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EX-10.9 - EX-10.9 - Cooper Industries plc | h67773exv10w9.htm |
EX-31.2 - EX-31.2 - Cooper Industries plc | h67773exv31w2.htm |
EX-32.1 - EX-32.1 - Cooper Industries plc | h67773exv32w1.htm |
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Table of Contents
10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended September 30, 2009
OR
o | 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 plc
Ireland | 98-0632292 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
5 Fitzwilliam Square | Dublin 2, Ireland | |
(Address of principal executive offices) | (Zip Code) |
(713) 209-8400
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Number of registrants common shares outstanding as of September 30, 2009 was 166,830,675.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
COOPER INDUSTRIES PLC
CONSOLIDATED INCOME STATEMENTS
(unaudited)
CONSOLIDATED INCOME STATEMENTS
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Revenues |
$ | 1,286.4 | $ | 1,727.7 | $ | 3,813.0 | $ | 4,998.1 | ||||||||
Cost of sales |
876.5 | 1,170.0 | 2,646.3 | 3,348.1 | ||||||||||||
Selling and administrative expenses |
251.1 | 307.8 | 757.4 | 923.7 | ||||||||||||
Restructuring and asset impairment charges |
6.5 | | 25.7 | 7.6 | ||||||||||||
Operating earnings |
152.3 | 249.9 | 383.6 | 718.7 | ||||||||||||
Interest expense, net |
15.9 | 17.3 | 47.4 | 50.5 | ||||||||||||
Income from continuing operations
before income taxes |
136.4 | 232.6 | 336.2 | 668.2 | ||||||||||||
Income taxes expense |
22.1 | 43.4 | 51.4 | 163.7 | ||||||||||||
Income from continuing operations |
114.3 | 189.2 | 284.8 | 504.5 | ||||||||||||
Income related to discontinued operations,
net of income taxes |
6.6 | 16.6 | 25.5 | 16.6 | ||||||||||||
Net income |
$ | 120.9 | $ | 205.8 | $ | 310.3 | $ | 521.1 | ||||||||
Income per common share: |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | .68 | $ | 1.09 | $ | 1.71 | $ | 2.88 | ||||||||
Income from discontinued operations |
.04 | .10 | .15 | .10 | ||||||||||||
Net income |
$ | .72 | $ | 1.19 | $ | 1.86 | $ | 2.98 | ||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
$ | .68 | $ | 1.08 | $ | 1.69 | $ | 2.85 | ||||||||
Income from discontinued operations |
.04 | .09 | .15 | .09 | ||||||||||||
Net income |
$ | .72 | $ | 1.17 | $ | 1.84 | $ | 2.94 | ||||||||
Cash dividends declared per common share |
$ | .25 | $ | .25 | $ | .75 | $ | .75 | ||||||||
The accompanying notes are an integral part of these statements.
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Table of Contents
COOPER INDUSTRIES PLC
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | (Note 1) | |||||||
(in millions) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 658.4 | $ | 258.8 | ||||
Investments |
3.6 | 21.9 | ||||||
Receivables |
875.8 | 1,011.4 | ||||||
Inventories |
502.7 | 641.8 | ||||||
Current discontinued operations receivable |
13.4 | 17.5 | ||||||
Deferred income taxes and other current assets |
223.9 | 246.5 | ||||||
Total current assets |
2,277.8 | 2,197.9 | ||||||
Property, plant and equipment, less accumulated depreciation |
709.6 | 728.2 | ||||||
Goodwill |
2,635.8 | 2,567.3 | ||||||
Long-term discontinued operations receivable |
166.6 | 174.8 | ||||||
Deferred income taxes and other noncurrent assets |
456.8 | 496.7 | ||||||
Total assets |
$ | 6,246.6 | $ | 6,164.9 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Short-term debt |
$ | 9.4 | $ | 25.6 | ||||
Accounts payable |
428.0 | 492.5 | ||||||
Accrued liabilities |
541.7 | 618.7 | ||||||
Current discontinued operations liability |
49.8 | 50.4 | ||||||
Current maturities of long-term debt |
277.3 | 275.0 | ||||||
Total current liabilities |
1,306.2 | 1,462.2 | ||||||
Long-term debt |
922.6 | 932.5 | ||||||
Postretirement benefits other than pensions |
68.7 | 71.2 | ||||||
Long-term discontinued operations liability |
747.2 | 764.7 | ||||||
Other long-term liabilities |
330.1 | 326.9 | ||||||
Total liabilities |
3,374.8 | 3,557.5 | ||||||
Common stock, $.01 par value |
1.7 | 1.7 | ||||||
Capital in excess of par value |
| | ||||||
Retained earnings |
3,135.7 | 2,935.4 | ||||||
Accumulated other nonowner changes in equity |
(265.6 | ) | (329.7 | ) | ||||
Total shareholders equity |
2,871.8 | 2,607.4 | ||||||
Total liabilities and shareholders equity |
$ | 6,246.6 | $ | 6,164.9 | ||||
The accompanying notes are an integral part of these statements.
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Table of Contents
COOPER INDUSTRIES PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 310.3 | $ | 521.1 | ||||
Adjust: Income related to discontinued operations |
(25.5 | ) | (16.6 | ) | ||||
Income from continuing operations |
284.8 | 504.5 | ||||||
Adjustments to reconcile to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
108.1 | 106.8 | ||||||
Deferred income taxes |
(13.7 | ) | 1.7 | |||||
Excess tax benefits from stock options and awards |
1.6 | (8.6 | ) | |||||
Restructuring and asset impairment charges |
25.7 | 7.6 | ||||||
Changes in assets and liabilities: (1) |
||||||||
Receivables |
163.4 | (123.4 | ) | |||||
Inventories |
153.5 | (53.6 | ) | |||||
Accounts payable and accrued liabilities |
(156.9 | ) | 28.8 | |||||
Discontinued operations assets and liabilities, net |
35.9 | 6.9 | ||||||
Other assets and liabilities, net |
36.0 | 99.1 | ||||||
Net cash provided by operating activities |
638.4 | 569.8 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from short-term investments |
19.1 | 56.4 | ||||||
Proceeds from cash restricted for business acquisitions |
| 290.1 | ||||||
Capital expenditures |
(70.8 | ) | (95.5 | ) | ||||
Cash paid for acquired businesses |
(21.8 | ) | (270.8 | ) | ||||
Proceeds from sales of property, plant and equipment and other |
1.4 | (0.9 | ) | |||||
Net cash used in investing activities |
(72.1 | ) | (20.7 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of debt |
| 297.6 | ||||||
Debt issuance costs |
(1.7 | ) | (0.6 | ) | ||||
Proceeds from debt derivatives |
| 0.5 | ||||||
Repayments of debt |
(24.6 | ) | (380.0 | ) | ||||
Dividends |
(125.7 | ) | (126.9 | ) | ||||
Purchases of common shares |
(26.0 | ) | (325.2 | ) | ||||
Excess tax benefits from stock options and awards |
(1.6 | ) | 8.6 | |||||
Proceeds from exercise of stock options and other |
4.5 | 17.0 | ||||||
Net cash used in financing activities |
(175.1 | ) | (509.0 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
8.4 | (12.2 | ) | |||||
Increase in cash and cash equivalents |
399.6 | 27.9 | ||||||
Cash and cash equivalents, beginning of period |
258.8 | 232.8 | ||||||
Cash and cash equivalents, end of period |
$ | 658.4 | $ | 260.7 | ||||
(1) | Net of the effects of acquisitions and translation. |
The accompanying notes are an integral part of these statements.
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Table of Contents
COOPER INDUSTRIES PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Accounting Policies
Basis of Presentation - The consolidated financial statements of Cooper Industries plc
(formerly Cooper Industries, Ltd.), an Irish company (Cooper), have been prepared in accordance
with generally accepted accounting principles in the United States.
In June 2009, our Board of Directors approved moving Coopers place of incorporation from
Bermuda to Ireland. This move is part of a reorganization that created a newly formed Irish
company, Cooper Industries plc. We completed the first step in this reorganization by establishing
our tax residency in Ireland in December 2008. At a Special Shareholders Meeting on August 31,
2009, shareholders voted in favor of completing the reorganization pursuant to which all Cooper
Industries, Ltd. Class A common shares held by public shareholders would be cancelled and all
holders of such shares would receive ordinary shares of Cooper Industries plc on a one-for-one
basis. The reorganization transaction was completed on September 8, 2009, following approval from
the Supreme Court of Bermuda, at which time Cooper Industries plc replaced Cooper Industries, Ltd.
as the ultimate parent company. Shares of the Irish company, Cooper Industries plc, began trading
on the New York Stock Exchange on September 9, 2009 under the symbol CBE, the same symbol under
which Cooper Industries, Ltd. shares were previously traded.
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 Coopers 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. Further, in connection with preparation
of the consolidated financial statements, Cooper evaluated subsequent events after the balance
sheet date of September 30, 2009 through November 5, 2009, which is the date these financial
statements were issued. For additional information regarding Coopers accounting policies, refer
to the Consolidated Financial Statements and related notes for the year ended December 31, 2008
included in Part IV of Coopers 2008 Annual Report on Form 10-K.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.
SFAS No. 168 made the FASB Accounting Standards Codification (ASC or the Codification) the
single source of U.S. GAAP used by nongovernmental entities in the preparation of financial
statements, except for rules and interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting guidance for SEC registrants. The
Codification was developed to organize GAAP pronouncements by accounting topics within a consistent
structure so that users can more easily access authoritative accounting guidance; its purpose is
not to create new accounting and reporting guidance. The Codification is effective July 1,
2009. All accounting references have therefore been updated and SFAS references have been replaced
with ASC references.
ASC Topic 820, Fair Value Measurements and Disclosures, was revised to provide enhanced
guidance for using fair value to measure assets and liabilities. ASC Topic 820 clarifies the
principle that fair value should be based on the assumptions market participants would use when
pricing assets or liabilities and establishes a hierarchy that prioritizes the information used to
develop those assumptions. ASC Topic 820 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. On February 12, 2008, the FASB delayed the
effective date of ASC Topic 820 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Cooper implemented the provisions of ASC Topic 820 as of January 1,
2008 for those assets and liabilities not subject to the deferral described above. The
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implementation of ASC Topic 820 as of January 1, 2009 for assets and liabilities previously
subject to the deferral described above did not have a material impact on Coopers results of
operations, financial position or cash flows. See Note 15 of the Notes to the Consolidated
Financial Statements.
Effective prospectively to business combinations completed on or after January 1, 2009, ASC
Topic 805, Business Combinations, was revised to provide enhanced guidance related to the
measurement of identifiable assets acquired, liabilities assumed and disclosure of information
related to business combinations. This guidance, together with the International Accounting
Standards Boards (IASB) IFRS 3, Business Combinations, completed a joint effort by the FASB and
IASB to improve financial reporting about business combinations and promotes the international
convergence of accounting standards. Cooper implemented the revised guidance prospectively to
business combinations completed on or after January 1, 2009. Cooper recognizes acquisition-related
costs in the period in which such costs are incurred as required by the guidance.
Effective January 1, 2009, ASC Topic 810, Consolidation, was revised to provide enhanced
guidance related to the disclosure of information regarding noncontrolling interests in a
subsidiary. This guidance, together with the IASBs IAS 27, Consolidated and Separate Financial
Statements, concluded a joint effort by the FASB and IASB to improve the accounting for and
reporting of noncontrolling interests in consolidated financial statements and promotes
international convergence of accounting standards. Cooper did not apply the disclosure provisions
of ASC Topic 810 regarding noncontrolling interests in a subsidiary as the information is
immaterial to the consolidated financial statements.
Effective January 1, 2009, the disclosure provisions of ASC Topic 815, Derivatives and
Hedging, were revised to provide greater transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are accounted for
under Topic 815, and (c) how derivative instruments and related hedged items affect an entitys
financial position, results of operations, and cash flows. Cooper implemented the revised guidance
as of January 1, 2009 and has provided the additional disclosures required.
Effective for fiscal years ending after December 15, 2009, ASC Topic 715, Compensation -
Retirement Benefits, was revised to require additional disclosures about assets held in an
employers defined benefit pension or other postretirement plan, primarily related to categories
and fair value measurements of plan assets. The revised guidance is effective for Coopers 2009
year end and will only impact the disclosures related to Coopers pension assets.
Effective for interim periods ending after June 15, 2009, ASC Topic 825, Financial
Instruments, was revised to extend the annual disclosure requirements of Topic 825 to interim
financial statements. Cooper has implemented the revised guidance and has provided the additional
disclosures required.
Reclassification - Certain amounts in the Consolidated Statements of Cash Flows in 2008 have
been reclassified to conform to the 2009 presentation.
Note 2. Restructuring and Asset Impairment Charges
During the fourth quarter of 2008, Cooper committed to employment reductions to appropriately
size Coopers workforce to current and anticipated market conditions and to downsize a domestic
Tools segment manufacturing operation. Cooper recorded a $35.7 million charge in the fourth
quarter of 2008 related to these actions, $25.5 million of which relates to the Electrical Products
segment and $10.2 million relates to the Tools segment. A total of 1,314 hourly and 930 salaried
positions are being eliminated as a result of the fourth quarter 2008 restructuring actions to
reduce Coopers workforce.
During the first nine months of 2009, Cooper committed to additional employment reductions and
certain facility closures as a result of managements ongoing assessment of its hourly and salary
workforce and its required production capacity in consideration of current and anticipated market
conditions and demand levels. Cooper recorded charges of $24.9 million in the first nine months of
2009 related to these
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actions, $15.2 million of which relates to the Electrical Products segment and $8.1 million
relates to the Tools segment. The remaining $1.6 million relates to reductions in Coopers
corporate staff. A total of 999 hourly and 694 salaried positions are being eliminated as a result
of the 2009 restructuring actions to reduce Coopers workforce.
The following table reflects activity in the accrued liability related to the restructuring
actions.
Contract | ||||||||||||
Involuntary Employee | Termination | |||||||||||
Termination Benefits | and Other | |||||||||||
Headcount | Dollars | Exit Costs | ||||||||||
($ in millions) | ||||||||||||
Balance at December 31, 2008 |
886 | $ | 28.0 | $ | 1.7 | |||||||
2009 restructuring actions |
1,693 | 22.2 | 2.7 | |||||||||
Headcount reductions or costs incurred |
(2,354 | ) | (43.0 | ) | (3.0 | ) | ||||||
Balance at September 30, 2009 |
225 | $ | 7.2 | $ | 1.4 | |||||||
The workforce reductions, contract termination and other exit costs and the related cash
payments associated with the accrual balances at September 30, 2009 will be substantially completed
in the first half of 2010. As part of the restructuring actions, Cooper has approved the closure of
ten factories and warehouses, six of which have been completed at the end of the third quarter
2009. Cooper has recorded non-cash impairment charges of $0.8 million related to these actions. Of
the remaining facility closures, two are expected to be completed by the end of 2009 with the
remaining two factory closures expected to be substantially completed in the first half of 2010.
Cooper expects to incur incremental restructuring charges in the range of approximately $8 to $15
million associated with the completion of planned restructuring activities as the actions are
implemented over the next year.
Note 3. Goodwill
Cooper had goodwill of $2.64 billion and $2.57 billion at September 30, 2009 and December 31,
2008, respectively. Goodwill is subject to an annual impairment test and Cooper has designated
January 1 as the date of this 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. Cooper has identified eight reporting
units for which goodwill is tested for impairment. The results of step one of the goodwill
impairment tests as of January 1, 2009 did not require the completion of step two of the test for
any reporting unit.
Note 4. Stock-Based Compensation
Cooper has a share-based compensation plan known as the Amended and Restated Stock Incentive
Plan (the Plan). The Plan provides for the granting of stock options, performance-based share
awards and restricted stock units. Since the original Plans inception in 1996, the aggregate
number of shares authorized under the Plan is 41 million. As of September 30, 2009, 5,949,184
shares were available for future grants under the Plan. Of the total shares available for future
grants, 2,805,533 are available for grants of performance-based shares and restricted stock units.
Total compensation expense for all share-based compensation arrangements under the Plan was $20.4
million and $28.6 million for the nine months ended September 30, 2009 and 2008, respectively. The
total income tax benefit recognized in the income statement for all share-based compensation
arrangements under the Plan was $7.2 million and $9.9 million for the nine months ended
September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, Cooper
granted 2,421,725 stock option awards, 370,560 performance-based shares and 108,160 restricted
stock units.
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Note 5. Acquisitions
Cooper completed three acquisitions and acquired certain intellectual property rights in the
Electrical Products segment during the nine months ended September 30, 2009. These acquisitions
were selected because of their strategic fit with existing Cooper businesses.
Cooper makes an initial allocation of the purchase price as of the date of acquisition, based
on its estimate of the fair value of the assets and liabilities acquired. Cooper continues to
evaluate the acquisition date fair value of the assets and liabilities acquired and will adjust the
allocations as additional information relative to the businesses becomes available for up to one
year from the acquisition date. This includes finalization of amount by major asset class and
weighted-average amortization period for other intangible assets acquired.
The acquisition date fair value of the total consideration for the 2009 acquisitions was
approximately $25.0 million. The acquisitions resulted in the recognition of preliminary estimated
aggregate goodwill of $14.0 million, substantially all of which is not expected to be deductible
for tax purposes. Total cash consideration paid for acquisitions during the first nine months of
2009 was $22.6 million, net of cash acquired.
The results of operations of acquisitions are included in the consolidated income statement
since the respective acquisition dates. Pro-forma income from continuing operations and diluted
earnings per share for the nine months ended September 30, 2009 and 2008, assuming the acquisitions
had occurred at the beginning of the period, would not be materially different from reported
results.
Note 6. Inventories
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Raw materials |
$ | 197.0 | $ | 239.3 | ||||
Work-in-process |
158.9 | 163.2 | ||||||
Finished goods |
328.6 | 405.0 | ||||||
Perishable tooling and supplies |
13.1 | 13.9 | ||||||
697.6 | 821.4 | |||||||
Allowance for excess and obsolete inventory |
(84.9 | ) | (77.0 | ) | ||||
Excess of current standard costs over LIFO costs |
(110.0 | ) | (102.6 | ) | ||||
Net inventories |
$ | 502.7 | $ | 641.8 | ||||
Note 7. Contingencies
Cooper and its subsidiaries are defendants or otherwise involved in a number of lawsuits in
the ordinary course of business. Cooper estimates the range of liability related to pending
litigation when management believes the amount and range of loss can be estimated. Cooper records
its best estimate of a loss when the loss is considered probable. When a liability is probable and
there is a range of estimated loss with no best estimate in the range, Cooper records the minimum
estimated liability related to the lawsuits or claims. As additional information becomes
available, Cooper assesses the potential liability related to pending litigation and claims and
revises its estimates. Due to uncertainties related to the resolution of lawsuits and claims, the
ultimate outcome may differ from the estimates. In the opinion of management and based on
liability accruals provided, the ultimate exposure with respect to these pending lawsuits and
claims is not expected to have a material adverse effect on Coopers consolidated financial
position or cash flows, although they could have a material adverse effect on the results of
operations for a particular reporting period.
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The U.S. Federal Government has enacted legislation intended to deny certain federal funding
and government contracts to U.S. companies that reincorporate outside the United States, including
Section 745 of the Consolidated Appropriations Act, 2008 (Public Law 110-161), Section 724(c) of
the Transportation, Treasury, Housing and Urban Development, the Judiciary, and Independent
Agencies Appropriations Act, 2006 (Public Law 109-115), and 6 U.S.C. 395(b) of The Homeland
Security Act. Cooper has self-reported to the Department of Defense certain transactions
aggregating approximately $8 million with U.S. government entities which may be subject to the
legislation. At the time of this filing, it is too early to determine whether any fines or
penalties may be assessed against Cooper.
Note 8. Debt
On August 14, 2009, Cooper entered into a credit agreement that provides a $350 million
three-year committed bank credit facility that replaces Coopers previous credit facility that was
to mature in November 2009. The agreement for the credit facility requires that Cooper maintains
certain financial ratios, including a prescribed limit on debt as a percentage of total
capitalization and 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. The credit agreement is not subject to termination based upon a decrease in
Coopers debt ratings or a material adverse change.
At September 30, 2009, Cooper has $9.4 million of short-term debt and $277.3 million of
current maturities of long-term debt. At September 30, 2009 Cooper had no commercial paper
borrowings outstanding. At September 30, 2009, Cooper has a U.S. committed credit facility for
$350 million that matures in August 2012. On November 2, 2009, Cooper repaid the $275 million 5.5%
senior unsecured notes at maturity.
Note 9. Shareholders Equity
As discussed in Note 1, Cooper completed a reorganization transaction on September 8, 2009
whereby all Cooper Industries, Ltd. Class A common shares held by public shareholders were
cancelled and all holders of such shares received ordinary shares of Cooper Industries plc on a
one-for-one basis. The Class A and Class B common shares of Cooper Industries, Ltd. held by
wholly-owned subsidiaries of Cooper Industries, Ltd. did not participate in the exchange
transaction and continue to be held by wholly-owned subsidiaries of Cooper Industries, Ltd. On
October 19, 2009, the Irish High Court approved the reduction of share premium (similar to
additional paid-in-capital) to establish distributable reserves on the unconsolidated balance sheet
of Cooper Industries plc. The establishment of distributable reserves was required to enable the
Company to pay dividends and repurchase shares in the future. The reorganization transaction and
establishment of distributable reserves had no impact on consolidated shareholders equity.
At September 30, 2009, Cooper Industries plc had 166,830,675 common shares, $.01 par value
issued and outstanding compared to Cooper Industries, Ltd.s 166,908,287 Class A common shares,
$.01 par value (excluding 37,362,915 Class A common shares held by wholly-owned subsidiaries) at
December 31, 2008. During the nine months ended September 30, 2009, Cooper issued 1,185,188 common
shares primarily in connection with employee incentive and benefit plans and Coopers dividend
reinvestment program. During the nine months ended September 30, 2009 and prior to the
reorganization transaction described above, Cooper Industries Ltd. and its wholly-owned
subsidiaries purchased 1,262,800 Class A common shares of Cooper Industries, Ltd. for $26.0 million
under Coopers share repurchase plans. The share purchases are recorded by Coopers wholly-owned
subsidiaries as an investment in Cooper Industries, Ltd. that is eliminated in consolidation.
A wholly-owned subsidiary owns all of the issued and outstanding Class B common shares of
Cooper Industries, Ltd. During the first quarter of 2009, Cooper Industries, Ltd. repurchased 4.2
million Class B common shares from its wholly-owned subsidiary. The subsidiarys investment in the
Class B common shares is eliminated in consolidation. If at any time a dividend was declared and
paid by Cooper
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Industries, Ltd. on the Class A common shares, a like dividend was declared and paid on the
Class B common shares in an equal amount per share.
On February 12, 2008, Coopers Board of Directors authorized the purchase of ten million
shares of common stock. On February 9, 2009, Cooper announced that the Board of Directors
authorized the repurchase of ten million shares of common stock in addition to the remaining
February 12, 2008 authorization. In the nine months ended September 30, 2009, Cooper repurchased
the one million shares intended to offset dilution from share issuances under equity compensation
plans, as well as 262,800 additional shares under the Cooper Board of Directors authorizations
discussed above. Cooper may continue to repurchase shares under these authorizations from time to
time during 2009. The decision whether to do so will depend on the favorability of market
conditions, as well as potential cash requirements for acquisitions and debt repayments. As of
September 30, 2009, 12,766,635 shares remain available to be repurchased under the authorizations
by the Board of Directors.
Note 10. Segment Information
Revenues | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Electrical Products |
$ | 1,147.2 | $ | 1,526.0 | $ | 3,408.8 | $ | 4,397.6 | ||||||||
Tools |
139.2 | 201.7 | 404.2 | 600.5 | ||||||||||||
Total revenues |
$ | 1,286.4 | $ | 1,727.7 | $ | 3,813.0 | $ | 4,998.1 | ||||||||
Operating Earnings | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Electrical Products |
$ | 173.5 | $ | 249.7 | $ | 467.0 | $ | 732.2 | ||||||||
Tools |
6.8 | 24.1 | 5.8 | 63.6 | ||||||||||||
Segment operating earnings |
180.3 | 273.8 | 472.8 | 795.8 | ||||||||||||
General Corporate expense |
21.5 | 23.9 | 63.5 | 69.5 | ||||||||||||
Restructuring and asset impairment charges |
6.5 | | 25.7 | 7.6 | ||||||||||||
Total operating earnings |
152.3 | 249.9 | 383.6 | 718.7 | ||||||||||||
Interest expense, net |
15.9 | 17.3 | 47.4 | 50.5 | ||||||||||||
Income from continuing operations
before income taxes |
$ | 136.4 | $ | 232.6 | $ | 336.2 | $ | 668.2 | ||||||||
The Electrical Products segment operating earnings for the nine month period ended September
30, 2008 includes a $3.9 million curtailment loss as a result of ceasing future benefit accruals
for two defined benefit plans in the U.K. General corporate expense includes $2.8 million and $3.0
million of incremental legal and other costs associated with the reorganization transaction for the
three and nine month periods ended September 30, 2009, respectively.
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Note 11. Pension and Other Postretirement Benefits
Pension Benefits | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 0.9 | $ | 0.6 | $ | 2.6 | $ | 2.5 | ||||||||
Interest cost |
10.6 | 10.4 | 31.4 | 31.5 | ||||||||||||
Expected return on plan assets |
(9.9 | ) | (12.3 | ) | (29.4 | ) | (37.3 | ) | ||||||||
Amortization of prior service cost |
(0.7 | ) | (0.7 | ) | (2.0 | ) | (1.8 | ) | ||||||||
Recognized actuarial loss |
5.7 | 2.5 | 17.0 | 7.3 | ||||||||||||
Curtailment loss |
| 3.9 | | 3.9 | ||||||||||||
Net periodic benefit cost |
$ | 6.6 | $ | 4.4 | $ | 19.6 | $ | 6.1 | ||||||||
Other Postretirement Benefits | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Interest cost |
$ | 1.2 | $ | 1.3 | $ | 3.6 | $ | 3.9 | ||||||||
Amortization of prior service cost |
(0.5 | ) | (0.5 | ) | (1.5 | ) | (1.5 | ) | ||||||||
Recognized actuarial gain |
(0.8 | ) | (0.6 | ) | (2.4 | ) | (1.8 | ) | ||||||||
Net periodic benefit cost (gain) |
$ | (0.1 | ) | $ | 0.2 | $ | (0.3 | ) | $ | 0.6 | ||||||
Note 12. Income Taxes
The effective tax rate was 15.3% for the nine months ended September 30, 2009 and 24.5% for
the nine months ended September 30, 2008. Cooper reduced income taxes expense by $9.6 million and
$22.9 million in the first nine months of 2009 and 2008, respectively, for discrete tax items
primarily related to statute expirations, state tax settlements, and foreign taxes. Excluding the
impacts of the discrete items, Coopers effective tax rate would have been 18.2% for the nine
months ended September 30, 2009 and 28.0% for the first nine months of 2008. The decrease in
Coopers 2009 effective tax rate compared to 2008, adjusted for the aforementioned discrete items,
is primarily related to the decrease in 2009 earnings without a corresponding decrease in projected
tax benefits.
Cooper has recorded a foreign deferred tax asset of approximately $1.3 billion as of September
30, 2009 relating to a net operating loss carryforward that was approved by a foreign jurisdiction
in September 2009. While this net operating loss carryforward has an indefinite life, a valuation
allowance of approximately $1.3 billion was recognized because management believes at this time it
is more likely than not that the deferred tax asset will not be realized.
Cooper has unrecognized gross tax benefits of $40.6 million at September 30, 2009.
Approximately $32.5 million of unrecognized tax benefits, if recognized, would favorably impact the
effective tax rate.
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Cooper believes it is reasonably possible that additional tax benefits in the range of
approximately $1 to $5 million could be recognized during the next 12 months as audits close and
statutes expire.
In June 2009, the Internal Revenue Service completed its examination of Coopers 2007 Federal
Tax Return and issued a notice of assessment in the amount of $16 million. The IRS challenged
Coopers intercompany pricing with a foreign affiliate. On July 15, 2009, Cooper filed its protest
for this assessment and continues to work with the IRS to resolve this matter. While the outcome
of the proceedings with the IRS cannot be predicted with certainty, management believes that it is
more likely than not that its tax position will prevail.
Cooper is under examination by various United States State and Local taxing authorities, as
well as various taxing authorities in other countries. Cooper is no longer subject to U.S. Federal
income tax examinations by tax authorities for years prior to 2007, and with few exceptions, Cooper
is no longer subject to State and Local, or non-U.S. income tax examinations by tax authorities for
years before 2000. Cooper fully cooperates with all audits, but defends existing positions
vigorously. These audits are in various stages of completion. To provide for potential tax
exposures, Cooper maintains a liability for unrecognized tax benefits, which management believes is
adequate. The results of future audit assessments, if any, could have a material effect on
Coopers cash flows as these audits are completed.
In June 2008, the German Tax Authorities issued a proposed audit finding related to a 2004
reorganization that was treated as a non-taxable event. Cooper believes that the reorganization was
properly reflected on its German income tax returns in accordance with applicable tax laws and
regulations in effect during the period involved. In August 2009, Cooper filed its response to the
proposed audit finding with respect to a portion of the transaction and expects an assessment
related to the remainder of the transaction in the future. Cooper will challenge the proposed
findings vigorously. While the outcome of the proceedings with the German Tax Authorities cannot be
predicted with certainty, management believes that it is more likely than not that its tax position
related to the 2004 reorganization will prevail. If the proposed audit finding is upheld, it would
require Cooper to pay German tax of approximately 58 million, which would be available for
credit in the United States, plus accrued interest.
Note 13. Net Income Per Common Share
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | 114.3 | $ | 189.2 | $ | 284.8 | $ | 504.5 | ||||||||
Income from discontinued operations |
6.6 | 16.6 | 25.5 | 16.6 | ||||||||||||
Net income applicable to common stock |
$ | 120.9 | $ | 205.8 | $ | 310.3 | $ | 521.1 | ||||||||
Weighted average common shares outstanding |
167.1 | 173.6 | 167.1 | 175.0 | ||||||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
$ | 114.3 | $ | 189.2 | $ | 284.8 | $ | 504.5 | ||||||||
Income from discontinued operations |
6.6 | 16.6 | 25.5 | 16.6 | ||||||||||||
Net income applicable to common stock |
$ | 120.9 | $ | 205.8 | $ | 310.3 | $ | 521.1 | ||||||||
Weighted average common shares outstanding |
167.1 | 173.6 | 167.1 | 175.0 | ||||||||||||
Incremental shares from assumed conversions: |
||||||||||||||||
Options, performance-based stock
awards and other employee awards |
1.2 | 2.1 | 1.1 | 2.2 | ||||||||||||
Weighted average common shares
and common share equivalents |
168.3 | 175.7 | 168.2 | 177.2 | ||||||||||||
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Options and employee awards are not considered in the calculations if the effect would be
antidilutive. Out of the money options and employee awards of 7.7 million and 3.3 million shares
were excluded in the nine months ended September 30, 2009 and 2008, respectively.
Note 14. 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Net income |
$ | 120.9 | $ | 205.8 | $ | 310.3 | $ | 521.1 | ||||||||
Foreign currency translation gains
(losses) |
3.5 | (56.8 | ) | 50.0 | (33.1 | ) | ||||||||||
Change in fair value of derivatives |
2.9 | (10.6 | ) | 7.6 | (0.6 | ) | ||||||||||
Pension and postretirement benefit plans |
2.3 | 3.4 | 6.5 | 4.3 | ||||||||||||
Net income and other nonowner
changes in equity |
$ | 129.6 | $ | 141.8 | $ | 374.4 | $ | 491.7 | ||||||||
Note 15. | Financial Instruments and Hedging Activities, Concentrations of Credit Risk and Fair Value of Financial Instruments |
All derivatives are 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.
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.
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As a result of having sales, purchases and certain intercompany transactions denominated in
currencies other than the functional currencies of Coopers businesses, Cooper is exposed to the
effect of currency exchange rate changes on its cash flows and earnings. Cooper enters into
currency forward exchange contracts to hedge significant non-functional currency denominated
transactions for periods consistent with the terms of the underlying transactions. Contracts
generally have maturities that do not exceed one year.
Currency forward exchange contracts executed to hedge forecasted transactions are accounted
for as cash flow hedges. Currency forward exchange contracts executed to hedge a recognized asset,
liability or firm commitment are accounted for as fair value hedges. Cooper sometimes enters into
certain currency forward exchange contracts that are not designated as hedges. These contracts are
intended to reduce cash flow volatility related to short-term intercompany financing transactions.
Cooper also enters into commodity swaps to reduce the volatility of price fluctuations on a portion
of up to eighteen months of forecasted material purchases. These instruments are designated as cash
flow hedges. Cooper does not enter into speculative derivative transactions.
During October 2005, Cooper entered into cross-currency swaps to effectively convert its newly
issued $325 million, 5.25% fixed-rate debt maturing in November 2012 to 272.6 million of 3.55%
fixed-rate debt. The $325 million debt issuance proceeds were swapped to 272.6 million and
lent through an intercompany loan to a non-U.S. subsidiary to partially fund repayment of the 300
million Euro bond debt that matured on October 25, 2005. The cross-currency swaps mature in
November 2012.
Assets and liabilities measured at fair value are based on one or more of three valuation
techniques. Valuation techniques utilized for each individual asset and liability category are
referenced in the tables below. The valuation techniques are as follows:
(a) | Market approach Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; | ||
(b) | Income approach Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models); | ||
(c) | Cost approach Amount that would be required to replace the service capacity of an asset (replacement cost). |
The inputs used in measuring fair value are prioritized using a three-tier fair value
hierarchy as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level
2) inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value as of September 30, 2009 on a recurring basis
are as follows:
Assets | Liabilities | |||||||||||
Significant other | Significant other | |||||||||||
observable inputs | observable inputs | Valuation | ||||||||||
(in millions) | (Level 2) | (Level 2) | Technique | |||||||||
Short-term investments |
$ | 3.6 | $ | | (a | ) | ||||||
Short-term currency forward
exchange contracts |
22.1 | (12.2 | ) | (a | ) | |||||||
Long-term currency forward
exchange contracts |
61.4 | (25.0 | ) | (a | ) | |||||||
Short-term commodity swaps |
1.5 | (3.8 | ) | (a | ) | |||||||
Long-term cross-currency swaps |
| (62.3 | ) | (a | ) | |||||||
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Except as discussed below, the currency forward exchange contracts and commodity swaps in the
above table are designated as hedging instruments. Currency forward exchange contracts representing
approximately $39 million of assets and $27 million of liabilities at September 30, 2009 are not
designated as hedging instruments.
Assets and liabilities measured at fair value as of December 31, 2008 on a recurring basis are
as follows:
Assets | Liabilities | |||||||||||
Significant other | Significant other | |||||||||||
observable inputs | observable inputs | Valuation | ||||||||||
(in millions) | (Level 2) | (Level 2) | Technique | |||||||||
Short-term investments |
$ | 21.9 | $ | | (a | ) | ||||||
Short-term currency forward
exchange contracts |
40.0 | (8.4 | ) | (a | ) | |||||||
Long-term currency forward
exchange contracts |
91.3 | (40.0 | ) | (a | ) | |||||||
Short-term commodity swaps |
| (33.5 | ) | (a | ) | |||||||
Long-term cross-currency swaps |
| (29.1 | ) | (a | ) | |||||||
There were no changes in our valuation techniques used to measure asset or liability fair
values on a recurring basis in the nine months ended September 30, 2009.
Gains or losses on derivative instruments are reported in the same line item as the underlying
hedged transaction in the consolidated statements of income. The net gain or loss on currency
forward exchange contracts was not material in the nine months ended September 30, 2009 and 2008.
For commodity swaps, Cooper recognized, in cost of sales, a net loss of $17.6 million and a net
gain of $7.0 million during the nine months ended September 30, 2009 and 2008, respectively. At
September 30, 2009, Cooper estimates that approximately $3 million of net losses on derivative
instruments designated as cash flow hedges will be reclassified from accumulated other nonowner
changes in equity to earnings during the next twelve months. The amount of discontinued cash flow
hedges in the nine months ended September 30, 2009 and 2008 was not material.
The table below summarizes the U. S. dollar equivalent contractual amounts of Coopers forward
exchange contracts at September 30, 2009 and December 31, 2008.
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
U.S. Dollar |
$ | 574.7 | $ | 502.4 | ||||
Euro |
362.3 | 214.6 | ||||||
British Pound Sterling |
198.4 | 151.3 | ||||||
Singapore Dollar |
51.5 | 23.0 | ||||||
Mexican Peso |
10.2 | 40.9 | ||||||
Other |
27.8 | 20.8 | ||||||
$ | 1,224.9 | $ | 953.0 | |||||
The contractual amounts of Coopers commodity swap contracts at September 30, 2009 and
December 31, 2008 were approximately $27 million and $68 million, respectively.
Other Instruments
In the normal course of business, Cooper executes stand-by letters of credit, performance
bonds and other guarantees that ensure Coopers performance or payment to third parties that are
not reflected in the
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consolidated balance sheets. The aggregate notional value of these instruments was $124.4
million and $107.9 million at September 30, 2009 and December 31, 2008, 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.
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 5.2% of accounts receivable at September 30, 2009 (5.5% at December
31, 2008).
Fair Value of Financial Instruments Other than Derivatives
Coopers financial instruments other than derivative instruments consist primarily of cash and
cash equivalents, investments, restricted cash, trade receivables, trade payables and debt
instruments. The book values of cash and cash equivalents, investments, restricted cash, trade
receivables, and trade payables are considered to be representative of their respective fair
values. Cooper had a book value of approximately $1.21 billion and $1.23 billion for debt
instruments at September 30, 2009 and December 31, 2008, respectively. The fair value (as
represented primarily by quoted market prices) of these debt instruments was approximately $1.30
billion and $1.25 billion at September 30, 2009 and December 31, 2008, respectively.
Note 16. Discontinued Operations Receivable and Liability
Discontinued Operations Liability
In October 1998, Cooper sold its Automotive Products business to Federal-Mogul Corporation
(Federal-Mogul). These discontinued businesses (including the Abex Friction 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 Friction 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. The
Bankruptcy Court for the District of Delaware confirmed Federal-Moguls plan of reorganization and
Federal-Mogul emerged from bankruptcy in December 2007. As part of Federal-Moguls Plan of
Reorganization, Cooper and Federal-Mogul reached a settlement agreement that was subject to
approval by the Bankruptcy Court resolving Federal-Moguls indemnification obligations to Cooper.
As discussed further below, on September 30, 2008, the Bankruptcy Court issued its final ruling
denying Coopers participation in the proposed Federal-Mogul 524(g) trust resulting in
implementation of the previously approved Plan B Settlement. As part of its obligation to Pneumo
for any asbestos-related claims arising from the Abex Friction 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 September 30, 2009, a total of 147,337 Abex Claims were filed, of which 124,360 claims have
been resolved leaving 22,977 Abex Claims pending at September 30, 2009. During the nine months
ended September 30, 2009, 1,162 claims were filed and 1,873 claims were resolved. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $2,085 before insurance. A total
of $159.5 million was spent on defense costs for the period August 28, 1998 through September 30,
2009. Historically, existing insurance coverage has provided 50% to 80% of the total defense and
indemnity payments for Abex Claims. However, insurance recovery is currently at a lower percentage
(approximately 30%) due to exhaustion of primary layers of coverage and litigation with certain
excess insurers, although in certain periods, insurance recoveries can be higher due to new
settlements with insurers.
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2005 2007
In December 2005, Cooper reached an initial agreement in negotiations with the representatives
of Federal-Mogul, its bankruptcy committees and the future claimants (the Representatives)
regarding Coopers participation in Federal Moguls proposed 524(g) asbestos trust. By
participating in this trust, Cooper would have resolved its liability for asbestos claims arising
from Coopers former Abex Friction Products business. The proposed settlement agreement was
subject to court approval and certain other approvals. Future claims would have been resolved
through the bankruptcy trust.
Although the final determination of whether Cooper would participate in the Federal-Mogul
524(g) trust was unknown, Coopers management concluded that, at the date of the filing of its 2005
Form 10-K, the most likely outcome in the range of potential outcomes was a settlement
approximating the December 2005 proposed settlement. Accordingly, the accrual for potential
liabilities related to the Automotive Products sale and the Federal-Mogul bankruptcy was $526.3
million at December 31, 2005. The December 31, 2005 discontinued operations accrual included
payments to a 524(g) trust over 25 years that were undiscounted, and included $215 million of
insurance recoveries where insurance in place agreements, settlements or policy recoveries were
probable.
Throughout 2006 and 2007, Cooper continued to believe that the most likely outcome in the
range of potential outcomes was a revised settlement with Cooper resolving its asbestos obligations
through participation in the proposed Federal-Mogul 524(g) trust. While the details of the
proposed settlement agreement evolved during the on-going negotiations throughout 2006 and 2007,
the underlying principles of the proposed settlement arrangements being negotiated principally
included fixed payments to a 524(g) trust over 25 years that were subject to reduction for
insurance proceeds received in the future.
As a result of the then current status of settlement negotiations, Cooper recorded a $20.3
million after-tax discontinued operations charge, which is net of an $11.4 million income tax
benefit, in the second quarter of 2006 to reflect the revised terms of the proposed settlement
agreement at that time. The discontinued operations accrual was $509.1 million and $529.6 million
as of December 31, 2007 and 2006, respectively, and included payments to a 524(g) trust over 25
years that were undiscounted, and included insurance recoveries of $230 million and $239 million,
respectively, where insurance in place agreements, settlements or policy recoveries were probable.
The U.S. Bankruptcy Court for the District of Delaware confirmed Federal-Moguls plan of
reorganization on November 8, 2007, and the U.S. District Court for the District of Delaware
affirmed the Bankruptcy Courts order on November 14, 2007. As part of its ruling, the Bankruptcy
Court approved the Plan B Settlement between Cooper and Federal-Mogul, which would require payment
of $138 million to Cooper in the event Coopers participation in the Federal-Mogul 524(g) trust is
not approved for any reason, or if Cooper elected not to participate or to pursue participation in
the trust. The Bankruptcy Court stated that it would consider approving Coopers participation in
the Federal-Mogul 524(g) trust at a later time, and that its order confirming the plan of
reorganization and approving the settlement between Cooper and Federal-Mogul did not preclude later
approval of Coopers participation in the 524(g) trust. Accordingly, in an effort to continue
working towards approval of Coopers participation in the trust and to address certain legal issues
identified by the Court, Cooper, Pneumo-Abex, Federal-Mogul, and other plan supporters filed the
Modified Plan A Settlement Documents on December 13, 2007. The Modified Plan A Settlement
Documents would have required Cooper to make an initial payment of $248.5 million in cash to the
Federal-Mogul trust upon implementation of Plan A with additional annual payments of up to $20
million each due over 25 years. If the Bankruptcy Court had approved the modified settlement and
that settlement was implemented, Cooper, through Pneumo-Abex LLC, would have continued to have
access to Abex insurance policies.
2008 2009
During the first quarter of 2008, the Bankruptcy Court concluded hearings on Plan A. On
September 30, 2008, the Bankruptcy Court issued its ruling denying the Modified Plan A Settlement
resulting in Cooper not participating in the Federal-Mogul 524(g) trust and instead proceeding with
the Plan B Settlement that had previously been approved by the Bankruptcy Court. As a result of
the Plan B Settlement, Cooper
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received the $138 million payment, plus interest of $3 million, in October 2008 from the
Federal-Mogul Bankruptcy estate and will continue to resolve through the tort system the asbestos
related claims arising from the Abex Friction product line that it had sold to Federal-Mogul in
1998. Additionally, under Plan B, Cooper has access to Abex insurance policies.
The accrual for potential liabilities related to the Automotive Products sale and the
Federal-Mogul bankruptcy and a progression of the activity is presented in the following table
assuming resolution through participation in the Federal-Mogul 524(g) trust up until September 30,
2008 when the accounting was adjusted to reflect the Plan B Settlement.
Nine Months Ended | ||||
September 30, 2008 | ||||
(in millions) | ||||
Accrual at beginning of period (under Plan A) |
$ | 509.1 | ||
Indemnity and defense payments |
(16.9 | ) | ||
Insurance recoveries |
25.4 | |||
Other |
(1.6 | ) | ||
Accrual at end of period (under Plan A) * |
$ | 516.0 | ||
* | The $516.0 million liability reflects the estimated liability under Plan A immediately prior to adjusting the accounting on September 30, 2008 to reflect the Plan B Settlement. |
As a result of the September 30, 2008 Bankruptcy Court ruling discussed above, Cooper
adjusted its accounting in the third quarter of 2008 to reflect the separate assets and liabilities
related to the on-going activities to resolve the potential asbestos related claims through the
tort system. Cooper recorded income from discontinued operations of $16.6 million, net of a $9.4
million income tax expense, in the third quarter of 2008 to reflect the Plan B Settlement.
The following table presents the separate assets and liabilities under the Plan B settlement
and the cash activity under the Plan B Settlement.
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Asbestos liability analysis (undiscounted): |
||||||||
Total liability for unpaid, pending and future indemnity and
defense costs at end of period |
$ | 797.0 | $ | 815.1 | ||||
Asbestos receivable analysis (undiscounted): |
||||||||
Insurance receivable for previously paid claims and
insurance settlements |
$ | 68.8 | $ | 74.6 | ||||
Insurance-in-place agreements available for pending and
future claims |
111.2 | 117.7 | ||||||
Total estimated asbestos receivable at end of period |
$ | 180.0 | $ | 192.3 | ||||
Nine Months Ended | ||||
September 30, 2009 | ||||
(in millions) | ||||
Cash Flow: |
||||
Indemnity and defense payments |
$ | (17.5 | ) | |
Insurance recoveries |
53.9 | |||
Other |
(0.5 | ) | ||
Net cash flow |
$ | 35.9 | ||
-18-
Table of Contents
During 2009, Cooper recognized after tax gains from discontinued operations of $25.5 million,
which is net of a $16.2 million income tax expense, from negotiated insurance settlements
consummated in 2009 that were not previously recognized. Cooper believes that it is likely that
additional insurance recoveries will be recorded in the future as new insurance-in-place agreements
are consummated or settlements with insurance carriers are completed. Timing and value of these
agreements and settlements cannot be currently estimated as they may be subject to extensive
additional negotiation and litigation.
Asbestos Liability Estimate
As of September 30, 2009, Cooper estimates that the undiscounted liability for pending and
future indemnity and defense costs for the next 45 years will be $797.0 million. The amount
included for unpaid indemnity and defense costs is not significant at September 30, 2009. The
estimated liability is before any tax benefit and is not discounted as the timing of the actual
payments is not reasonably predictable.
The methodology used to project Coopers liability estimate relies upon a number of
assumptions including Coopers recent claims experience and declining future asbestos spending
based on past trends and publicly available epidemiological data, changes in various jurisdictions,
managements judgment about the current and future litigation environment, and the availability to
claimants of other payment sources.
Abex discontinued using asbestos in the Abex Friction product line in the 1970s and
epidemiological studies that are publicly available indicate the incidence of asbestos-related
disease is in decline and should continue to decline steadily. However, there can be no assurance
that these studies, or other assumptions, will not vary significantly from the estimates utilized
to project the undiscounted liability.
Although Cooper believes that its estimated liability for pending and future indemnity and
defense costs represents the best estimate of its future obligation, Cooper utilized scenarios that
it believed were reasonably possible that indicate a broader range of potential estimates from $735
to $950 million (undiscounted).
Asbestos Receivable Estimate
As of September 30, 2009, Cooper, through Pneumo-Abex LLC, has access to Abex insurance
policies with remaining limits on policies with solvent insurers in excess of $680 million.
Insurance recoveries reflected as receivables in the balance sheet include recoveries where
insurance-in-place agreements, settlements or policy recoveries are probable. As of September 30,
2009, Coopers receivable for recoveries of costs from insurers amounted to $180.0 million, of
which $68.8 million relate to costs previously paid or insurance settlements. Coopers
arrangements with the insurance carriers defer certain amounts of insurance and settlement proceeds
that Cooper is entitled to receive beyond twelve months. Approximately 90% of the $180 million
receivable from insurance companies at September 30, 2009 is due from domestic insurers whose AM
Best rating is Excellent (A-) or better. The remaining balance of the insurance receivable has
been significantly discounted to reflect managements best estimate of the recoverable amount.
Cooper believes that it is likely that additional insurance recoveries will be recorded in the
future as new insurance-in-place agreements are consummated or settlements with insurance carriers
are completed. However, extensive litigation with the insurance carriers may be required to
receive those additional recoveries.
Critical Accounting Assumptions
The amounts recorded by Cooper for its asbestos liability and related insurance receivables
are not discounted and rely on assumptions that are based on currently known facts and strategy.
The value of the liability on a discounted basis net of the amount of insurance recoveries likely
to materialize in the future would be significantly lower than the net amounts currently recognized
in the balance sheet. Coopers actual asbestos costs or insurance recoveries could be
significantly higher or lower than those recorded if assumptions used in the estimation process
vary significantly from actual results over time. As the estimated liability is not discounted and
extends over 45 years, any changes in key assumptions could have a significant impact on the
recorded liability. Key variables in these assumptions include the number and type
-19-
Table of Contents
of new claims filed each year, the average indemnity and defense costs of resolving claims, the
number of years these assumptions are projected into the future, and the resolution of on-going
negotiations of additional settlement or coverage-in-place agreements with insurance carriers.
Assumptions with respect to these variables are subject to greater uncertainty as the projection
period lengthens. Other factors that may affect Coopers liability and ability to recover under
its insurance policies include uncertainties surrounding the litigation process from jurisdiction
to jurisdiction and from case to case, reforms that may be made by state and federal courts, and
the passage of state or federal tort reform legislation. Cooper will review these assumptions on a
periodic basis to determine whether any adjustments are required to the estimate of its recorded
asbestos liability and related insurance receivables.
From a cash flow perspective, Cooper management believes that the annual cash outlay for its
potential asbestos liability, net of insurance recoveries, will not be material to Coopers
operating cash flow.
Note 17. Consolidating Financial Information
Cooper Industries plc, Cooper Industries, Ltd. and certain of Coopers principal operating
subsidiaries (the Guarantors) fully and unconditionally guarantee, on a joint and several basis,
the registered debt securities of Cooper Industries, LLC and Cooper US, Inc. Cooper Industries plc
was incorporated on June 4, 2009 and as discussed in Note 1 replaced Cooper Industries, Ltd. as the
ultimate parent company on September 8, 2009. The following condensed consolidating financial
information is included so that separate financial statements of Cooper Industries, LLC, Cooper US,
Inc. or the Guarantors 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 of Cooper
Industries, Ltd. that are held by wholly-owned subsidiaries are accounted for using the cost
method.
-20-
Table of Contents
Consolidating Income Statements
Three Months Ended September 30, 2009
(in millions)
Three Months Ended September 30, 2009
(in millions)
Cooper | Cooper | Cooper | Cooper | |||||||||||||||||||||||||||||
Industries | Industries, | Industries, | US, | Other | Consolidating | |||||||||||||||||||||||||||
plc | Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | |||||||||||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | | $ | 745.5 | $ | 703.2 | $ | (162.3 | ) | $ | 1,286.4 | |||||||||||||||
Cost of sales |
| | (0.6 | ) | (0.5 | ) | 532.6 | 507.3 | (162.3 | ) | 876.5 | |||||||||||||||||||||
Selling and
administrative expenses |
0.5 | 5.0 | 4.4 | 13.1 | 114.6 | 114.0 | (0.5 | ) | 251.1 | |||||||||||||||||||||||
Restructuring and
asset impairment
charges |
| | | | 1.2 | 5.3 | | 6.5 | ||||||||||||||||||||||||
Interest expense, net |
| | 3.9 | 11.6 | | 0.4 | | 15.9 | ||||||||||||||||||||||||
Equity in earnings of
subsidiaries, net of
tax |
21.1 | 167.7 | 1.0 | 63.4 | 5.4 | 66.4 | (325.0 | ) | | |||||||||||||||||||||||
Intercompany income
(expense) |
| (6.5 | ) | 6.6 | 9.1 | (34.1 | ) | 60.3 | (35.4 | ) | | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
20.6 | 156.2 | (0.1 | ) | 48.3 | 68.4 | 202.9 | (359.9 | ) | 136.4 | ||||||||||||||||||||||
Income tax expense
(benefit) |
| | (0.4 | ) | (18.2 | ) | 26.0 | 14.7 | | 22.1 | ||||||||||||||||||||||
Income from
continuing operations |
20.6 | 156.2 | 0.3 | 66.5 | 42.4 | 188.2 | (359.9 | ) | 114.3 | |||||||||||||||||||||||
Income from
discontinued
operations, net of tax |
| | 6.6 | | | | | 6.6 | ||||||||||||||||||||||||
Net income |
$ | 20.6 | $ | 156.2 | $ | 6.9 | $ | 66.5 | $ | 42.4 | $ | 188.2 | $ | (359.9 | ) | $ | 120.9 | |||||||||||||||
Consolidating Income Statements
Three Months Ended September 30, 2008
(in millions)
Three Months Ended September 30, 2008
(in millions)
Cooper | Cooper | Cooper | ||||||||||||||||||||||||||
Industries, | Industries, | US, | Other | Consolidating | ||||||||||||||||||||||||
Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | ||||||||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | 1,020.0 | $ | 811.9 | $ | (104.2 | ) | $ | 1,727.7 | |||||||||||||
Cost of sales |
(0.1 | ) | (0.1 | ) | 2.3 | 728.2 | 543.9 | (104.2 | ) | 1,170.0 | ||||||||||||||||||
Selling and administrative
expenses |
2.4 | 3.4 | 19.5 | 145.0 | 141.5 | (4.0 | ) | 307.8 | ||||||||||||||||||||
Restructuring and asset
impairment charges |
| | | | | | | |||||||||||||||||||||
Interest expense, net |
| 4.0 | 13.2 | | 0.1 | | 17.3 | |||||||||||||||||||||
Equity in earnings of
subsidiaries, net of tax |
250.2 | 13.3 | 149.0 | 23.1 | 171.7 | (607.3 | ) | | ||||||||||||||||||||
Intercompany income
(expense) |
(10.4 | ) | (11.5 | ) | 30.5 | (44.9 | ) | 72.0 | (35.7 | ) | | |||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
237.5 | (5.5 | ) | 144.5 | 125.0 | 370.1 | (639.0 | ) | 232.6 | |||||||||||||||||||
Income tax expense (benefit) |
| (7.1 | ) | (27.3 | ) | 34.9 | 42.9 | | 43.4 | |||||||||||||||||||
Income from continuing
operations |
237.5 | 1.6 | 171.8 | 90.1 | 327.2 | (639.0 | ) | 189.2 | ||||||||||||||||||||
Income related to
discontinued operations,
net of income taxes |
| 16.6 | | | | | 16.6 | |||||||||||||||||||||
Net income |
$ | 237.5 | $ | 18.2 | $ | 171.8 | $ | 90.1 | $ | 327.2 | $ | (639.0 | ) | $ | 205.8 | |||||||||||||
-21-
Table of Contents
Consolidating Income Statements
Nine Months Ended September 30, 2009
(in millions)
Nine Months Ended September 30, 2009
(in millions)
Cooper | Cooper | Cooper | Cooper | |||||||||||||||||||||||||||||
Industries | Industries, | Industries, | US, | Other | Consolidating | |||||||||||||||||||||||||||
plc | Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | |||||||||||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | | $ | 2,263.8 | $ | 1,939.6 | $ | (390.4 | ) | $ | 3,813.0 | |||||||||||||||
Cost of sales |
| | (1.9 | ) | (0.4 | ) | 1,642.7 | 1,396.3 | (390.4 | ) | 2,646.3 | |||||||||||||||||||||
Selling and
administrative expenses |
0.5 | 12.8 | 9.4 | 45.2 | 356.9 | 334.7 | (2.1 | ) | 757.4 | |||||||||||||||||||||||
Restructuring and
asset impairment
charges |
| | | 1.5 | 7.5 | 16.7 | | 25.7 | ||||||||||||||||||||||||
Interest expense, net |
| | 11.9 | 35.2 | 0.4 | (0.1 | ) | | 47.4 | |||||||||||||||||||||||
Equity in earnings of
subsidiaries, net of
tax |
21.1 | 446.9 | (8.6 | ) | 172.1 | 37.1 | 195.2 | (863.8 | ) | | ||||||||||||||||||||||
Intercompany income
(expense) |
| (21.8 | ) | 1.7 | 41.7 | (103.6 | ) | 185.6 | (103.6 | ) | | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
20.6 | 412.3 | (26.3 | ) | 132.3 | 189.8 | 572.8 | (965.3 | ) | 336.2 | ||||||||||||||||||||||
Income tax expense
(benefit) |
| | (6.9 | ) | (63.0 | ) | 62.9 | 58.4 | | 51.4 | ||||||||||||||||||||||
Income (loss) from
continuing operations |
20.6 | 412.3 | (19.4 | ) | 195.3 | 126.9 | 514.4 | (965.3 | ) | 284.8 | ||||||||||||||||||||||
Income from
discontinued
operations, net of tax |
| | 25.5 | | | | | 25.5 | ||||||||||||||||||||||||
Net income |
$ | 20.6 | $ | 412.3 | $ | 6.1 | $ | 195.3 | $ | 126.9 | $ | 514.4 | $ | (965.3 | ) | $ | 310.3 | |||||||||||||||
Consolidating Income Statements
Nine Months Ended September 30, 2008
(in millions)
Nine Months Ended September 30, 2008
(in millions)
Cooper | Cooper | Cooper | ||||||||||||||||||||||||||
Industries, | Industries, | US, | Other | Consolidating | ||||||||||||||||||||||||
Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | ||||||||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | 2,945.1 | $ | 2,344.2 | $ | (291.2 | ) | $ | 4,998.1 | |||||||||||||
Cost of sales |
(0.2 | ) | (0.3 | ) | 5.4 | 2,065.4 | 1,569.0 | (291.2 | ) | 3,348.1 | ||||||||||||||||||
Selling and administrative
expenses |
7.9 | 9.4 | 62.6 | 432.4 | 424.6 | (13.2 | ) | 923.7 | ||||||||||||||||||||
Restructuring and asset
impairment charges |
| | | | 7.6 | | 7.6 | |||||||||||||||||||||
Interest expense, net |
| 14.2 | 37.9 | | (1.6 | ) | | 50.5 | ||||||||||||||||||||
Equity in earnings of
subsidiaries, net of tax |
649.7 | 25.9 | 380.3 | 88.3 | 416.4 | (1,560.6 | ) | | ||||||||||||||||||||
Intercompany income (expense) |
(29.9 | ) | (30.9 | ) | 89.1 | (127.5 | ) | 203.4 | (104.2 | ) | | |||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
612.1 | (28.3 | ) | 363.5 | 408.1 | 964.4 | (1,651.6 | ) | 668.2 | |||||||||||||||||||
Income tax expense (benefit) |
| (20.4 | ) | (52.9 | ) | 123.2 | 113.8 | | 163.7 | |||||||||||||||||||
Income (loss) from continuing
operations |
612.1 | (7.9 | ) | 416.4 | 284.9 | 850.6 | (1,651.6 | ) | 504.5 | |||||||||||||||||||
Income related to
discontinued operations,
net of income taxes |
| 16.6 | | | | | 16.6 | |||||||||||||||||||||
Net income |
$ | 612.1 | $ | 8.7 | $ | 416.4 | $ | 284.9 | $ | 850.6 | $ | (1,651.6 | ) | $ | 521.1 | |||||||||||||
-22-
Table of Contents
Consolidating Balance Sheets
September 30, 2009
(in millions)
September 30, 2009
(in millions)
Cooper | Cooper | Cooper | Cooper | ||||||||||||||||||||||||||||||
Industries | Industries, | Industries, | US, | Other | Consolidating | ||||||||||||||||||||||||||||
plc | Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | ||||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | | $ | 479.5 | $ | 1.9 | $ | 177.0 | $ | | $ | 658.4 | |||||||||||||||||
Investments |
| | | 3.6 | | | | 3.6 | |||||||||||||||||||||||||
Receivables |
| | 0.1 | 0.1 | 412.7 | 462.9 | | 875.8 | |||||||||||||||||||||||||
Inventories |
| | | | 246.3 | 256.4 | | 502.7 | |||||||||||||||||||||||||
Current discontinued
operations receivable |
| | 13.4 | | | | | 13.4 | |||||||||||||||||||||||||
Deferred income taxes and
other current assets |
| | 28.7 | 58.8 | 36.2 | 100.2 | | 223.9 | |||||||||||||||||||||||||
Total current assets |
| | 42.2 | 542.0 | 697.1 | 996.5 | | 2,277.8 | |||||||||||||||||||||||||
Property, plant and
equipment, less
accumulated depreciation |
| | | 61.1 | 313.0 | 335.5 | | 709.6 | |||||||||||||||||||||||||
Goodwill |
| | | | 1,278.0 | 1,357.8 | | 2,635.8 | |||||||||||||||||||||||||
Investment in subsidiaries |
2,609.7 | 3,008.0 | 566.8 | 4,686.4 | 1,177.3 | 2,560.3 | (14,608.5 | ) | | ||||||||||||||||||||||||
Investment in parent |
| | | 3,418.5 | | 312.7 | (3,731.2 | ) | | ||||||||||||||||||||||||
Intercompany accounts
receivable |
1.4 | | 72.1 | | 1,807.9 | 1,546.5 | (3,427.9 | ) | | ||||||||||||||||||||||||
Intercompany notes receivable |
| 3,345.0 | 27.8 | 494.0 | 0.1 | 4,307.4 | (8,174.3 | ) | | ||||||||||||||||||||||||
Long-term discontinued
operations receivable |
| | 166.6 | | | | | 166.6 | |||||||||||||||||||||||||
Deferred income taxes and
other noncurrent assets |
| | 244.8 | 8.2 | (103.5 | ) | 307.3 | | 456.8 | ||||||||||||||||||||||||
Total assets |
$ | 2,611.1 | $ | 6,353.0 | $ | 1,120.3 | $ | 9,210.2 | $ | 5,169.9 | $ | 11,724.0 | $ | (29,941.9 | ) | $ | 6,246.6 | ||||||||||||||||
Short-term debt |
$ | | $ | | $ | | $ | | $ | | $ | 9.4 | $ | | $ | 9.4 | |||||||||||||||||
Accounts payable |
| 41.6 | 6.4 | 18.2 | 150.3 | 211.5 | | 428.0 | |||||||||||||||||||||||||
Accrued liabilities |
0.2 | 3.4 | 38.0 | 68.0 | 218.1 | 214.0 | | 541.7 | |||||||||||||||||||||||||
Current discontinued
operations liability |
| | 49.8 | | | | | 49.8 | |||||||||||||||||||||||||
Current maturities of
long-term debt |
| | 277.3 | | | | | 277.3 | |||||||||||||||||||||||||
Total current liabilities |
0.2 | 45.0 | 371.5 | 86.2 | 368.4 | 434.9 | | 1,306.2 | |||||||||||||||||||||||||
Long-term debt |
| | | 922.6 | | | | 922.6 | |||||||||||||||||||||||||
Intercompany accounts payable |
| 83.6 | | 3,344.3 | | | (3,427.9 | ) | | ||||||||||||||||||||||||
Intercompany notes payable |
| 1,435.7 | | 1,214.6 | 1,742.3 | 3,781.7 | (8,174.3 | ) | | ||||||||||||||||||||||||
Long-term discontinued
operations liability |
| | 747.2 | | | | | 747.2 | |||||||||||||||||||||||||
Other long-term liabilities |
| | 44.4 | 131.2 | 58.3 | 164.9 | | 398.8 | |||||||||||||||||||||||||
Total liabilities |
0.2 | 1,564.3 | 1,163.1 | 5,698.9 | 2,169.0 | 4,381.5 | (11,602.2 | ) | 3,374.8 | ||||||||||||||||||||||||
Common stock |
1.7 | | | | | | | 1.7 | |||||||||||||||||||||||||
Subsidiary preferred stock |
| | | | | 325.5 | (325.5 | ) | | ||||||||||||||||||||||||
Subsidiary common stock |
| 3.1 | | | | 285.4 | (288.5 | ) | | ||||||||||||||||||||||||
Capital in excess of par
value |
2,587.4 | 3,270.5 | | 752.3 | 1,490.3 | 2,184.0 | (10,284.5 | ) | | ||||||||||||||||||||||||
Retained earnings |
20.6 | 1,648.2 | 83.1 | 3,014.9 | 1,537.9 | 4,823.6 | (7,992.6 | ) | 3,135.7 | ||||||||||||||||||||||||
Accumulated other non- owner
changes in equity |
1.2 | (133.1 | ) | (125.9 | ) | (255.9 | ) | (27.3 | ) | (276.0 | ) | 551.4 | (265.6 | ) | |||||||||||||||||||
Total shareholders equity |
2,610.9 | 4,788.7 | (42.8 | ) | 3,511.3 | 3,000.9 | 7,342.5 | (18,339.7 | ) | 2,871.8 | |||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 2,611.1 | $ | 6,353.0 | $ | 1,120.3 | $ | 9,210.2 | $ | 5,169.9 | $ | 11,724.0 | $ | (29,941.9 | ) | $ | 6,246.6 | ||||||||||||||||
-23-
Table of Contents
Consolidating Balance Sheets
December 31, 2008
(in millions)
December 31, 2008
(in millions)
Cooper | Cooper | Cooper | ||||||||||||||||||||||||||
Industries, | Industries, | US, | Other | Consolidating | ||||||||||||||||||||||||
Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | ||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 81.6 | $ | 1.3 | $ | 175.9 | $ | | $ | 258.8 | ||||||||||||||
Investments |
| | 21.9 | | | | 21.9 | |||||||||||||||||||||
Receivables |
| | 0.5 | 521.8 | 489.1 | | 1,011.4 | |||||||||||||||||||||
Inventories |
| | | 336.2 | 305.6 | | 641.8 | |||||||||||||||||||||
Current discontinued
operations receivable |
| 17.5 | | | | | 17.5 | |||||||||||||||||||||
Deferred income taxes and
other current assets |
10.8 | 24.8 | 79.6 | 33.1 | 98.2 | | 246.5 | |||||||||||||||||||||
Total current assets |
10.8 | 42.3 | 183.6 | 892.4 | 1,068.8 | | 2,197.9 | |||||||||||||||||||||
Property, plant and
equipment, less
accumulated depreciation |
| | 61.2 | 324.3 | 342.7 | | 728.2 | |||||||||||||||||||||
Goodwill |
| | | 1,266.4 | 1,300.9 | | 2,567.3 | |||||||||||||||||||||
Investment in subsidiaries |
2,541.5 | 587.4 | 4,438.5 | 1,116.9 | 2,734.1 | (11,418.4 | ) | | ||||||||||||||||||||
Investment in parent |
| | 3,532.7 | | 312.7 | (3,845.4 | ) | | ||||||||||||||||||||
Intercompany accounts
receivable |
| 903.8 | | 1,546.2 | 1,564.2 | (4,014.2 | ) | | ||||||||||||||||||||
Intercompany notes
receivable |
3,345.0 | 24.0 | 1,361.7 | 0.2 | 4,028.5 | (8,759.4 | ) | | ||||||||||||||||||||
Long-term discontinued
operations receivable |
| 174.8 | | | | | 174.8 | |||||||||||||||||||||
Deferred income taxes and
other noncurrent assets |
| 248.2 | (9.0 | ) | (116.5 | ) | 374.0 | | 496.7 | |||||||||||||||||||
Total assets |
$ | 5,897.3 | $ | 1,980.5 | $ | 9,568.7 | $ | 5,029.9 | $ | 11,725.9 | $ | (28,037.4 | ) | $ | 6,164.9 | |||||||||||||
Short-term debt |
$ | | $ | | $ | | $ | | $ | 25.6 | $ | | $ | 25.6 | ||||||||||||||
Accounts payable |
42.5 | 3.1 | 18.9 | 207.8 | 220.2 | | 492.5 | |||||||||||||||||||||
Accrued liabilities |
6.5 | 33.0 | 106.7 | 255.3 | 217.2 | | 618.7 | |||||||||||||||||||||
Current discontinued
operations liability |
| 50.4 | | | | | 50.4 | |||||||||||||||||||||
Current maturities of
long-term debt |
| 275.0 | | | | | 275.0 | |||||||||||||||||||||
Total current liabilities |
49.0 | 361.5 | 125.6 | 463.1 | 463.0 | | 1,462.2 | |||||||||||||||||||||
Long-term debt |
| 2.2 | 922.1 | 8.0 | 0.2 | | 932.5 | |||||||||||||||||||||
Intercompany accounts
payable |
10.6 | | 4,003.6 | | | (4,014.2 | ) | | ||||||||||||||||||||
Intercompany notes
payable |
1,155.7 | 851.6 | 1,217.1 | 1,742.0 | 3,793.0 | (8,759.4 | ) | | ||||||||||||||||||||
Long-term discontinued
operations liability |
| 764.7 | | | | | 764.7 | |||||||||||||||||||||
Other long-term liabilities |
| 49.8 | 62.0 | 70.0 | 216.3 | | 398.1 | |||||||||||||||||||||
Total liabilities |
1,215.3 | 2,029.8 | 6,330.4 | 2,283.1 | 4,472.5 | (12,773.6 | ) | 3,557.5 | ||||||||||||||||||||
Class A common stock |
2.0 | | | | | (0.3 | ) | 1.7 | ||||||||||||||||||||
Class B common stock |
1.1 | | | | | (1.1 | ) | | ||||||||||||||||||||
Subsidiary preferred stock |
| | | | 325.5 | (325.5 | ) | | ||||||||||||||||||||
Subsidiary common stock |
| | | | 348.6 | (348.6 | ) | | ||||||||||||||||||||
Capital in excess of
par value |
3,365.0 | | 753.9 | 1,455.0 | 2,561.0 | (8,134.9 | ) | | ||||||||||||||||||||
Retained earnings |
1,511.3 | 94.4 | 2,778.8 | 1,342.3 | 4,381.8 | (7,173.2 | ) | 2,935.4 | ||||||||||||||||||||
Accumulated other non-
owner changes in equity |
(197.4 | ) | (143.7 | ) | (294.4 | ) | (50.5 | ) | (363.5 | ) | 719.8 | (329.7 | ) | |||||||||||||||
Total shareholders equity |
4,682.0 | (49.3 | ) | 3,238.3 | 2,746.8 | 7,253.4 | (15,263.8 | ) | 2,607.4 | |||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 5,897.3 | $ | 1,980.5 | $ | 9,568.7 | $ | 5,029.9 | $ | 11,725.9 | $ | (28,037.4 | ) | $ | 6,164.9 | |||||||||||||
-24-
Table of Contents
Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2009
(in millions)
Nine Months Ended September 30, 2009
(in millions)
Cooper | Cooper | Cooper | Cooper | |||||||||||||||||||||||||||||
Industries | Industries, | Industries, | US, | Other | Consolidating | |||||||||||||||||||||||||||
plc | Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | |||||||||||||||||||||||||
Net cash provided by (used in)
operating activities |
$ | (0.4 | ) | $ | (28.6 | ) | $ | 23.9 | $ | 0.4 | $ | 254.3 | $ | 388.8 | $ | | $ | 638.4 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||||||||||
Proceeds from short-term investments |
| | | 19.1 | | | | 19.1 | ||||||||||||||||||||||||
Capital expenditures |
| | | (15.6 | ) | (26.8 | ) | (28.4 | ) | | (70.8 | ) | ||||||||||||||||||||
Cash paid for acquired businesses |
| | | (10.7 | ) | (7.9 | ) | (3.2 | ) | | (21.8 | ) | ||||||||||||||||||||
Investments in affiliates |
| (0.1 | ) | (0.2 | ) | (0.2 | ) | | | 0.5 | | |||||||||||||||||||||
Loans to affiliates |
| | (3.8 | ) | (261.3 | ) | | (1,131.2 | ) | 1,396.3 | | |||||||||||||||||||||
Repayments of loans from affiliates |
| 0.1 | | 375.8 | | 841.4 | (1,217.3 | ) | | |||||||||||||||||||||||
Dividends from affiliates |
| | | 107.9 | 42.5 | 8.0 | (158.4 | ) | | |||||||||||||||||||||||
Proceeds from sales of property,
plant and equipment |
| | | | | 1.4 | | 1.4 | ||||||||||||||||||||||||
Net cash provided by (used in)
investing activities |
| | (4.0 | ) | 215.0 | 7.8 | (312.0 | ) | 21.1 | (72.1 | ) | |||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||||||||||
Debt issuance costs |
| | | (1.7 | ) | | | | (1.7 | ) | ||||||||||||||||||||||
Repayments of debt |
| | | | (8.0 | ) | (16.6 | ) | | (24.6 | ) | |||||||||||||||||||||
Borrowings from affiliates |
| 1,313.0 | | 47.6 | | 35.7 | (1,396.3 | ) | | |||||||||||||||||||||||
Repayments of loans to affiliates |
| (1,105.8 | ) | | (47.5 | ) | | (64.0 | ) | 1,217.3 | | |||||||||||||||||||||
Other intercompany financing
activities |
0.1 | 76.5 | (19.9 | ) | 185.7 | (253.5 | ) | 11.1 | | | ||||||||||||||||||||||
Dividends |
| (125.7 | ) | | | | | | (125.7 | ) | ||||||||||||||||||||||
Dividends paid to affiliates |
| (107.6 | ) | | | | (50.8 | ) | 158.4 | | ||||||||||||||||||||||
Purchases of common shares |
| (26.0 | ) | | | | | | (26.0 | ) | ||||||||||||||||||||||
Excess tax benefits from stock
options and awards |
| | | (1.6 | ) | | | | (1.6 | ) | ||||||||||||||||||||||
Issuance of stock |
| | | | | 0.5 | (0.5 | ) | | |||||||||||||||||||||||
Proceeds from exercise of stock
options and other |
0.3 | 4.2 | | | | | | 4.5 | ||||||||||||||||||||||||
Net cash provided by (used in)
financing activities |
0.4 | 28.6 | (19.9 | ) | 182.5 | (261.5 | ) | (84.1 | ) | (21.1 | ) | (175.1 | ) | |||||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| | | | | 8.4 | | 8.4 | ||||||||||||||||||||||||
Increase in cash and cash equivalents |
| | | 397.9 | 0.6 | 1.1 | | 399.6 | ||||||||||||||||||||||||
Cash and cash equivalents, beginning
of period |
| | | 81.6 | 1.3 | 175.9 | | 258.8 | ||||||||||||||||||||||||
Cash and cash equivalents, end of
period |
$ | | $ | | $ | | $ | 479.5 | $ | 1.9 | $ | 177.0 | $ | | $ | 658.4 | ||||||||||||||||
-25-
Table of Contents
Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2008
(in millions)
Nine Months Ended September 30, 2008
(in millions)
Cooper | Cooper | Cooper | ||||||||||||||||||||||||||
Industries, | Industries, | US, | Other | Consolidating | ||||||||||||||||||||||||
Ltd. | LLC | Inc. | Guarantors | Subsidiaries | Adjustments | Total | ||||||||||||||||||||||
Net cash provided by (used in)
operating activities |
$ | (29.5 | ) | $ | (17.7 | ) | $ | (26.8 | ) | $ | 159.0 | $ | 484.8 | $ | | $ | 569.8 | |||||||||||
Cash flows from investing
activities: |
||||||||||||||||||||||||||||
Proceeds from short-term
investments |
| | 56.4 | | | | 56.4 | |||||||||||||||||||||
Proceeds from cash restricted for
business acquisitions |
| | | | 290.1 | | 290.1 | |||||||||||||||||||||
Capital expenditures |
| | (11.9 | ) | (37.4 | ) | (46.2 | ) | | (95.5 | ) | |||||||||||||||||
Cash paid for acquired businesses |
| | | | (270.8 | ) | | (270.8 | ) | |||||||||||||||||||
Investments in affiliates |
| | (18.0 | ) | (3.3 | ) | | 21.3 | | |||||||||||||||||||
Loans to affiliates |
(189.8 | ) | | (568.2 | ) | | (751.3 | ) | 1,509.3 | | ||||||||||||||||||
Repayments of loans from affiliates |
346.8 | 1.8 | 358.4 | 0.1 | 590.4 | (1,297.5 | ) | | ||||||||||||||||||||
Dividends from affiliates |
| | 96.1 | | 8.0 | (104.1 | ) | | ||||||||||||||||||||
Proceeds from sales of property,
plant and equipment and other |
| | (3.3 | ) | 0.6 | 1.8 | | (0.9 | ) | |||||||||||||||||||
Net cash provided by (used in)
investing activities |
157.0 | 1.8 | (90.5 | ) | (40.0 | ) | (178.0 | ) | 129.0 | (20.7 | ) | |||||||||||||||||
Cash flows from financing
activities: |
||||||||||||||||||||||||||||
Proceeds from issuance of debt |
| | 297.6 | | | | 297.6 | |||||||||||||||||||||
Debt issuance costs |
| | (0.6 | ) | | | | (0.6 | ) | |||||||||||||||||||
Proceeds from debt derivatives |
| | 0.5 | | | | 0.5 | |||||||||||||||||||||
Repayments of debt |
| (100.0 | ) | (218.7 | ) | | (61.3 | ) | | (380.0 | ) | |||||||||||||||||
Borrowings from affiliates |
1,083.7 | 151.5 | 42.6 | 3.2 | 228.3 | (1,509.3 | ) | | ||||||||||||||||||||
Repayments of loans to affiliates |
(850.9 | ) | | (97.5 | ) | (3.0 | ) | (346.1 | ) | 1,297.5 | | |||||||||||||||||
Other intercompany financing
activities |
(2.2 | ) | (34.2 | ) | 325.1 | (114.8 | ) | (187.1 | ) | 13.2 | | |||||||||||||||||
Dividends |
(126.9 | ) | | | | | | (126.9 | ) | |||||||||||||||||||
Dividends paid to affiliates |
(104.1 | ) | | | | | 104.1 | | ||||||||||||||||||||
Purchase of common shares |
(141.6 | ) | | (183.6 | ) | | | | (325.2 | ) | ||||||||||||||||||
Excess tax benefits from stock
options and awards |
| | 8.6 | | | | 8.6 | |||||||||||||||||||||
Issuance of stock |
| | | | 21.3 | (21.3 | ) | | ||||||||||||||||||||
Proceeds from exercise of stock
options and other |
13.2 | | 17.0 | | | (13.2 | ) | 17.0 | ||||||||||||||||||||
Net cash provided by (used in)
financing activities |
(128.8 | ) | 17.3 | 191.0 | (114.6 | ) | (344.9 | ) | (129.0 | ) | (509.0 | ) | ||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| | | | (12.2 | ) | | (12.2 | ) | |||||||||||||||||||
Increase (decrease) in cash and
cash equivalents |
(1.3 | ) | 1.4 | 73.7 | 4.4 | (50.3 | ) | | 27.9 | |||||||||||||||||||
Cash and cash equivalents,
beginning of period |
1.3 | | 23.1 | (1.1 | ) | 209.5 | | 232.8 | ||||||||||||||||||||
Cash and cash equivalents, end of
period |
$ | | $ | 1.4 | $ | 96.8 | $ | 3.3 | $ | 159.2 | $ | | $ | 260.7 | ||||||||||||||
-26-
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We often discuss expectations regarding our future markets, demand for our products and
services, and our performance in our annual and quarterly reports, press releases, and other
written and oral statements. Statements that relate to matters that are not historical facts are
forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. These forward-looking statements are
based on an analysis of currently available competitive, financial and economic data and our
operating plans. They are inherently uncertain and investors should recognize that events and
actual results could turn out to be significantly different from our expectations. By way of
illustration, when used in this document, words such as anticipate, believe, expect, plan,
intend, estimate, project, will, should, could, may, predict and similar
expressions are intended to identify forward-looking statements.
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of
Financial Condition and Results of Operations, includes forward-looking statements. These
statements are not historical facts but instead represent only our beliefs regarding future events,
many of which, by their nature, are inherently uncertain and outside of our control. It is
possible that our actual results and financial condition may differ, possibly materially, from the
anticipated results and the financial condition indicated in these forward-looking statements. For
us, particular uncertainties that could cause our actual results to be materially different than
those expressed in our forward-looking statements include: market and economic conditions,
competitive pressures, volatility of raw material prices, our ability to develop and introduce new
products, our ability to implement revenue growth plans and cost-reduction programs, mergers and
acquisitions and their implementations, implementation of manufacturing rationalization programs,
changes in legislation and regulations (including changes in tax laws, tax treaties or tax
regulations), changes in financial markets including currency exchange rate fluctuations, and our
ability to resolve potential liabilities and insurance recoveries resulting from Pneumo-Abex
related asbestos claims.
The above description of risks and uncertainties is by no means all-inclusive, but is designed
to highlight what we believe are important factors to consider. For a more detailed description of
risk factors, please see Part II Item 1A. Risk Factors.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to
we, us, our, the Company, or Cooper means Cooper Industries plc and, where the context
requires, includes our subsidiaries.
Recent Developments
In June 2009, our Board of Directors approved moving Coopers place of incorporation from
Bermuda to Ireland. This move is part of a reorganization that created a newly formed Irish
company, Cooper Industries plc. We completed the first step in this reorganization by establishing
our tax residency in Ireland in December 2008. At a Special Shareholders Meeting on August 31,
2009, shareholders voted in favor of completing the reorganization pursuant to which all Cooper
Industries, Ltd. Class A common shares held by public shareholders would be cancelled and all
holders of such shares would receive ordinary shares of Cooper Industries plc on a one-for-one
basis. The reorganization transaction was completed on September 8, 2009, following approval from
the Supreme Court of Bermuda, at which time Cooper Industries plc replaced Cooper Industries, Ltd.
as the ultimate parent company. On October 19, 2009, the Irish High Court approved the reduction of
share premium (similar to additional paid-in-capital) to establish distributable reserves on the
unconsolidated balance sheet of Cooper Industries plc. The establishment of distributable reserves
was required to enable the Company to pay dividends and repurchase shares in the future.
We believe incorporating in Ireland offers increased strategic flexibility and operational
benefits as we continue to expand the growing international portion of our business. We do not
expect the reorganization will have any material impact on our financial results. Shares of the
Irish company, Cooper Industries plc,
-27-
Table of Contents
began trading on the New York Stock Exchange on September 9, 2009 under the symbol CBE, the
same symbol under which Cooper Industries, Ltd. shares were previously traded. Cooper Industries
plc will remain subject to the U.S. Securities and Exchange Commission reporting requirements, the
mandates of the Sarbanes-Oxley Act and applicable corporate governance rules of the New York Stock
Exchange.
Results of Operations
Three Months Ended September 30, 2009 Compared With Three Months Ended September 30, 2008
Income from continuing operations for the third quarter of 2009 was $114.3 million on revenues
of $1,286.4 million compared with 2008 third quarter income from continuing operations of $189.2
million on revenues of $1,727.7 million. Third quarter 2009 diluted earnings per share decreased
37% to $.68 from $1.08 in 2008. During the third quarter of 2009, reported income from continuing
operations was reduced by restructuring charges of $6.5 million or $.03 per share. The third
quarter 2009 results included discrete tax adjustments that increased earnings per share from
continuing operations by $.01 per share. During the third quarter of 2008, tax benefits from
settlements and other discrete tax adjustments increased earnings per share from continuing
operations by $.11 per share.
Revenues:
Revenues for the third quarter of 2009 decreased 25.5% compared to the third quarter of 2008.
The impact of currency translation decreased reported revenues by 2.0% for the quarter.
Electrical Products segment revenues decreased 24.8% compared to the third quarter of 2008.
The impact of unfavorable currency translation decreased reported revenues by 1.8% and acquisitions
increased reported revenues 0.1% for the quarter. The global recession resulted in weakness in all
markets for the Electrical Products segment, especially the North American and Western European
markets when comparing results to the prior year.
Tools segment revenues for the third quarter of 2009 decreased 31.0% from the third quarter of
2008. Unfavorable currency translation decreased revenues by 3.2% over the third quarter of 2008.
Lower revenues from declining retail market activity, weaker demand in the North American and
Western European industrial markets and lower requirements for assembly systems for the light
passenger vehicle markets drove the reduction in revenue compared to prior year results.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 68.1% for the third quarter of 2009 compared
to 67.7% for the comparable 2008 quarter. The increase in the cost of sales percentage primarily
resulted from negative leverage on fixed costs due to lower demand for products.
Electrical Products segment cost of sales, as a percentage of revenues, was 67.7% for the
third quarter of 2009 compared to 67.5% for the third quarter of 2008. The increase in cost of
sales as a percentage of revenues in comparison to the prior year third quarter was primarily due
to negative leverage of fixed costs from reduced demand due to the global market slowdown. Tools
segment cost of sales, as a percentage of revenues, was 72.9% for the third quarter of 2009
compared to 69.0% for the third quarter of 2008. The increase in the cost of sales percentage was
primarily driven by unfavorable leverage of fixed costs due to lower production volumes.
Selling and administrative expenses, as a percentage of revenues, for the third quarter of
2009 was 19.5% compared to 17.8% for the third quarter of 2008. Selling and administrative
expenses were reduced by $56.7 million in the third quarter 2009 when compared to the same prior
year period. The increase in percentage is reflective of the reduced revenue levels offset by cost
reduction actions taken to align the overall selling and administrative expenses with current and
projected market demand.
-28-
Table of Contents
Electrical Products segment selling and administrative expenses, as a percentage of revenues
for the third quarter of 2009, was 17.2% compared to 16.1% for the third quarter of 2008. The
increase in the percentage reflects the impact of 25% lower comparable revenue levels for the third
quarter 2009 which was partially offset by cost reduction actions taken to adjust segment selling
and administrative expenses to global market conditions.
Tools segment selling and administrative expenses, as a percentage of revenues for the third
quarter of 2009, was 22.3% compared to 19.1% for the third quarter of 2008. The increase in
selling and administrative expenses, as a percentage of revenues, was driven by the 31% reduction
in comparable third quarter 2009 revenues partially offset by cost reduction actions implemented
for the segment.
Net interest expense in the third quarter of 2009 decreased $1.4 million from the 2008 third
quarter, primarily as a result of lower average debt balances. Average debt balances were $1.21
billion and $1.33 billion and average interest rates were 5.37% and 5.18% for the third quarter of
2009 and 2008, respectively.
Operating Earnings:
Electrical Products segment third quarter 2009 operating earnings decreased 31% to $173.5
million from $249.7 million for the same quarter of last year. The decrease resulted from the
reduced global market demand and adjustments to production volumes to align with the current market
demand. The Electrical Products segment continues its investment in productivity initiatives which
include manufacturing productivity improvements, product redesign and selling and administrative
expense reductions to improve operating earnings in addition to continuing review of additional
restructuring actions.
Tools segment third quarter 2009 operating earnings was $6.8 million compared to operating
earnings of $24.1 million in the third quarter of 2008. The decrease resulted from the impact of
lower unit volumes and curtailment of production volumes to forecasted market demand. The Tools
segment continues its investment in productivity initiatives to improve operating earnings in
addition to continuing review of additional restructuring actions.
General Corporate expense decreased $2.4 million to $21.5 million during the third quarter of
2009 compared to $23.9 million during the same period of 2008. The decrease primarily relates to
lower stock compensation expense and actions taken to reduce General Corporate expense in response
to the reduced global market demand for Cooper products. General Corporate expense for the third
quarter 2009 included $2.8 million in costs associated with the reincorporation of the Company to
Ireland.
Restructuring and Asset Impairment Charges:
In the third quarter of 2009, Cooper recorded a pre-tax restructuring charge of $5.7 million
primarily for severance costs as a result of managements on-going assessment of its operational
cost structure in consideration of the continued challenging market conditions and anticipated
future market levels. An incremental total of 440 hourly and 126 salary positions are being
eliminated as a result of the third quarter 2009 restructuring actions to reduce Coopers
workforce. The third quarter 2009 also includes a non-cash impairment charge of $0.8 million
related to certain facility closures. See Note 2 of the Notes to the Consolidated Financial
Statements.
Income Taxes:
The effective tax rate was 16.2% for the three months ended September 30, 2009 and 18.7% for
the three months ended September 30, 2008. Cooper reduced income taxes expense by $1.2 million and
$18.3 million in the three months ended September 30, 2009 and 2008, respectively, for discrete tax
items primarily related to statute expirations, state tax settlements, and foreign taxes. Excluding
the discrete tax items, Coopers effective tax rate for the three months ended September 30, 2009
and 2008 was 17.1% and
-29-
Table of Contents
26.5%. This decrease is primarily related to lower earnings in 2009 without a corresponding
decrease in projected tax benefits.
Nine Months Ended September 30, 2009 Compared With Nine Months Ended September 30, 2008
Income from continuing operations for the nine months ended September 30, 2009 was $284.8
million on revenues of $3,813.0 million compared with income from continuing operations of $504.5
million on revenues of $4,998.1 million during the comparable 2008 period. Diluted earnings per
share from continuing operations were $1.69 in 2009 compared to $2.85 in 2008. During the nine
months ended September 30, 2009, income from continuing operations was reduced by restructuring
charges of $25.7 million or $.13 per share. Income from continuing operations for the nine months
ended September 30, 2009 was favorably impacted by discrete tax items primarily related to foreign
taxes which improved earnings by $.06 per share. During the nine months ended September 30, 2008,
income from continuing operations was reduced by restructuring charges of $7.6 million or $.03 per
share. Discrete tax items for the nine months ended September 30, 2008 favorably impacted earnings
by $.13 per share.
Revenues:
Revenues for the nine months ended September 30, 2009 decreased 23.7% compared to the same
period in 2008. The impact of acquisitions increased comparable revenues in 2009 by 0.7% with
currency translation decreasing 2009 revenues by 3.3%.
Electrical Products segment revenues for the nine months ended September 30, 2009 decreased
22.5% compared to the same period in 2008. The impact of acquisitions increased revenue by 0.7%
and currency translation had a 3.0% unfavorable effect on revenues in the nine months ended
September 30, 2009. Revenue declines were a result of the global recession in all markets for the
Electrical Products segment, especially for distribution channels impacted by the overall reduced
demand and actions taken by distributors to reduce the inventory levels in the channel.
Tools segment revenues for the nine months ended September 30, 2009 decreased 32.7% compared
to the same period in 2008. Unfavorable currency translation impact was 5.4% on revenues in 2009.
Revenues declined as the segment continued to see weak global demand in all markets.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 69.4% for the nine months ended September 30,
2009 compared to 67.0% for the comparable 2008 period. The increase in the cost of sales
percentage primarily resulted from negative leverage on fixed costs due to lower demand for
products and production curtailments to reduce overall inventory levels to align with slowing
market demands.
Electrical Products segment cost of sales, as a percentage of revenues, was 68.8% for the nine
months ended September 30, 2009 compared to 66.6% for the comparable period in 2008. The increase
in cost of sales as a percentage of revenues in comparison to the prior year period was primarily
due to negative leverage of fixed costs from the 23% decline in revenues due to the global market
slowdown and actions taken to adjust production inventory levels to current lower market
conditions.
Tools segment cost of sales, as a percentage of revenues, was 75.2% for the nine months ended
September 30, 2009 compared to 69.6% for the same period of 2008. The increase in the cost of
sales percentage was driven by unfavorable leverage of fixed costs due to lower production volumes
and further actions taken to adjust inventory levels to market conditions.
Selling and administrative expenses, as a percentage of revenues, for the nine months ended
September 30, 2009 was 19.9% compared to 18.5% for the same 2008 period. Selling and administrative
expenses were reduced by $166.3 million in the first nine months of 2009 when compared to the same
prior year period. The increase in the percentage is reflective of the reduced revenue levels
offset partially by cost
-30-
Table of Contents
reduction actions taken to align the overall selling and administrative expenses with current
and projected market demand.
Electrical Products segment selling and administrative expenses, as a percentage of revenues,
for the nine months ended September 30, 2009 was 17.5% compared to 16.8% for the same period in
2008. The increase in the percentage reflects the impact of 23% lower comparable revenue levels in
2009 which was partially offset by cost reduction actions taken to adjust segment selling and
administrative expenses to global market conditions.
Tools segment selling and administrative expenses, as a percentage of revenues, for the nine
months ended September 30, 2009 was 23.4% compared to 19.8% for the same 2008 period. The increase
in selling and administrative expenses, as a percentage of revenues, was driven by the 33%
reduction in comparable revenues partially offset by cost reduction actions implemented for the
segment.
Net interest expense for the nine months ended September 30, 2009 decreased $3.1 million from
the comparable 2008 period primarily as a result of lower average debt balances partially offset by
higher average borrowing rates and lower interest earned on cash invested. Average debt balances
were $1.22 billion and $1.39 billion and average interest rates were 5.35% and 5.16% for the nine
months ended September 30, 2009 and 2008, respectively.
Operating Earnings:
Electrical Products segment operating earnings of $467.0 million for the nine months ended
September 30, 2009 decreased 36% from the operating earnings of $732.2 million for the same period
of last year. The decrease primarily resulted from the reduced global market demand and
adjustments to production volumes to align with the lower market demand.
Tools segment operating earnings was $5.8 million in the nine months ended September 30, 2009
compared to operating earnings of $63.6 million in the same period of 2008. The decrease resulted
from the impact of lower unit volumes and further curtailment of production volumes to adjust
inventory levels to current and forecasted market demand.
General Corporate expense decreased $6.0 million to $63.5 million during the nine months ended
September 30, 2009 compared to $69.5 million during the same period of 2008. The decrease
primarily relates to lower stock and incentive compensation expense and actions taken to reduce
General Corporate expense in response to the reduced global market demand for Cooper products.
General Corporate expense for the nine months ended September 30, 2009 includes $3.0 million in
costs associated with the reincorporation of the Company to Ireland.
Restructuring and Asset Impairment Charges:
At December 31, 2008, Cooper had an accrual of $29.7 million for future cash expenditures
related to its fourth quarter 2008 restructuring actions. The fourth quarter 2008 restructuring
actions included the elimination of 1,314 hourly and 930 salaried positions.
During the nine months ended September 30, 2009, Cooper recorded pre-tax restructuring and
asset impairment charges of $25.7 million related to additional employment reductions and certain
facility closures as a result of managements on-going assessment of its hourly and salary
workforce and its required production capacity in consideration of current and anticipated market
conditions and demand levels. An incremental total of 999 hourly and 694 salary positions are being
eliminated as a result of the 2009 restructuring actions to reduce Coopers workforce.
During the nine months ended September 30, 2009, Cooper expended $26.9 million in cash related
to its fourth quarter 2008 restructuring actions and an additional $19.1 million for the actions
taken in 2009.
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At September 30, 2009, Cooper has an accrual for future cash expenditures related to the
restructuring actions of $8.6 million. The related cash payments will be substantially completed
in the first half of 2010.
As part of the restructuring actions, Cooper has approved the closure of ten factories and
warehouses, six of which have been completed as of September 30, 2009. Cooper has recorded non-cash
impairment charges of $0.8 million related to these actions. Of the remaining facility closures,
two are expected to be completed by the end of 2009 with the remaining two factory closures
expected to be substantially completed in the first half of 2010. Cooper expects to incur
incremental restructuring charges in the range of approximately $8 to $15 million associated with
the completion of planned restructuring activities as the actions are implemented over the next
year. See Note 2 of the Notes to the Consolidated Financial Statements.
Cooper estimates the restructuring actions taken in the fourth quarter of 2008 and during the
nine months ended September 30, 2009 have reduced operating costs by approximately $59 million in
2009 and anticipates these actions will reduce operating costs by approximately $24 million during
the remainder of 2009. Cooper expects to realize approximately $13 million of sequential benefits
in 2010 from the restructuring actions taken to date.
Income Taxes:
The effective tax rate was 15.3% for the nine months ended September 30, 2009 and 24.5% for
the nine months ended September 30, 2008. Cooper reduced income taxes expense by $9.6 million and
$22.9 million in the nine months ended September 30, 2009 and 2008, respectively, for discrete tax
items primarily related to statute expirations, state tax settlements and foreign taxes. Excluding
the impacts of the discrete items, Coopers effective tax rate would have been 18.2% and 28.0% for
the nine months ended September 30, 2009 and 2008, respectively. The decrease in Coopers 2009
effective tax rate compared to 2008, adjusted for the aforementioned discrete items, is primarily
related to a decrease in 2009 earnings without a corresponding decrease in projected tax benefits.
Income Related to Discontinued Operations:
During the nine months ended September 30, 2009, Cooper recognized an after tax gain from
discontinued operations of $25.5 million, which is net of a $16.2 million income tax expense (or
$.15 per diluted share) related to its asbestos liability regarding the Automotive Products
segment, which was sold in 1998. The income resulted from negotiated insurance settlements
consummated in 2009 that were not previously recognized. Cooper believes that it is likely that
additional insurance recoveries will be recorded in the future as new insurance-in-place agreements
are consummated or settlements with insurance carriers are completed. The timing and value of these
agreements and settlements cannot be currently estimated as they may be subject to extensive
additional negotiation and litigation. See Note 16 of the Notes to the Consolidated Financial
Statements.
Liquidity and Capital Resources
Liquidity:
Coopers operating working capital (defined as receivables and inventories less accounts
payable) decreased $210.2 million during the nine months ended September 30, 2009. A $135.6 million
decrease in receivables and a $139.1 million decrease in inventories, partially offset by a $64.5
million decrease in accounts payable, were driven primarily by a 24% decrease in sales and
aggressive actions to right size Coopers businesses for current market conditions. Coopers
operating working capital at September 30, 2009 was approximately 28% lower than at September 30,
2008 as operating working capital levels have been adjusted to the current lower operating levels.
Operating working capital turnover (defined as annualized revenues divided by average quarterly
operating working capital) for the third quarter of 2009 was 5.2 turns as compared to 5.1 turns for
the same period of 2008.
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Cash provided by operating activities was $638.4 million during the nine months ended
September 30, 2009. This cash, plus $19.1 million from redemption of short-term investments and
$4.5 million of cash received from stock option exercises significantly exceeded the funds utilized
to fund capital expenditures of $70.8 million, acquisitions of $21.8 million, dividends of $125.7
million, debt repayments of $24.6 million and share purchases of $26.0 million. Cash provided by
operating activities in 2009 is net of a $25 million voluntary contribution to the U.S. defined
benefit pension plan.
Cash provided by operating activities was $569.8 million during the nine months ended
September 30, 2008. This cash, plus $297.5 million of net proceeds from issuances of debt, $290.1
million of proceeds from cash previously restricted, $56.4 million from redemption of short-term
investments and $17.0 million of cash received from stock option exercises was primarily used to
fund capital expenditures of $95.5 million, acquisitions of $270.8 million, dividends of $126.9
million, debt repayments of $380.0 million and share purchases of $325.2 million.
As discussed in Note 16 of Notes to the Consolidated Financial Statements, Coopers contingent
liabilities related to the Automotive Products sale to Federal-Mogul in 1998 will continue to be
resolved through the tort system. Cooper anticipates that the annual cash outlay for its potential
asbestos liability, net of insurance recoveries, will average in the range of $20 to $30 million,
although the amounts will vary as the amount of the actual net cash outlay is not reasonably
predictable. In 2009, insurance recoveries will likely exceed cash outlays.
Coopers financial position and liquidity has remained strong during the global economic
recession. It is likely that most markets that Cooper services will continue to have weak demand
in the near term. While the length and depth of the recession and a recovery are not predictable,
Cooper is proactively adjusting our cost structure. In this regard, in the fourth quarter of 2008,
Cooper implemented contingency plans to reduce our cost structure and recognized a restructuring
charge of $35.7 million primarily related to reductions in our workforce in excess of 2,200
employees. During the nine months ended September 30, 2009, Cooper further reduced its workforce by
approximately 1,700 additional employees and recognized restructuring charges of $24.9 million.
Cash flows from operating activities for the nine months ended September 30, 2009 have been reduced
by the $46.0 million expended in connection with the restructuring actions. At September 30, 2009,
Cooper had an $8.6 million accrual related to these activities for which the related cash payments
will be substantially completed in the first half of 2010. As part of the restructuring actions,
Cooper has approved the closure of ten factories and warehouses, six of which have been completed
at the end of the third quarter 2009. Of the remaining facility closures, two are expected to be
completed by the end of 2009 with the remaining two factory closures expected to be substantially
completed in the first half of 2010. Cooper expects to incur incremental restructuring charges in
the range of approximately $8 to $15 million associated with the completion of planned
restructuring activities as the actions are implemented over the next year, with approximately $7
million expected during the fourth quarter of 2009. See Note 2 of the Notes to the Consolidated
Financial Statements for further information.
On November 2, 2009, Cooper repaid the $275 million 5.5% senior unsecured notes at maturity
with existing cash. Cooper currently anticipates that it will annually generate in excess of $600
million in cash flow available for acquisitions, debt repayments, dividends and common stock
repurchases during 2009.
Capital Resources:
Cooper targets a 30% to 40% debt-to-total capitalization ratio. Excess cash flows are
utilized to fund acquisitions or to purchase shares of Cooper common stock. Coopers debt-to-total
capitalization ratio was 29.6% at September 30, 2009, 32.1% at December 31, 2008 and 29.6% at
September 30, 2008.
At September 30, 2009 and December 31, 2008, Cooper had cash and cash equivalents of
$658.4 million and $258.8 million, respectively and short-term investments of $3.6 million and
$21.9 million, respectively. At September 30, 2009 and December 31, 2008, Cooper had short-term
debt of $9.4 million and $25.6 million, respectively.
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On August 14, 2009 Cooper entered into a credit agreement that provides a $350 million
three-year committed bank credit facility that replaces Coopers previous credit facility that was
to mature in November 2009. Coopers practice is to back up its short-term debt balance with a
combination of cash, cash equivalents, and committed credit facilities. At September 30, 2009,
Cooper has a $350 million committed credit facility that matures in August 2012. Short-term debt,
to the extent not backed up by cash or short-term investments, reduces the amount of additional
liquidity provided by the committed credit facility.
The credit facility agreement is not subject to termination based on a decrease in Coopers
debt ratings or a material adverse change clause. The principal financial covenants in the
agreement limits Coopers debt-to-total capitalization ratio to 60% and requires 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
agreement.
Coopers access to the commercial paper market could be adversely affected by a change in the
credit ratings assigned to its commercial paper. Should Coopers 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 credit facilities to provide short-term funding.
The committed credit facilities do not contain any provision which makes their availability to
Cooper dependent on Coopers credit ratings.
Critical Accounting Estimates and Recently Issued Accounting Standards
We disclosed our critical accounting policies in our Annual Report on Form 10-K for the year
ended December 31, 2008. No significant changes have occurred to those policies except our adoption
of the revisions to ASC Topic 805, Business Combinations effective January 1, 2009. The revisions
provide enhanced guidance related to the measurement of identifiable assets acquired, liabilities
assumed and disclosure of information related to business combinations. Cooper implemented the
revised guidance prospectively to business combinations completed on or after January 1, 2009. See
Note 1 of the Notes to the Consolidated Financial Statements.
Cooper had goodwill of $2.64 billion and $2.57 billion at September 30, 2009 and December 31,
2008, respectively. Cooper records goodwill related to business acquisitions when the purchase
price exceeds the fair value of identified assets and liabilities acquired. Goodwill is subject to
an annual impairment test and Cooper has designated January 1 as the date of this 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. Cooper has identified eight reporting units for which goodwill is tested for
impairment.
Goodwill impairment is evaluated using a two-step process. The first step of the goodwill
impairment test compares the fair value of a reporting unit with its carrying value. If the
carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test shall be performed. The second step compares the implied fair value of the
reporting units goodwill to the carrying amount of its goodwill to measure the amount of
impairment loss. The implied fair value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination (e.g., the fair value of the reporting unit is
allocated to all of the assets and liabilities, including any unrecognized intangible assets, as if
the reporting unit had been acquired in a business combination and the fair value of the reporting
unit was the purchase price paid to acquire the reporting unit).
The primary technique we utilize in estimating the fair value of our reporting units is
discounted cash flow analysis. Discounted cash flow analysis requires us to make various judgments,
estimates and assumptions, many of which are interdependent, about future sales, operating margins,
growth rates, capital expenditures, working capital and discount rates. In addition to estimating
the fair value of each of our reporting units using discounted cash flow analysis, we compare the
sum of the fair values of our reporting units that resulted from the discounted cash flow analysis
to our market capitalization to determine that our estimates of reporting unit fair value are
reasonable.
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The starting point for the assumptions used in our discounted cash flow analysis is the annual
long range financial forecast. The annual planning process that we undertake to prepare the long
range financial forecast takes into consideration a multitude of factors including historical
growth rates and operating performance, related industry trends, macroeconomic conditions,
inflationary and deflationary forces, pricing strategies, customer analysis, operational issues,
competitor analysis, customer needs and marketplace data, among others. Assumptions are also made
for perpetual growth rates for periods beyond the long range financial forecast period. Our
estimates of fair value are sensitive to changes in all of these variables, certain of which relate
to broader macroeconomic conditions outside our control.
The long range financial forecast is typically completed early in the fourth quarter of each
year, and it serves as the primary basis for our estimate of reporting unit fair values used in our
annual impairment tests, absent significant changes in our outlook on future results. In the fourth
quarter of 2008, the global financial and credit crisis and economic slowdown impacted the
near-term outlook for the majority of our businesses. As a result, we revised the operating plans
and discounted cash flows included in our initial long range financial forecast for each reporting
unit to reflect our most current assessment of estimated fair value for purposes of the January 1,
2009 goodwill impairment test.
In determining the fair value of our reporting units at January 1, 2009, we were required to
make significant judgments and estimates regarding the expected severity and duration of the
current economic slowdown. We forecasted revenues for Electrical Products reporting units to
decline in 2009 in the range of 1% to 16% with an average reduction of 11%. We forecasted Tools
revenues to decline in 2009 by 24%. The forecast assumptions for 2010 anticipate a recovery to
begin in certain markets and realization of certain benefits from cost reduction actions taken in
late 2008 and early 2009 to reduce our overall cost structure. Our forecasted revenue amounts in
2011 are approximately 7% above the actual 2008 revenue levels for Electrical Products and
approximately 4% lower than 2008 for Tools. In developing our forecast, we considered the
historical operating results achieved in each of our businesses. Over the three year period through
2008, Electrical Products revenues increased annually in the range of 11% to 15%. Tools revenues
increased approximately 4% in 2006 and 5% in 2007 and declined approximately 4% in 2008. During the
three year period through 2008, Cooper achieved compounded annual growth in earnings from
continuing operations of over 15% (2006 24%; 2007 20%; 2008 8%) and free cash flow in excess
of earnings from continuing operations.
We estimate a 3% annual growth rate beyond 2011 to arrive at a normalized residual year
representing the perpetual cash flows of each reporting unit. The forecasted 3% annual growth rate
is less than Coopers historical annual growth rate achieved in the prior three and five year
periods through 2008. The residual year cash flow was capitalized to arrive at the terminal value
of the reporting units. Utilizing a discount rate of 11% for each reporting unit, the present value
of the cash flows during the projection period and terminal value were aggregated to estimate the
fair value of the reporting units. We assumed a discount rate of 11% in our discounted cash flow
analysis at January 1, 2009 compared to a 10% discount rate used at January 1, 2008. In determining
the appropriate discount rate, we considered the weighted average cost of capital for comparable
companies.
Due to the effects of the current economic slowdown on our operations, we determined that,
although the estimated fair value significantly exceeded the carrying value for each of our
reporting units as of January 1, 2009, the margin by which the estimated fair value exceeded
carrying value was smaller than the prior year. If the current economic downturn worsens or does
not recover as we have projected, the estimated fair values of our reporting units could decrease.
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The following table provides information for each of Coopers eight reporting units.
$ in millions | ||||||||||||||||||||
Percentage | ||||||||||||||||||||
Reduction | ||||||||||||||||||||
Fair Value | Fair Value | Required to | ||||||||||||||||||
in Excess | in Excess | Reduce 1/1/09 | ||||||||||||||||||
of Carrying | of Carrying | Estimated Fair | ||||||||||||||||||
Goodwill at | Value at | Goodwill at | Value at | Value to | ||||||||||||||||
Reporting Unit | 12/31/07 (2) | 1/1/08 (1) | 12/31/08 (2) | 1/1/09 (1) | Carrying Value | |||||||||||||||
B-Line |
$ | 319.8 | 39 | % | $ | 303.4 | 88 | % | 47 | % | ||||||||||
Bussmann |
337.3 | 117 | % | 337.8 | 65 | % | 39 | % | ||||||||||||
Crouse-Hinds |
213.0 | 372 | % | 362.8 | 192 | % | 66 | % | ||||||||||||
Lighting |
367.8 | 124 | % | 362.1 | 93 | % | 48 | % | ||||||||||||
Wiring Devices |
81.7 | 144 | % | 82.7 | 72 | % | 42 | % | ||||||||||||
Power Systems |
429.3 | 201 | % | 443.1 | 85 | % | 46 | % | ||||||||||||
Safety |
484.2 | 48 | % | 374.0 | 35 | % | 26 | % | ||||||||||||
Tools |
307.2 | 107 | % | 301.4 | 35 | % | 26 | % |
(1) | Expressed as a percentage of carrying value. | |
(2) | There were no changes in the allocation of goodwill between reporting units. The changes in goodwill are due to the effect of acquisitions and translation. |
In addition to estimating the fair value of each of our reporting units using the discounted
cash flow analysis as described above, we compared the sum of the fair values of our reporting
units that resulted from the discounted cash flow analysis to our market capitalization to
determine that our estimates of reporting unit fair value were reasonable. As of December 31, 2008,
our equity market capitalization was approximately $5.1 billion, compared to the $2.6 billion book
value of equity.
The above table reflects the percentage reduction in estimated fair value required to reduce
the January 1, 2009 fair value estimates to the respective reporting units carrying value. To
evaluate the sensitivity of the fair value calculations and to address the uncertainty inherent in
estimating the fair values of our reporting units, we applied a range of discount rates and
long-term cash flow growth assumptions. Discount rates applied ranged from 9% to 13% with long-term
cash flow growth assumptions ranging from 2% to 4%. Under this range of assumptions, only one
scenario would reduce the fair value of a reporting unit below its carrying value (with the fair
value approximately 1% below its carrying value). If the current economic downturn worsens or the
projected recovery is significantly delayed beyond our projections, it is possible the estimated
fair values of certain reporting units could decrease such that the second step of the goodwill
impairment test must be completed.
There are significant inherent uncertainties and management judgment involved in estimating
the fair value of each reporting unit. While we believe we have made reasonable estimates and
assumptions to estimate the fair value of our reporting units, it is possible that a material
change could occur. If actual results are not consistent with our current estimates and
assumptions, or if changes in macroeconomic conditions outside the control of management change
such that it results in a significant negative impact on our estimated fair values, we may be
required to perform the second step of the impairment test for one or more of our reporting units,
which could result in a material impairment of our goodwill.
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As of September 30, 2009, there have been no material changes to Coopers off-balance sheet
arrangements and contractual obligations as described in its Annual Report on Form 10-K for the
year ended December 31, 2008.
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:
September 30, | ||||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Electrical Products |
$ | 545.0 | $ | 773.9 | ||||
Tools |
56.8 | 83.2 | ||||||
$ | 601.8 | $ | 857.1 | |||||
Item 4. Controls and Procedures
The Companys management, with the participation of the Companys Chairman and Chief Executive
Officer and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, the Companys Chairman and Chief Executive Officer and Senior Vice President and
Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure
controls and procedures are effective, at the reasonable assurance level, in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act and are effective, at the reasonable
assurance level, in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
Companys management, including the Companys Chairman and Chief Executive Officer and Senior Vice
President and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There have not been any changes in the Companys internal control over financial reporting
(identified in connection with the evaluation required by paragraph (d) in Rules 13a-15 and 15d-15
under the Exchange Act) during the most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Discontinued Operations Liability
Information regarding the discontinued operations liability is incorporated by reference to
Note 16 of Notes to the Consolidated Financial Statements included in Part I of this Form 10-Q.
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Other Matters
Cooper and its subsidiaries are defendants or otherwise involved in a number of lawsuits in
the ordinary course of business. We estimate the range of our liability related to pending
litigation when we believe the amount and range of loss can be estimated. We record our best
estimate of a loss when the loss is considered probable. When a liability is probable and there is
a range of estimated loss with no best estimate in the range, we record the minimum estimated
liability related to the lawsuits or claims. As additional information becomes available, we
assess the potential liability related to our pending litigation and claims and revise our
estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate
outcome may differ from our estimates. In the opinion of management and based on liability
accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not
expected to have a material adverse effect on our consolidated financial position or cash flows,
although they could have a material adverse effect on our results of operations for a particular
reporting period.
The U.S. Federal Government has enacted legislation intended to deny certain federal funding
and government contracts to U.S. companies that reincorporate outside the United States, including
Section 745 of the Consolidated Appropriations Act, 2008 (Public Law 110-161), Section 724(c) of
the Transportation, Treasury, Housing and Urban Development, the Judiciary, and Independent
Agencies Appropriations Act, 2006 (Public Law 109-115), and 6 U.S.C. 395(b) of The Homeland
Security Act. The Company has self-reported to the Department of Defense certain transactions
aggregating approximately $8 million with U.S. government entities which may be subject to the
legislation. At the time of this filing, it is too early to determine whether any fines or
penalties may be assessed against the Company.
Item 1A. Risk Factors
Please refer to the Risk Factors section in our Annual Report on Form 10-K for discussion
of risks to which our business, financial condition, results of operations and cash flows are
subject. Other than as set forth below, there have been no material changes to the risk factors
disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Risks relating to Coopers change in its jurisdiction of incorporation from Bermuda to Ireland.
Legislative and regulatory action could materially adversely affect us.
Legislative and regulatory action may be taken in the U.S. which, if ultimately enacted, could
override tax treaties upon which we rely or broaden the circumstances under which we would be
considered a U.S. resident, each of which could materially and adversely affect our effective tax
rate and/or require us to take further action, at potentially significant expense, to seek to
preserve our effective tax rate. We cannot predict the outcome of any specific legislative or
regulatory proposals. However, if proposals were enacted that had the effect of disregarding the
reincorporation to Ireland or limiting our ability as an Irish company to take advantage of tax
treaties with the U.S., we could be subjected to increased taxation and/or potentially significant
expense.
The U.S. Federal Government and certain states and municipalities have enacted legislation
intended to deny federal funding and government contracts to U.S. companies that reincorporate
outside the U.S. For instance, the Financial Services and General Government Appropriations Act
for fiscal year 2008 signed into law in December 2007 includes a provision that prohibits
government contracts with U.S. companies that have reincorporated outside the United States. We
cannot provide any assurance that the impact on us of any adopted or proposed legislation in this
area will not be materially adverse to our operations.
In addition, there continues to be negative publicity regarding, and criticism of,
companies that conduct substantial business in the U.S. but are domiciled in countries that do not
have tax treaties with the United States, like Bermuda. We cannot assure you that moving our
jurisdiction of incorporation to Ireland will eliminate the risk that we may be subject to similar
criticism.
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The reincorporation to Ireland may not allow us to maintain a competitive worldwide effective
corporate tax rate.
We believe that the reincorporation should improve our ability to maintain a competitive
worldwide effective corporate tax rate. We cannot give any assurance as to what our effective tax
rate will be after the reincorporation, however, because of, among other things, uncertainty
regarding the tax policies of the jurisdictions where we operate. Our actual effective tax rate may
vary from this expectation and that variance may be material. Additionally, the tax laws of Ireland
and other jurisdictions could change in the future, and such changes could cause a material change
in our effective tax rate.
After the reincorporation, a transfer of Cooper Industries plc shares may be subject to Irish stamp
duty.
A transfer of Cooper Industries plc shares from a seller who holds shares beneficially
to a buyer who holds the acquired shares beneficially will not be subject to Irish stamp duty. A
transfer of Cooper Industries plc shares by a seller who holds shares directly to any buyer, or by
a seller who holds the shares beneficially to a buyer who holds the acquired shares directly, may
be subject to Irish stamp duty (currently at the rate of 1% of the price paid or the market value
of the shares acquired, if higher) payable by the buyer.
We currently intend to pay stamp duty in connection with share transfers made in the
ordinary course of trading by a seller who holds shares directly to a buyer who holds the acquired
shares beneficially. In other cases Cooper may, in its absolute discretion, pay any stamp duty.
Cooper Industries plcs articles of association provide that, in the event of any such payment,
Cooper Industries plc may seek reimbursement from the buyer or seller, at its discretion.
Following Cooper Industries change in tax residency in December 2008, dividends received by
shareholders may be subject to Irish dividend withholding tax whether or not the reincorporation is
completed.
In certain circumstances, Cooper Industries will be required to deduct Irish dividend
withholding tax (currently at the rate of 20%) from dividends paid to its shareholders. Irish
withholding tax (if any) arises in respect of dividends paid after Cooper Industries establishment
of tax residency in Ireland, which occurred in December 2008. In the majority of cases,
shareholders resident in the U.S. will not be subject to Irish withholding tax, and shareholders
resident in a number of other countries will not be subject to Irish withholding tax provided that
they complete certain Irish dividend withholding tax forms.
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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 during
the three months ended September 30, 2009:
Purchases of Equity Securities
Total Number of Shares | Maximum Number of | |||||||||||||||
Total Number of | Average Price | Purchased as Part of | Shares that May Yet Be | |||||||||||||
Shares | Paid per | Publicly Announced Plans | Purchased Under the | |||||||||||||
Period | Purchased | Share | or Programs (1) | Plans or Programs (1) | ||||||||||||
As of 6/30/09 |
12,766,635 | |||||||||||||||
7/01/09 7/31/09 |
| $ | | | 12,766,635 | |||||||||||
8/01/09 8/31/09 |
| $ | | | 12,766,635 | |||||||||||
9/01/09 9/30/09 |
| $ | | | 12,766,635 | (2) | ||||||||||
Total |
| $ | | |
(1) | On February 12, 2008, Coopers Board of Directors authorized the repurchase of up to ten million shares of Cooper common stock. On February 9, 2009, Cooper announced that the Board of Directors authorized the repurchase of ten million shares of common stock in addition to the remaining February 12, 2008 authorization, which is reflected in the above table. Cooper has also announced that the Board authorized the repurchase of shares issued from time to time under its equity compensation plans, matched savings plan and dividend reinvestment plan in order to offset the dilution that results from issuing shares under these plans. For 2009, Cooper used an estimate that one million shares would be issued under equity compensation plans, which is reflected in the above table. | |
(2) | As of the date of this filing in 2009, Cooper had repurchased the one million shares intended to offset dilution from share issuances under equity compensation plans, as well as 262,800 additional shares under the Cooper Board of Directors authorizations discussed above. Cooper may continue to repurchase shares under this authorization from time to time during 2009. The decision whether to do so will depend on the favorability of market conditions, as well as potential cash requirements for acquisitions and debt repayments. |
Item 3. Defaults Upon Senior Securities
Not applicable
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Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of shareholders was held on August 31, 2009 in Houston, Texas. Two
proposals, as described in Coopers Proxy Statement dated July 16, 2009, were voted upon at the
meeting and approved by the shareholders. The following is a brief description of the matters
voted upon and the results of voting.
1. Proposal to approve a Scheme of Arrangement that will effectively change the place of
incorporation of the parent company of Cooper Industries from Bermuda to Ireland.
In order for the Scheme of Arrangement to be approved, it must receive the affirmative vote of
a majority in number of record holders of the Cooper Industries, Ltd. Class A common shares present
and voting on the proposal at the meeting, representing 75% or more in value of the Class A common
shares present and voting on the proposal at the meeting.
Number of holders of Class A common shares present and voting at the meeting:
For: |
2,933 | (83 | %) | ||||||
Against: |
406 | (11 | %) | ||||||
Abstain: |
212 | (6 | %) | ||||||
Number of Class A common shares present and voting at the meeting:
| |||||||||
For: |
165,540,514 | (93.48 | %) | ||||||
Against: |
10,800,758 | (6.10 | %) | ||||||
Abstain: |
740,261 | (.42 | %) | ||||||
2. If the Scheme of Arrangement is approved, a proposal to approve the reduction of share
premium of Cooper Industries plc, an Irish company that is now the new parent company of Cooper
Industries, to approve the reduction of share premium and creation of distributable reserves.
|
|||||||||
In order for the distributable reserves proposal to be approved, it must receive the
affirmative vote of holders of at least a majority of the Cooper Industries, Ltd. Class A common
shares present and voting on the proposal.
|
|||||||||
For: |
173,541,489 | (98.0 | %) | ||||||
Against: |
2,844,080 | (1.61 | %) | ||||||
Abstain: |
695,963 | (.39 | %) |
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Table of Contents
Item 6. Exhibits
2.0 | Scheme of Arrangement between Cooper Industries, Ltd. and the Class A Common Shareholders (incorporated by reference to Annex A to Coopers Definitive Proxy Statement on Schedule 14A filed July 16, 2009). | ||
3.0 | Memorandum and Articles of Association of Cooper Industries plc (incorporated by reference to Exhibit 3.1 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.1 | Second Amended and Restated Rights Agreement, dated September 8, 2009, by and among Cooper Industries plc, Cooper Industries, Ltd. and Computershare Trust Company, N.A., as Rights Agent (incorporated by referenced to Exhibit 4.1 to Cooper Industries plcs Form 8-K filed on September 9, 2009). | ||
4.2 | Fifth Supplemental Indenture, dated as of September 8, 2009, by and among Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Industries plc and The Bank of New York Mellon Trust Company, N.A., (successor to JPMorgan Chase Bank, N.A.) as Trustee (incorporated by reference to Exhibit 4.2 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.3 | First Supplemental Indenture, dated as of September 8, 2009, by and among Cooper US, Inc., the Guarantors (as defined therein), Cooper Industries plc and The Bank of New York Mellon Trust Company, N.A. (successor to JPMorgan Chase Bank, N.A.) as Trustee (incorporated by reference to Exhibit 4.3 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.4 | Third Supplemental Indenture, dated as of September 8, 2009, by and among Cooper US, Inc., the Guarantors (as defined therein), Cooper Industries plc and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.4 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.1 | Amended and Restated Cooper Industries plc Directors Stock Plan (As Amended and Restated as of September 8, 2009) (incorporated by reference to Exhibit 10.3 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.2 | Cooper Industries plc Amended and Restated Directors Retainer Fee Stock Plan (As Amended and Restated as of September 8, 2009) (incorporated by reference to Exhibit 10.4 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.3 | First Amendment to Cooper Industries Amended and Restated Management Annual Incentive Plan (As Amended and Restated for Non-Deferral Terms as of February 13, 2006) (As Amended and Restated in connection with Section 409A, Effective January 1, 2005) (incorporated by reference to Exhibit 10.6 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.4 | Cooper Industries plc Amended and Restated Stock Incentive Plan (As Amended and Restated September 8, 2009) (incorporated by reference to Exhibit 10.7 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.5 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Amended and Restated Cooper Industries, Ltd. Directors Stock Plan (incorporated by reference to Exhibit 10.8 to Cooper Industries plcs Form 8-K filed September 9, 2009). |
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Table of Contents
10.6 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries, Ltd. Amended and Restated Directors Retainer Fee Stock Plan (incorporated by reference to Exhibit 10.9 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.7 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries Amended and Restated Management Annual Incentive Plan (incorporated by reference to Exhibit 10.10 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.8 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries, Ltd. Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.11 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.9 | Credit Agreement, dated August 14, 2009, among Cooper Industries, Ltd., Cooper US, Inc., the Subsidiary Guarantors named therein and the banks named therein. | ||
12. | Computation of Ratios of Earnings to Fixed Charges for the Calendar Years 2004 through 2008 and the Nine Months Ended September 30, 2009 and 2008. | ||
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. |
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Schema Document | ||
101.CAL | XBRL Calculation Linkbase Document | ||
101.LAB | XBRL Label Linkbase Document | ||
101.PRE | XBRL Presentation Linkbase Document | ||
101.DEF | XBRL Definition Linkbase Document |
Pursuant to Rule 406T of Regulation S-T, the interactive data included in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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Table of Contents
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 plc
(Registrant) |
||||
Date: November 5, 2009 | /s/ Terry A. Klebe | |||
Terry A. Klebe, Senior Vice President and | ||||
Chief Financial Officer | ||||
Date: November 5, 2009 | /s/ Rick L. Johnson | |||
Rick L. Johnson, Vice President, Controller and | ||||
Chief Accounting Officer | ||||
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Table of Contents
Exhibit Index
Exhibit No.
2.0 | Scheme of Arrangement between Cooper Industries, Ltd. and the Class A Common Shareholders (incorporated by reference to Annex A to Coopers Definitive Proxy Statement on Schedule 14A filed July 16, 2009). | ||
3.0 | Memorandum and Articles of Association of Cooper Industries plc (incorporated by reference to Exhibit 3.1 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.1 | Second Amended and Restated Rights Agreement, dated September 8, 2009, by and among Cooper Industries plc, Cooper Industries, Ltd. and Computershare Trust Company, N.A., as Rights Agent (incorporated by referenced to Exhibit 4.1 to Cooper Industries plcs Form 8-K filed on September 9, 2009). | ||
4.2 | Fifth Supplemental Indenture, dated as of September 8, 2009, by and among Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Industries plc and The Bank of New York Mellon Trust Company, N.A., (successor to JPMorgan Chase Bank, N.A.) as Trustee (incorporated by reference to Exhibit 4.2 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.3 | First Supplemental Indenture, dated as of September 8, 2009, by and among Cooper US, Inc., the Guarantors (as defined therein), Cooper Industries plc and The Bank of New York Mellon Trust Company, N.A. (successor to JPMorgan Chase Bank, N.A.) as Trustee (incorporated by reference to Exhibit 4.3 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
4.4 | Third Supplemental Indenture, dated as of September 8, 2009, by and among Cooper US, Inc., the Guarantors (as defined therein), Cooper Industries plc and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.4 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.1 | Amended and Restated Cooper Industries plc Directors Stock Plan (As Amended and Restated as of September 8, 2009) (incorporated by reference to Exhibit 10.3 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.2 | Cooper Industries plc Amended and Restated Directors Retainer Fee Stock Plan (As Amended and Restated as of September 8, 2009) (incorporated by reference to Exhibit 10.4 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.3 | First Amendment to Cooper Industries Amended and Restated Management Annual Incentive Plan (As Amended and Restated for Non-Deferral Terms as of February 13, 2006) (As Amended and Restated in connection with Section 409A, Effective January 1, 2005) (incorporated by reference to Exhibit 10.6 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.4 | Cooper Industries plc Amended and Restated Stock Incentive Plan (As Amended and Restated September 8, 2009) (incorporated by reference to Exhibit 10.7 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.5 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Amended and Restated Cooper Industries, Ltd. Directors Stock Plan (incorporated by reference to Exhibit 10.8 to Cooper Industries plcs Form 8-K filed September 9, 2009). |
Table of Contents
Exhibit No.
10.6 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries, Ltd. Amended and Restated Directors Retainer Fee Stock Plan (incorporated by reference to Exhibit 10.9 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.7 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries Amended and Restated Management Annual Incentive Plan (incorporated by reference to Exhibit 10.10 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.8 | Deed Poll of Assumption, dated September 8, 2009, by Cooper Industries plc relating to the Cooper Industries, Ltd. Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.11 to Cooper Industries plcs Form 8-K filed September 9, 2009). | ||
10.9 | Credit Agreement, dated August 14, 2009, among Cooper Industries, Ltd., Cooper US, Inc., the Subsidiary Guarantors named therein and the banks named therein. | ||
12. | Computation of Ratios of Earnings to Fixed Charges for the Calendar Years 2004 through 2008 and the Nine Months Ended September 30, 2009 and 2008. | ||
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. | ||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Schema Document | ||
101.CAL | XBRL Calculation Linkbase Document | ||
101.LAB | XBRL Label Linkbase Document | ||
101.PRE | XBRL Presentation Linkbase Document | ||
101.DEF | XBRL Definition Linkbase Document |
Pursuant to Rule 406T of Regulation S-T, the interactive data included in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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