories........................... - 13.6 556.4 - 570.0
Deferred income taxes and
other current assets............... 1.0 210.5 (29.7) - 181.8
--------- ------------ ------------ ------------ -----------
Total current assets........... 571.6 367.6 2,145.0 (1,172.9) 1,911.3
--------- ------------ ------------ ------------ -----------
Property, plant and equipment, less
accumulated depreciation........... - 61.3 638.1 - 699.4
Goodwill.............................. - 41.4 2,038.5 - 2,079.9
Investment in subsidiaries............ 2,584.8 6,123.1 12.5 (8,720.4) -
Investment in parent.................. - 2,289.5 109.5 (2,399.0) -
Intercompany notes receivable......... 0.1 81.6 4,943.5 (5,025.2) -
Deferred income taxes and other
noncurrent assets.................. - 187.6 40.3 - 227.9
--------- ------------ ------------ ------------ -----------
Total assets................... $ 3,156.5 $ 9,152.1 $ 9,927.4 $ (17,317.5) $ 4,918.5
========= ============ ============ ============ ===========
Short-term debt....................... $ - $ - $ 6.5 $ - $ 6.5
Accounts payable...................... 32.6 28.0 295.3 - 355.9
Accrued liabilities................... 1.5 135.8 265.0 - 402.3
Accrual for discontinued operations... - 230.5 - - 230.5
Intercompany payables................. - 1,172.9 - (1,172.9) -
Current maturities of long-term debt.. - - 0.4 - 0.4
--------- ------------ ------------ ------------ -----------
Total current liabilities...... 34.1 1,567.2 567.2 (1,172.9) 995.6
--------- ------------ ------------ ------------ -----------
Long-term debt........................ - 926.3 410.4 - 1,336.7
Intercompany notes payable............ 130.3 4,813.2 81.7 (5,025.2) -
Other long-term liabilities........... - 330.6 160.1 - 490.7
--------- ------------ ------------ ------------ -----------
Total liabilities.............. 164.4 7,637.3 1,219.4 (6,198.1) 2,823.0
--------- ------------ ------------ ------------ -----------
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........ 2,821.4 8.7 7,204.5 (9,600.4) 434.2
Retained earnings..................... 185.9 1,653.3 1,494.8 (1,526.4) 1,807.6
Accumulated other nonowner changes
in equity.......................... (16.7) (147.2) (132.3) 149.0 (147.2)
--------- ------------ ------------ ------------ -----------
Total shareholders' equity..... 2,992.1 1,514.8 8,708.0 (11,119.4) 2,095.5
--------- ------------ ------------ ------------ -----------
Total liabilities and
shareholders'equity... ...... $ 3,156.5 $ 9,152.1 $ 9,927.4 $ (17,317.5) $ 4,918.5
========= ============ ============ ============ ===========
-13-
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ------------- ------------- ------------- -----------
Cash and cash equivalents................ $ 96.4 $ 257.2 $ 110.1 $ - $ 463.7
Receivables.............................. - 49.8 688.8 - 738.6
Intercompany receivables................. 465.9 - 645.9 (1,111.8) -
Inventories.............................. - 14.2 537.8 - 552.0
Deferred income taxes and other
current assets........................ 1.6 227.8 (22.9) - 206.5
------------- ------------- ------------- ------------- -----------
Total current assets............... 563.9 549.0 1,959.7 (1,111.8) 1,960.8
------------- ------------- ------------- ------------- -----------
Property, plant and equipment, less
accumulated depreciation.............. - 60.1 651.3 - 711.4
Goodwill................................. - 41.4 2,015.2 - 2,056.6
Investment in subsidiaries............... 2,485.6 5,849.1 (40.5) (8,294.2) -
Investment in parent..................... - 2,308.2 - (2,308.2) -
Intercompany notes receivable............ 0.1 81.6 4,905.0 (4,986.7) -
Deferred income taxes and other
noncurrent assets..................... - 186.3 50.2 - 236.5
------------- ------------- ------------- ------------- -----------
Total assets....................... $ 3,049.6 $ 9,075.7 $ 9,540.9 $ (16,700.9) $ 4,965.3
============= ============= ============= ============= ===========
Short-term debt.......................... $ - $ - $ 6.2 $ - $ 6.2
Accounts payable......................... 32.4 33.0 263.7 - 329.1
Accrued liabilities...................... 1.3 153.5 278.9 - 433.7
Accrual for discontinued operations...... - 252.5 - - 252.5
Intercompany payables.................... - 1,111.3 0.5 (1,111.8) -
Current maturities of long-term debt..... - - 0.4 - 0.4
------------- ------------- ------------- ------------- -----------
Total current liabilities.......... 33.7 1,550.3 549.7 (1,111.8) 1,021.9
------------- ------------- ------------- ------------- -----------
Long-term debt........................... - 922.4 414.3 - 1,336.7
Intercompany notes payable............... 91.9 4,813.2 81.7 (4,986.8) -
Other long-term liabilities.............. - 328.0 160.5 - 488.5
------------- ------------- ------------- ------------- -----------
Total liabilities.................. 125.6 7,613.9 1,206.2 (6,098.6) 2,847.1
------------- ------------- ------------- ------------- -----------
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........... 2,814.4 6.9 7,065.2 (9,368.5) 518.0
Retained earnings........................ 141.2 1,618.6 1,291.3 (1,288.3) 1,762.8
Accumulated other nonowner changes
in equity............................. (33.1) (163.7) (162.8) 196.1 (163.5)
------------- ------------- ------------- ------------- -----------
Total shareholders' equity......... 2,924.0 1,461.8 8,334.7 (10,602.3) 2,118.2
------------- ------------- ------------- ------------- -----------
Total liabilities and
shareholders' equity............. $ 3,049.6 $ 9,075.7 $ 9,540.9 $ (16,700.9) $ 4,965.3
============= ============= ============= ============= ===========
-14-
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------ ------------- ----------
Net cash provided by (used in)
operating activities............... $ (1.1) $ (55.3) $ 119.2 $ - $ 62.8
Cash flows from investing activities:
Capital expenditures................ - (3.6) (13.1) - (16.7)
Cash paid for acquired businesses... - - (10.1) - (10.1)
Intercompany sale (purchase) of
investment in parent............. - 109.5 (109.5) - -
Intercompany sale (purchase) of
investment in subsidiaries....... - (182.1) 182.1 - -
Loans to affiliates................. - - (38.5) 38.5 -
Dividends from subsidiaries......... - 1.0 - (1.0) -
Other............................... - 0.7 2.6 - 3.3
----------- ------------ ------------- ----------- ----------
Net cash provided by (used in)
investing activities........... - (74.5) 13.5 37.5 (23.5)
Cash flows from financing activities:
Proceeds from issuances of debt..... - - 1.0 - 1.0
Repayments of debt.................. - - (0.8) - (0.8)
Borrowings from affiliates.......... 38.5 - - (38.5) -
Other intercompany financing
activities........................ 0.5 59.2 (59.7) - -
Dividends........................... (32.9) - - - (32.9)
Dividends paid to affiliates........ - - (1.0) 1.0 -
Subsidiary purchase of parent shares - (109.5) - - (109.5)
Employee stock plan activity and
other............................. - 12.2 - - 12.2
----------- ------------ ------------- ----------- ----------
Net cash provided by (used in)
financing activities............ 6.1 (38.1) (60.5) (37.5) (130.0)
Effect of exchange rate changes on
cash and cash equivalents........... - - 1.7 - 1.7
----------- ------------ ------------- ----------- ----------
Increase (decrease) in cash and cash
equivalents......................... 5.0 (167.9) 73.9 - (89.0)
Cash and cash equivalents, beginning
of period........................... 96.4 257.2 110.1 - 463.7
----------- ------------ ------------- ----------- ----------
Cash and cash equivalents, end of
period.............................. $ 101.4 $ 89.3 $ 184.0 $ - $ 374.7
=========== ============ ============= =========== ==========
-15-
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------ ------------- --------
Net cash provided by (used in)
operating activities................ $ (1.5) $ (152.0) $ 143.2 $ - $ (10.3)
Cash flows from investing activities:
Capital expenditures................ - (4.5) (14.9) - (19.4)
Loans to affiliates................. - 1.0 - (1.0) -
Other............................... - - 3.9 - 3.9
----------- ------------ ------------ ----------- ----------
Net cash used in investing
activities....................... - (3.5) (11.0) (1.0) (15.5)
Cash flows from financing activities:
Proceeds from issuances of debt..... - - 0.3 - 0.3
Repayments of debt.................. - (166.6) (0.1) - (166.7)
Borrowings from affiliates.......... - - (1.0) 1.0 -
Other intercompany financing
activities........................ 1.1 115.8 (116.9) - -
Dividends........................... (32.1) - - - (32.1)
Subsidiary purchase of parent shares - (5.4) - - (5.4)
Employee stock plan activity and
other............................. - 0.4 - - 0.4
----------- ------------ ------------ ------------ ----------
Net cash used in financing
activities....................... (31.0) (55.8) (117.7) 1.0 (203.5)
Effect of exchange rate changes on
cash and cash equivalents.......... - - (1.4) - (1.4)
----------- ------------ ------------ ------------ ----------
Increase (decrease) in cash and cash
equivalents........................ (32.5) (211.3) 13.1 - (230.7)
Cash and cash equivalents, beginning
of period.......................... 33.9 244.3 23.8 - 302.0
----------- ------------ ------------ ------------ ----------
Cash and cash equivalents, end of
period............................. $ 1.4 $ 33.0 $ 36.9 $ - $ 71.3
=========== ============ ============ =========== ==========
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003
Net income for the first quarter of 2004 was $77.7 million on revenues
of $1,064.6 million compared with 2003 first quarter net income of $56.6 million
on revenues of $957.8 million. First quarter diluted earnings per share
increased 33% to $.81 from $.61 in 2003.
REVENUES:
Revenues for the first quarter of 2004 increased 11% compared to the
first quarter of 2003. The impact of foreign currency translation increased
reported revenues by approximately 3% for the quarter.
Electrical Products segment revenues increased 11% compared to the
first quarter of 2003. Excluding the impact of favorable currency translation,
revenues increased 8% in the first quarter of 2004. All of Cooper's Electrical
Products businesses experienced real revenue growth during the quarter. Retail
channel sales were very strong during the period, accounting for about one-third
of the quarter's incremental revenue growth and positively impacting sales in
both the lighting and wiring devices businesses. Continued strong residential
construction and improving industrial and electronic markets as well as new
product introductions and key market penetration programs bolstered sales of
Cooper's hazardous-duty, circuit protection and support systems products.
Increased maintenance spending by utilities resulted in revenue gains in
Cooper's power transmission and distribution equipment business. Cooper's
European lighting and security businesses benefited from new product
introductions and improved penetration of European industrial markets.
Tools & Hardware segment revenues for the first quarter of 2004
increased 13% from the first quarter of 2003. Excluding the impact of favorable
currency translation, revenues increased 7% in the first quarter of 2004. Tools
& Hardware segment revenues were driven by improved industrial markets, strong
retail channel sales and new product introductions. These gains were partially
offset by lower shipments of assembly equipment to the worldwide automotive
industry.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 69.7% for the first
quarter of 2004 compared to 70.4% for the comparable 2003 quarter. The decrease
in the cost of sales percentage was primarily due to benefits of restructuring
activities undertaken during 2003 and ongoing sourcing and productivity
initiatives.
Electrical Products segment cost of sales, as a percentage of revenues,
was 69.0% for the first quarter of 2004 compared to 70.0% for the first quarter
of 2003. The decrease in the cost of sales percentage was primarily a result of
reduced material cost and the ongoing focus on adjusting the segment's cost
structure. Tools & Hardware segment cost of sales, as a percentage of revenues,
was 72.9% for the first quarter of 2004 compared to 73.0% for the first quarter
of 2003. The slight decrease in cost of sales percentage reflects improvements
in the segment's cost structure partially offset by continuing actions to reduce
the cost base of the business and product mix during the quarter.
Selling and administrative expenses, as a percentage of revenues, for
the first quarter of 2004 were 19.6% compared to 20.1% for the first quarter of
2003. The decrease in the selling and administrative expenses percentage is due
to increased revenues, partially offset by higher stock-based compensation and
other incentive programs and selling and marketing costs related to Cooper's
sales growth initiatives.
-17-
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the first quarter of 2004 were 17.4% compared to
17.5% for the first quarter of 2003. The decrease in selling and administrative
expenses percentage is primarily due to improved sales volumes partially offset
by continued investment in market penetration programs.
Tools & Hardware segment selling and administrative expenses, as a
percentage of revenues, for the first quarter of 2004 were 20.3% compared to
22.7% for the first quarter of 2003. The decrease in the selling and
administrative expenses percentage is primarily due to continued efforts to
control costs, coupled with the impact of increased revenues.
Interest expense, net for the first quarter of 2004 decreased $3.0
million from the 2003 first quarter primarily as a result of lower average
interest rates and slightly lower average debt balances, along with higher
average cash and cash equivalents balances. Average debt balances were $1.34
billion and $1.37 billion and average interest rates were 5.6% and 6.1% for the
first quarter of 2004 and 2003, respectively. The decrease in average interest
rates primarily resulted from the benefit of interest-rate swaps that
effectively converted $300 million of 5.25% fixed-rate debt to variable-rate
debt at the six month LIBOR rate plus 1.91%.
OPERATING EARNINGS:
Electrical Products segment first quarter 2004 operating earnings
increased 20% to $120.8 million from $100.3 million for the same quarter of last
year. The increase was primarily due to the combination of revenue increases,
cost reduction actions and productivity improvement initiatives.
Tools & Hardware segment first quarter 2004 operating earnings
increased 82% to $11.8 million compared to $6.5 million in the first quarter of
2003. The increase primarily reflects the favorable impact of manufacturing
rationalization efforts undertaken throughout 2003 and the impact of additional
sales volumes, partially offset by lower volume in the assembly equipment
business following record shipments in 2003.
General Corporate expense increased $2.4 million to $18.4 million
during the first quarter of 2004 compared to $16.0 million during the first
quarter of 2003. This increase primarily resulted from the incremental impact of
stock-based compensation expenses.
INCOME TAXES:
The effective tax rate was 20.0% for the three months ended March 31,
2004 and 19.9% for the three months ended March 31, 2003.
RESTRUCTURING CHARGES:
During the fourth quarter of 2003, Cooper recorded net restructuring
charges of $16.9 million, or $13.6 million after taxes ($.14 per diluted common
share). This represented costs associated with restructuring projects undertaken
in 2003 of $18.4 million, partially offset by a $1.5 million adjustment of
estimates for restructuring projects initiated in 2002.
The most significant action included in the charges was an announcement
of the closing of Cooper Wiring Devices' manufacturing operations in New York
City. This action will include the withdrawal from a multiple-employer pension
plan. Cooper recorded a $12.5 million obligation as an estimate of Cooper's
portion of unfunded benefit obligations of the plan. The remaining $5.9 million
charge primarily represents severance for announced employment reductions at
several locations. The 2003 net impact of the charges was $16.4 million on the
Electrical Products segment, $(0.4) million on the Tools & Hardware segment and
$0.9 million related to General Corporate. As of March 31, 2004, Cooper had paid
a total of $3.9 million for these actions, substantially all of which was for
severance and related costs.
-18-
A total of 114 salaried and 150 hourly personnel were scheduled to be
eliminated as a result of these actions, and substantially all of the personnel
were terminated as of March 31, 2004. The majority of the remaining severance
obligation will be paid in the second quarter of 2004. The multiple-employer
pension obligation is expected to be paid over 15 years, beginning in 2005.
Cooper estimates the annual savings from the personnel reductions will be
approximately $6.0 million, (net of the anticipated additional employees added
in lower-cost regions) with most of the savings beginning in the first quarter
of 2004. The savings from the withdrawal from the multiple-employer pension plan
are approximately $1 million per year and are expected to begin in 2005. The
majority of the eliminated costs previously were reflected as cost of sales.
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size Cooper'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 were sold, outsourced, discontinued or moved to a lower cost environment.
Cooper recorded a provision for these announced actions of $39.1 million ($15.0
million of which was non-cash), or $29.8 million after taxes ($.32 per diluted
common share). Of this amount, $24.0 million ($11.0 million of which was
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, $1.3 million remained to be expended
at March 31, 2004.
The following table reflects activity related to the fourth quarter
2002 restructuring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
--------- --------- ---------------
($ in millions)
2002 Restructuring 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
Employees terminated................................ (982) - -
Cash expenditures................................... - (14.9) (2.9)
Reversal of excess accruals......................... (9) (0.9) (0.6)
--------- -------- --------
Balance at December 31, 2003........................ 31 0.4 2.3
Employees terminated................................ (31) - -
Cash expenditures................................... - (0.4) (1.0)
--------- -------- --------
Balance at March 31, 2004........................... - $ - $ 1.3
========= ======== ========
A total of 435 salaried and 771 hourly positions were scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions were replaced
ultimately as a result of Cooper's ongoing efforts to relocate production
capacity to lower cost locations. Substantially all of the closure and
rationalization activities were initiated and completed by the end of 2003. The
expenditures related to the 2002 restructuring charge were funded from cash
provided by operating activities.
As of March 31, 2004, Cooper anticipates incurring approximately $0.5
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 actions was approximately
$10 million in pretax savings, the majority of which benefited the second half
of the year. The initial savings were realized from personnel reductions that
principally impacted selling and administrative expenses and lower costs of
sales. Cooper expects that incremental savings of $25.0 to $30.0 million will be
realized in 2004, largely reflected as lower cost of sales.
-19-
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY:
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $37 million during the first
quarter of 2004. This $46 million increase in receivables and an $18 million
increase in inventories, partially offset by an increase in accounts payable
were driven by increased sales volumes. Operating working capital turnover
(defined as annualized revenues divided by average quarterly operating working
capital) for the 2004 first quarter of 4.3 turns increased from 3.9 turns in the
same period of 2003.
Cash provided by operating activities was $63 million during the 2004
first quarter. This cash, plus an additional $89 million of cash and cash
equivalents and $12 million of cash received from employee stock activity were
primarily used to fund capital expenditures of $17 million, an acquisition of
$10 million, dividends of $33 million and share purchases of $110 million.
Cash used in operating activities was $10 million in the first quarter
of 2003. An approximate $57 million timing-related increase in the funding of
certain employee benefit trusts was the primary cause of the use of cash. The
benefits prefunded in the first quarter of 2003 were paid during the remainder
of 2003. A decrease in Cooper's cash and cash equivalents balance of $231
million was primarily used for capital expenditures of $19 million, dividends of
$32 million, share purchases of $5 million and net debt repayments of $166
million.
Cooper is continuing to focus on initiatives to maximize cash flows.
Cooper currently anticipates a continuation of its long-term ability to annually
generate approximately $200 million in cash flow available for acquisitions,
debt repayments and common stock repurchases.
In connection with acquisitions accounted for 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. Cash flows from operating activities are
reduced by the amounts expended against the various accruals established in
connection with each acquisition. Spending against these accruals was $1.9
million and $2.0 million during the three months ended March 31, 2004 and 2003,
respectively.
CAPITAL RESOURCES:
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-total capitalization ratio
within this range. Excess cash flows are utilized to fund acquisitions or to
purchase shares of Cooper common stock. Cooper's debt-to-total capitalization
ratio was 39.1% at March 31, 2004, 38.8% at December 31, 2003 and 38.8% at March
31, 2003.
At March 31, 2004 and December 31, 2003, Cooper had no commercial paper
outstanding and cash and cash equivalents of $374.7 million and $463.7 million,
respectively.
Cooper's practice is to back up outstanding commercial paper balances
with a combination of cash and committed bank credit facilities. As of March 31,
2004, committed bank credit facilities totalled $450 million and mature on
November 17, 2004. Cooper intends to enter into a new committed bank credit
facility during 2004. With no commercial paper outstanding and more than
adequate cash and cash equivalents available to fund operations, Cooper is not
currently dependent upon its committed bank credit facilities to finance its
operations. 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
-20-
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.
At March 31, 2004, $225 million of Cooper Ohio's existing shelf
registration to issue up to $500 million of debt securities remains available.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
As of March 31, 2004, there have been no material changes to Cooper's
off-balance sheet arrangements and contractual obligations as described in its
Annual Report on Form 10-K for the year ended December 31, 2003.
BACKLOG
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
MARCH 31,
------------------------------
2004 2003
------------- -------------
(in millions)
Electrical Products......................................................... $ 327.4 $ 245.4
Tools & Hardware............................................................ 86.7 96.3
------------- -------------
$ 414.1 $ 341.7
============= =============
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q 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,
potential liability exposure resulting from Federal-Mogul Corporation's
("Federal-Mogul") bankruptcy filing, and any statements regarding future
revenues, cost 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, the successful implementation
of Cooper's strategic initiatives, changes in mix of products sold, mergers and
acquisitions and their integration into Cooper, the timing and amount of any
share repurchases, 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.
-21-
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by 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.
PART II - OTHER INFORMATION
Item 1. 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 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 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 March 31, 2004, a
total of 120,144 Abex Claims were filed, of which 63,114 claims have been
resolved leaving 57,030 Abex Claims pending at March 31, 2004, that are the
responsibility of Federal-Mogul. During the three months ended March 31, 2004,
5,168 claims were filed and 10,833 claims were resolved. Since August 28, 1998,
the average indemnity payment for resolved Abex Claims was $1,932 before
insurance. A total of $52.3 million was spent on defense costs for the period
August 28, 1998 through March 31, 2004. 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, LLC, in the
fourth quarter of 2001 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, 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
-22-
industries. All of this data was used to determine a reasonable expectation of
future claims, indemnity payments and insurance coverage. 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.
Cooper's fourth-quarter 2001 analysis of the contingent liability
exposure assumed that the liabilities would be settled within the Federal-Mogul
bankruptcy proceedings. This analysis assumed that representatives of
Federal-Mogul, its bankruptcy committees and the future claimants (the
"Representatives") would reach similar conclusions regarding the potential
future liabilities and insurance recoveries as Cooper did based on the Bates
White, LLC analysis. Throughout 2003, Cooper worked towards resolution of the
indemnification issues and future handling of the Abex-related claims within the
Federal-Mogul bankruptcy proceedings. This included negotiations with the
Representatives regarding participation in Federal-Mogul's proposed 524(g)
asbestos trust. Based on the status of the recent negotiations in 2004, Cooper
concluded that it is probable that Federal-Mogul will reject the 1998 Agreement.
Cooper also concluded that the Representatives would require any negotiated
settlement through the Federal-Mogul bankruptcy to be at the high end of the
Bates White, LLC liability analysis and with substantially lower insurance
recovery assumptions and higher administrative costs.
While Cooper believes that the insurance has significant additional
value, extensive litigation with the insurance carriers may be required to
receive recoveries and there is risk that court decisions could reduce the value
of the recoveries. Additionally, the assumptions on liability payments could
prove inaccurate over time. If Cooper is unable to reach a settlement with the
Representatives and the 1998 Agreement is rejected, Cooper would be required to
reflect an accrual for the total estimated liability and a receivable for the
probable insurance recoveries. Generally accepted accounting principles provide
relatively conservative requirements for the recording of insurance recoveries
and a substantial portion of the potential insurance recoveries would not be
reflected as receivables until future events occur.
During late February and early March 2004, Cooper reassessed the
accrual required based on the current status of the negotiations with the
Representatives and the liability and insurance receivable that would be
required to be recorded if this matter is not settled within the Federal-Mogul
bankruptcy. Cooper concluded that resolution within the Federal-Mogul proposed
524(g) asbestos trust would likely be within the range of the liabilities, net
of insurance recoveries, that Cooper would accrue if this matter were not
settled within the Federal-Mogul bankruptcy. Accordingly, Cooper recorded a
$126.0 million after-tax discontinued operations charge, net of a $70.9 million
income tax benefit, in the fourth quarter of 2003.
Cooper is continuing negotiations with the Representatives. At this
time, the exact manner in which this issue will be resolved is not known. At
March 31, 2004, the accrual for potential liabilities related to the Automotive
Products sale and the Federal-Mogul bankruptcy was $230.5 million.
-23-
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table reflects activity related to equity securities
purchased by Cooper's wholly-owned subsidiaries during the three months ended
March 31, 2004:
PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF SHARES
PURCHASED AS PART OF THAT MAY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY ANNOUNCED PLANS OR UNDER THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE PROGRAMS (1) PROGRAMS (1)
- ---------------- ---------------- -------------- --------------------------- -------------------------
As of 12/31/03 3,461,250
1/01/04 - 1/31/04 104,000 $ 57.28 104,000 3,357,250
2/01/04 - 2/29/04 930,000 55.80 930,000 2,427,250
3/01/04 - 3/31/04 953,000 54.20 953,000 1,474,250
--------- -------- ---------
Total 1,987,000 $ 55.11 1,987,000
(1) On February 9, 2000, Cooper publicly announced that its Board of
Directors authorized the repurchase of up to 5 million shares of Cooper
common stock. Cooper has also announced that the Board authorized the
repurchase of shares issued from time to time under its equity
compensation plans in order to offset the dilution that results from
issuing shares under these plans. For 2004, Cooper's current estimate
is that 1.2 million shares will be issued under equity compensation
plans, which is reflected in the above table.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4. Amended and Restated Voting Agreement dated as of March 31,
2004 between Cooper Industries, Ltd., Cooper Industries, Inc.
and Cooper Bermuda Investments, Ltd.
10. Form of Cooper Industries, Inc. Executive Stock Incentive
Agreement dated as of February 10, 2004.
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 1999 through 2003 and the Three Months Ended
March 31, 2004 and 2003.
23. Consent of Bates White, LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-24-
(b) Reports on Form 8-K
Cooper filed or furnished the following reports on Form 8-K during the
first quarter of 2004:
- Form 8-K dated January 22, 2004, which furnished a copy of a
press release containing Cooper's financial results for the
quarter and year ended December 31, 2003.
- Form 8-K dated January 27, 2004, which furnished "Sales
Trends" information to be posted on Cooper's website.
- Form 8-K dated February 20, 2004, which furnished "Sales
Trends" information to be posted on Cooper's website.
- Form 8-K dated March 8, 2004, which furnished a copy of a
press release setting forth Cooper's results of operations for
the fourth quarter and full year 2003 after reassessing its
year-end 2003 accrual for discontinued operations.
- Form 8-K dated March 18, 2004, which announced a revision to
earnings estimates through a press release titled "Cooper
Industries Expects First Quarter Earnings of Between $.75 and
$.80 Per Share" and furnished "Sales Trends" information to be
posted on Cooper's website.
- Form 8-K dated March 25, 2004, which announced the acquisition
of RSA Lighting.
-25-
Signatures
Pursuant to the requirements 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.
------------------------------------
(Registrant)
Date: May 7, 2004 /s/ Terry A. Klebe
------------------------------------
Terry A. Klebe
Senior Vice President and
Chief Financial Officer
Date: May 7, 2004 /s/ Jeffrey B. Levos
------------------------------------
Jeffrey B. Levos
Vice President and Controller and
Chief Accounting Officer
-26-
Exhibit Index
Exhibit No.
4. Amended and Restated Voting Agreement dated as of March 31, 2004
between Cooper Industries, Ltd., Cooper Industries, Inc. and Cooper
Bermuda Investments, Ltd.
10. Form of Cooper Industries, Inc. Executive Stock Incentive Agreement
dated as of February 10, 2004.
12. Computation of Ratios of Earnings to Fixed Charges for the Calendar
Years 1999 through 2003 and the three months ended March 31, 2004 and
2003.
23. Consent of Bates White, LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.