FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-1175
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Cooper Industries, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-4156620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
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(Address of principal executive offices) (Zip Code)
(713) 209-8400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of issuer's common stock as of April 30, 2002 was
93,059,274.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
--------- ---------
(in millions, where applicable)
Revenues ........................................................ $ 975.0 $ 1,095.1
Cost of sales ................................................... 701.4 768.9
Selling and administrative expenses ............................. 185.2 199.5
Goodwill amortization ........................................... -- 14.8
Interest expense, net ........................................... 16.9 25.1
--------- ---------
Income before income taxes .................................. 71.5 86.8
Income taxes .................................................... 22.7 30.4
--------- ---------
Net income .................................................. $ 48.8 $ 56.4
========= =========
Income per Common Share:
Basic ....................................................... $ .52 $ .60
========= =========
Diluted ..................................................... $ .52 $ .60
========= =========
Cash dividends per Common Share ................................. $ .35 $ .35
========= =========
</Table>
The accompanying notes are an integral part of these statements.
-2-
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(in millions)
ASSETS
Cash and cash equivalents .................................. $ 7.5 $ 11.5
Receivables ................................................ 774.3 777.1
Inventories ................................................ 657.4 670.9
Deferred income taxes and other current assets ............. 183.9 191.7
--------- ---------
Total current assets .............................. 1,623.1 1,651.2
--------- ---------
Property, plant and equipment, less accumulated depreciation 806.9 826.8
Goodwill ................................................... 1,952.4 1,958.7
Deferred income taxes and other noncurrent assets .......... 160.3 174.7
--------- ---------
Total assets ...................................... $ 4,542.7 $ 4,611.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt ............................................ $ 55.1 $ 132.9
Accounts payable ........................................... 351.9 401.4
Accrued liabilities ........................................ 489.3 510.9
Current maturities of long-term debt ....................... 210.6 60.9
--------- ---------
Total current liabilities ......................... 1,106.9 1,106.1
--------- ---------
Long-term debt ............................................. 1,059.8 1,107.0
Postretirement benefits other than pensions ................ 194.5 196.7
Other long-term liabilities ................................ 175.4 178.4
--------- ---------
Total liabilities ................................. 2,536.6 2,588.2
--------- ---------
Common stock, $5.00 par value .............................. 615.0 615.0
Capital in excess of par value ............................. 639.9 646.0
Retained earnings .......................................... 2,341.1 2,325.0
Common stock held in treasury, at cost ..................... (1,457.2) (1,435.0)
Accumulated other nonowner changes in equity ............... (132.7) (127.8)
--------- ---------
Total shareholders' equity ........................ 2,006.1 2,023.2
--------- ---------
Total liabilities and shareholders' equity ........ $ 4,542.7 $ 4,611.4
========= =========
</Table>
The accompanying notes are an integral part of these statements.
-3-
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
------ ------
(in millions)
Cash flows from operating activities:
Net income ................................................................. $ 48.8 $ 56.4
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization .............................................. 30.0 46.1
Deferred income taxes ...................................................... 6.0 --
Changes in assets and liabilities: (1)
Receivables ............................................................ 0.1 (21.1)
Inventories ............................................................ 12.4 (50.7)
Accounts payable and accrued liabilities ............................... (64.7) (52.2)
Other assets and liabilities, net ...................................... 13.2 (13.0)
------ ------
Net cash provided by (used in) operating activities .............. 45.8 (34.5)
Cash flows from investing activities:
Cash received from (paid for) acquired businesses .......................... (1.1) 11.3
Capital expenditures ....................................................... (14.5) (39.6)
Proceeds from sales of property, plant and equipment ....................... 1.7 0.8
Investment in joint venture ................................................ (1.9) --
------ ------
Net cash used in investing activities ............................ (15.8) (27.5)
Cash flows from financing activities:
Proceeds from issuances of debt ............................................ 33.3 135.9
Repayments of debt ......................................................... (0.4) (51.1)
Dividends .................................................................. (32.7) (32.7)
Acquisition of treasury shares ............................................. (34.5) --
Activity under employee stock plans ........................................ 0.5 1.4
------ ------
Net cash provided by (used in) financing activities .............. (33.8) 53.5
Effect of exchange rate changes on cash and cash equivalents ................... (0.2) (0.1)
------ ------
Decrease in cash and cash equivalents .......................................... (4.0) (8.6)
Cash and cash equivalents, beginning of period ................................. 11.5 26.4
------ ------
Cash and cash equivalents, end of period ....................................... $ 7.5 $ 17.8
====== ======
</Table>
(1) Net of the effects of acquisitions and translation.
The accompanying notes are an integral part of these statements.
-4-
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The financial information presented as of any
date other than December 31 has been prepared from the books and records without
audit. Financial information as of December 31 has been derived from Cooper's
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated, have
been included. For further information regarding Cooper's accounting policies,
refer to the Consolidated Financial Statements and related notes for the year
ended December 31, 2001 included in Part IV of Cooper's 2001 Annual Report on
Form 10-K.
NOTE 2. ADOPTION OF NEW ACCOUNTING STANDARD
On January 1, 2002, Cooper adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") and is
therefore no longer amortizing goodwill. Under SFAS No. 142, goodwill is subject
to an annual impairment test. By the end of the second quarter of 2002, Cooper
will complete the first step of the required two-step impairment test of
goodwill as of January 1, 2002. Cooper does not expect completion of the
impairment tests will have a significant effect on its consolidated results of
operations or financial position.
Net income and income per common share excluding goodwill amortization,
net of taxes for the three months ended March 31, 2001 would have been as
follows:
<Table>
<Caption>
NET
INCOME
-------------
(in millions)
Reported net income.............................................................. $ 56.4
Goodwill amortization, net of taxes.............................................. 12.3
---------
Adjusted net income.............................................................. $ 68.7
=========
</Table>
<Table>
<Caption>
BASIC DILUTED
-------- -------
Income per Common Share:
Reported net income........................................................ $ .60 $ .60
Goodwill amortization, net of taxes........................................ .13 .13
-------- -------
Adjusted net income........................................................ $ .73 $ .73
======== =======
</Table>
Changes in the carrying amount of goodwill for the three months ended
March 31, 2002, by segment, were as follows:
<Table>
<Caption>
ELECTRICAL TOOLS &
PRODUCTS HARDWARE TOTAL
---------- -------- ---------
(in millions)
Balance January 1, 2002 ..................... $ 1,655.8 $ 302.9 $ 1,958.7
Additions to Goodwill ....................... 1.1 -- 1.1
Translation adjustments ..................... (7.5) 0.1 (7.4)
--------- --------- ---------
Balance March 31, 2002 ...................... $ 1,649.4 $ 303.0 $ 1,952.4
========= ========= =========
</Table>
-5-
Other intangible assets primarily consist of patents and trademarks.
The gross carrying value of other intangible assets was $11.3 million at March
31, 2002 and December 31, 2001. Accumulated amortization of other intangible
assets was $7.5 million and $7.3 million at March 31, 2002 and December 31,
2001, respectively. Other intangible assets continue to be amortized over their
remaining useful lives which were evaluated and determined to remain
appropriate. Amortization expense of other intangible assets was $0.2 million
for the three months ended March 31, 2002 and 2001.
On January 1, 2002, Cooper adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Adoption of this statement did not have an effect on Cooper's
consolidated results of operations or financial position.
NOTE 3. ACQUISITIONS
During the first quarter of 2002, Cooper paid $1.1 million related to
previously acquired businesses. The terms of a previous acquisition agreement
provided for additional consideration to be paid if earnings of the acquired
businesses exceeded certain targeted levels. During the first quarter of 2001,
Cooper received purchase price adjustments of $11.3 million, net related to
previously acquired businesses.
NOTE 4. INVENTORIES
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(in millions)
Raw materials .................................. $ 211.2 $ 223.6
Work-in-process ................................ 129.2 132.2
Finished goods ................................. 374.1 374.0
Perishable tooling and supplies ................ 21.0 21.4
-------- --------
735.5 751.2
Excess of current standard costs over LIFO costs (78.1) (80.3)
-------- --------
Net inventories ..................... $ 657.4 $ 670.9
======== ========
</Table>
NOTE 5. LONG-TERM DEBT
At March 31, 2002, commercial paper of $391 million was classified as
long-term debt, reflecting Cooper's intention to refinance this amount during
the 12-month period following the balance sheet date through either continued
short-term borrowing or utilization of available bank credit facilities.
During 1999, Cooper completed a shelf registration statement to issue
up to $500 million of debt securities. At March 31, 2002, all $500 million of
the shelf registration was available to be issued.
NOTE 6. COMMON STOCK
During the first quarter of 2002, Cooper repurchased 0.9 million shares
of its common stock at a cost of $34.5 million.
-6-
NOTE 7. SEGMENT INFORMATION
<Table>
<Caption>
REVENUES OPERATING EARNINGS
-------------------------- --------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in millions)
Electrical Products ......................... $ 819.5 $ 910.0 $ 91.8 $ 102.6
Tools & Hardware ............................ 155.5 185.1 5.3 16.9
--------- --------- --------- ---------
Total management reporting ............... $ 975.0 $ 1,095.1 97.1 119.5
========= =========
General corporate expenses .................. 8.7 7.6
Interest expense, net ....................... 16.9 25.1
--------- ---------
Income before income taxes .................. $ 71.5 $ 86.8
========= =========
</Table>
NOTE 8. NET INCOME PER COMMON SHARE
<Table>
<Caption>
BASIC DILUTED
---------------------- ---------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- --------------------
2002 2001 2002 2001
-------- ------- ------- -------
(in millions)
Net income applicable to Common stock................. $ 48.8 $ 56.4 $ 48.8 $ 56.4
======== ======= ======= =======
Weighted average Common shares outstanding............ 93.9 93.8 93.9 93.8
======== =======
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards............... 0.6 0.9
------- ------
Weighted average Common shares
and Common share equivalents...................... 94.5 94.7
======= ======
</Table>
Options and employee awards are not considered in the calculations if the effect
would be antidilutive.
NOTE 9. 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:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
------- --------
(in millions)
Net income........................................................................ $ 48.8 $ 56.4
Foreign currency translation losses............................................... (5.2) (12.6)
Change in fair value of derivatives............................................... 0.3 (0.3)
------- --------
Net income and other nonowner changes in equity................................... $ 43.9 $ 43.5
======= ========
</Table>
-7-
NOTE 10. ASBESTOS LIABILITIES
In October 1998, Cooper sold its Automotive Products business to
Federal-Mogul Corporation ("Federal-Mogul"). These discontinued businesses
(including the Abex product line obtained from Pneumo-Abex Corporation
("Pneumo") in 1994) were operated through subsidiary companies, and the stock of
those subsidiaries was sold to Federal-Mogul pursuant to a Purchase and Sale
Agreement dated August 17, 1998 ("1998 Agreement"). In conjunction with the
sale, Federal-Mogul indemnified Cooper for certain liabilities of these
subsidiary companies, including liabilities related to the Abex product line and
any potential liability that Cooper may have to Pneumo pursuant to a 1994 Mutual
Guaranty Agreement between Cooper and Pneumo. On October 1, 2001, Federal-Mogul
and several of its affiliates filed a Chapter 11 bankruptcy petition and
indicated that Federal-Mogul may not honor the indemnification obligations to
Cooper. As of the date of this filing, Federal-Mogul had not yet made a decision
whether to reject the 1998 Agreement, which includes the indemnification to
Cooper. If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of
its future obligations under the 1998 Agreement, including specific indemnities
relating to payment of taxes and certain obligations regarding insurance for its
former Automotive Products businesses. To the extent Cooper is obligated to
Pneumo for any asbestos-related claims arising from the Abex product line ("Abex
Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for
such claims. Based on information provided by representatives of Federal-Mogul
and recent claims experience, from August 28, 1998 through March 31, 2002, a
total of 79,329 Abex Claims were filed, of which 17,239 claims have been
resolved leaving 62,090 Abex Claims pending at March 31, 2002, that are the
responsibility of Federal-Mogul. During the three months ended March 31, 2002,
4,177 claims were filed and 265 claims were resolved. Since August 28, 1998, the
average indemnity payment for resolved Abex Claims was $965 before insurance. A
total of $27.5 million was spent on defense costs for the period August 28, 1998
through March 31, 2002. Historically, existing insurance coverage has provided
50% to 80% of the total defense and indemnity payments for Abex Claims.
Cooper completed a thorough analysis of its potential exposure for
asbestos liabilities in the event Federal-Mogul rejects the 1998 Agreement. The
analysis included a review of the Abex Claims history, existing insurance
coverage, the contractual indemnities and other facts determined to date. At
this time, the manner in which this issue ultimately will be resolved is not
known. Cooper is preserving its rights as a creditor for breach of
Federal-Mogul's indemnification to Cooper and its rights against all
Federal-Mogul subsidiaries. Cooper intends to take all actions to seek a
resolution of the indemnification issues and future handling of the Abex-related
claims within the Federal-Mogul bankruptcy proceedings. At March 31, 2002,
Cooper had a $100 million accrual for potential liabilities related to the
Federal-Mogul bankruptcy.
NOTE 11. OTHER EVENTS
On February 13, 2002, Cooper announced that it had completed its
previously announced strategic alternatives review process. After careful review
of all the available alternatives with management and its financial advisors,
Cooper's Board of Directors concluded that it is in the best interest of
Cooper's shareholders to move forward with its plan to reincorporate in Bermuda,
as previously announced on June 11, 2001. Cooper's announcement noted that the
strategic alternatives review process was very careful, deliberate and complete
in analyzing how best to maximize shareholder value; however, as a result of
intervening circumstances including the tragic events of September 11, 2001, the
bankruptcy of Federal-Mogul and a very difficult business environment, Cooper
received no definitive proposals to acquire the Company as a whole or in parts.
Under its plan to change its place of incorporation from Ohio to
Bermuda, Cooper Industries, Ltd., a newly formed Bermuda corporation, will
become the parent holding company of Cooper Industries, Inc. Upon completion of
the reorganization, each share of Cooper Industries, Inc. common stock will
automatically convert into a share of Cooper Industries, Ltd. common stock and
will have substantially the same attributes as Cooper Industries, Inc. common
stock. Cooper Industries, Ltd. shares will be listed on the New York Stock
Exchange under the "CBE" symbol, the same symbol under which the Company's
-8-
common stock currently trades. A special meeting of the shareholders of Cooper
Industries, Inc. will be held on May 14, 2002 to vote on the proposed
transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
Net income for the first quarter of 2002 was $48.8 million on revenues
of $975.0 million compared with 2001 first quarter net income of $56.4 million
on revenues of $1,095.1 million. First quarter diluted earnings per share
decreased 13% to $.52 from $.60 in 2001. On January 1, 2002, Cooper adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"), and no longer amortizes goodwill. See Note 2
of the Notes to Consolidated Financial Statements for additional information on
the adoption of SFAS No. 142. Excluding goodwill amortization, first quarter
2001 net income would have been $68.7 million and diluted earnings per share
would have been $.73.
REVENUES:
Revenues for the first quarter of 2002 decreased 11% compared to the
first quarter of 2001. The impact of foreign currency translation reduced
reported revenues by approximately 1% for the quarter.
First quarter 2002 Electrical Products revenues decreased 10% from the
first quarter last year. The weakness in the overall North American economy
affected virtually all of the markets served by the Electrical Products segment.
The decline was driven mostly by the continuing softness in the domestic
industrial, commercial construction and utility markets. Orders for electronic
and telecommunication products were also weak, but showed signs of stabilizing
as the quarter progressed. Additionally, sluggish demand for hazardous duty
electrical equipment impacted revenues in the quarter.
Tools & Hardware segment revenues for the quarter decreased 16% from
the first quarter of 2001. Hand tools sales were down from last year due to
lower demand in both the domestic industrial and electronic channels. Power
tools and automotive assembly equipment were affected by the overall slowdown in
industrial activity. A strong U.S. Dollar reduced total Tools & Hardware
revenues during the quarter by approximately 2%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 71.9% for the first
quarter of 2002 compared to 70.2% for the comparable 2001 quarter. The increase
in the cost of sales percentage was due primarily to lower absorption of
production costs and inefficiencies resulting from adjusting manufacturing
levels in response to lower demand and efforts to reduce inventories.
Selling and administrative expenses, as a percentage of revenues, for
the first quarter of 2002 were 19.0% compared to 18.2% for the first quarter of
2001. The increase in the selling and administrative expense percentage reflects
the impact of lower revenues. Spending for the quarter was $14.3 million lower
than prior year as a result of cost control programs in 2001 and 2002.
Interest expense, net for the first quarter of 2002 decreased $8.2
million from the 2001 first quarter primarily as a result of lower average
interest rates, as well as lower average debt levels.
-9-
SEGMENT OPERATING EARNINGS:
Electrical Products segment first quarter 2002 operating earnings
decreased 11% to $91.8 million from $102.6 million for the same quarter of last
year. Excluding goodwill amortization, Electrical Products segment first quarter
2001 operating earnings were $115.1 million. The decrease from prior year was
due to lower revenues reflective of the overall weakness of the U.S. economy,
competitive market conditions, and lower absorption of production costs as a
result of reduced manufacturing levels.
Tools & Hardware segment operating earnings were $5.3 million for the
2002 first quarter, compared to $16.9 million in the first quarter of 2001.
Excluding goodwill amortization, Tools & Hardware segment first quarter 2001
operating earnings were $19.2 million. The lower operating earnings primarily
reflect the impact of the reduction in revenues from the prior year, production
inefficiencies related to lower manufacturing levels and inventory reduction
efforts.
INCOME TAXES:
Taxes on income decreased primarily as a result of lower taxable
earnings. The effective tax rate was 31.75% for the three months ended March 31,
2002 and 32.5% for the three months ended March 31, 2001, excluding goodwill
amortization. The decrease in the effective tax rate is due to international tax
planning activities.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY:
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $33 million during the first
quarter of 2002. This increase in operating working capital for the 2002 first
quarter is primarily related to a reduction in accounts payable reflecting a
lower level of business activity. Operating working capital turnover for the
2002 first quarter of 3.7 turns declined from 3.9 turns in the same period of
2001 reflecting the impact of lower shipments.
Cash provided by operating activities was $46 million in the first
quarter of 2002. These funds plus net proceeds from borrowings of $33 million
were used to fund capital expenditures of $15 million, dividends of $33 million
and share repurchases of $35 million. During the first quarter of 2001, cash
used in operating activities was $35 million. Net proceeds from borrowings of
$85 million and cash received of $11 million related to previous acquisitions
were used to fund capital expenditures of $40 million, dividends of $33 million
and the cash needed for operating activities.
Cooper is continuing to focus on initiatives to maximize cash flows.
These actions include reduced capital spending, elimination of discretionary
spending and workforce reductions. As a result, Cooper currently anticipates a
continuation of its long-term ability to annually generate approximately $200
million in cash flow available for acquisitions, debt repayment and common stock
repurchases.
In connection with acquisitions accounted for as purchases, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired businesses
into existing Cooper operations. Cash flows from operating activities are
reduced by the amounts expended against the various accruals established in
connection with each acquisition. Spending against these accruals for the three
months ended March 31, 2002 and 2001 was $2.0 million and $2.1 million,
respectively.
-10-
During the fourth quarter of 2001, Cooper recorded a $7.1 million
accrual for severance and other costs associated with the consolidation or
closure of certain Electrical Products segment facilities. A total of 77
salaried and 196 hourly positions will be eliminated in 2002 as a result of
these planned consolidation actions. It is anticipated that all expenditures
will be incurred during the first half of 2002. During the first quarter of
2002, 56 positions were eliminated and $2.4 million in cash expenditures were
incurred against the accrual.
As of March 31, 2002, Cooper anticipates incurring $3.0 million related
to facility exit costs and disruptions to operations under the 2001 facility
consolidation plan that could not be accrued. A majority of the $3.0 million
relates to operating inefficiencies and training, personnel and inventory
relocation costs which will be required to be expensed as incurred during 2002.
CAPITAL RESOURCES:
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-total capitalization ratio
within this range. Excess cash flows are utilized to fund acquisitions or to
purchase shares of Cooper Common stock. Cooper's debt-to-total capitalization
ratio was 39.8% at March 31, 2002, 45.2% at March 31, 2001, and 39.1% at
December 31, 2001.
Cooper relies on commercial paper markets as its principal source of
short-term financing. As of March 31, 2002 and December 31, 2001, Cooper's
outstanding commercial paper balance was $391 million and $342 million,
respectively. The weighted average interest rate on these borrowings was 2.39%
and 2.54% at March 31, 2002 and December 31, 2001, respectively.
Cooper's practice is to back up its outstanding commercial paper with a
combination of cash and committed bank credit facilities. As of March 31, 2002,
the balance of these committed bank credit facilities was $990 million, $440
million of which mature on May 30, 2002 and $550 million of which mature on
November 17, 2004. By May 30, 2002, Cooper anticipates extending the maturity of
or replacing a substantial portion of the $440 million of maturing committed
bank credit facilities. Outstanding commercial paper balances, to the extent not
backed up by cash, reduce the amount of available borrowings under the committed
bank credit facilities. The credit facility agreements require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization. Cooper is in compliance with all covenants
set forth in the credit facility agreements. As of March 31, 2002, there have
been no material changes to Cooper's contractual obligations or other
commitments as described in its Annual Report on Form 10-K for the year ended
December 31, 2001.
Cooper's access to the commercial paper market could be adversely
affected by a change in the credit ratings assigned to its commercial paper.
Should Cooper's access to the commercial paper market be adversely affected due
to a change in its credit ratings, Cooper would rely on a combination of
available cash and its committed bank credit facilities to provide short-term
funding. The committed bank credit facilities do not contain any provision which
makes their availability to Cooper dependent on Cooper's credit ratings.
During December 1999, Cooper completed a shelf registration to issue up
to $500 million of debt securities. At March 31, 2002, all $500 million of the
shelf registration was available to be issued.
-11-
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:
<Table>
<Caption>
MARCH 31,
-------------------------
2002 2001
-------- --------
(in millions)
Electrical Products.......................... $ 256.5 $ 319.1
Tools & Hardware............................. 49.1 102.5
-------- --------
$ 305.6 $ 421.6
======== ========
</Table>
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q includes certain forward-looking statements. The
forward-looking statements reflect Cooper's expectations, objectives and goals
with respect to future events and financial performance, and are based on
assumptions and estimates which Cooper believes are reasonable. Forward-looking
statements include, but are not limited to, statements regarding facility
consolidations and cost-reduction programs, the anticipated
debt-to-capitalization ratio, the replacement of maturing committed bank credit
facilities, potential liability exposure resulting from Federal-Mogul
Corporation's bankruptcy filing and any statements regarding future revenues,
earnings, cash flows and capital expenditures. Cooper wishes to caution readers
not to put undue reliance on these statements and that actual results could
differ materially from anticipated results. Important factors which may affect
the actual results include, but are not limited to, the net effects of Cooper's
cost reduction programs, the timing of facility consolidations and the magnitude
of any disruption from such consolidations, the resolution of Federal-Mogul's
bankruptcy proceedings, market and economic conditions, changes in raw material
and energy costs, industry competition, changes in financial markets including
foreign currency rate fluctuations and changing legislation and regulations. The
statements also assume, without limitation, no significant change in competitive
conditions and such other risk factors as are discussed from time to time in
Cooper's periodic filings with the Securities and Exchange Commission. The
forward-looking statements contained in this report are intended to qualify for
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended.
-12-
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Cooper is subject to various suits, legal proceedings and
claims that arise in the normal course of business. While it is not feasible to
predict the outcome of these matters with certainty, management is of the
opinion that their ultimate disposition should not have a material adverse
effect on Cooper's financial statements.
In October 1998, Cooper sold its Automotive Products business
to Federal-Mogul Corporation ("Federal-Mogul"). These discontinued businesses
(including the Abex product line obtained from Pneumo-Abex Corporation
("Pneumo") in 1994) were operated through subsidiary companies, and the stock of
those subsidiaries was sold to Federal-Mogul pursuant to a Purchase and Sale
Agreement dated August 17, 1998 ("1998 Agreement"). In conjunction with the
sale, Federal-Mogul indemnified Cooper for certain liabilities of these
subsidiary companies, including liabilities related to the Abex product line and
any potential liability that Cooper may have to Pneumo pursuant to a 1994 Mutual
Guaranty Agreement between Cooper and Pneumo. On October 1, 2001, Federal-Mogul
and several of its affiliates filed a Chapter 11 bankruptcy petition and
indicated that Federal-Mogul may not honor the indemnification obligations to
Cooper. As of the date of this filing, Federal-Mogul had not yet made a decision
whether to reject the 1998 Agreement, which includes the indemnification to
Cooper. If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of
its future obligations under the 1998 Agreement, including specific indemnities
relating to payment of taxes and certain obligations regarding insurance for its
former Automotive Products businesses. To the extent Cooper is obligated to
Pneumo for any asbestos-related claims arising from the Abex product line ("Abex
Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for
such claims. Based on information provided by representatives of Federal-Mogul
and recent claims experience, from August 28, 1998 through March 31, 2002, a
total of 79,329 Abex Claims were filed, of which 17,239 claims have been
resolved leaving 62,090 Abex Claims pending at March 31, 2002, that are the
responsibility of Federal-Mogul. Since August 28, 1998, the average indemnity
payment for resolved Abex Claims was $965 before insurance. A total of $27.5
million was spent on defense costs for the period August 28, 1998 through March
31, 2002. Historically, existing insurance coverage has provided 50% to 80% of
the total defense and indemnity payments for Abex Claims. Cooper is preserving
its rights as a creditor for breach of Federal-Mogul's indemnification to Cooper
and its rights against all Federal-Mogul subsidiaries. Cooper intends to take
all actions to seek a resolution of the indemnification issues and future
handling of the Abex-related claims within the Federal-Mogul bankruptcy
proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Form of Cooper Industries, Inc. Executive
Restricted Stock Agreement.
12. Computation of Ratios of Earnings to Fixed
Charges for the Calendar Years 2001 through
1997 and the Three Months Ended March 31,
2002 and 2001.
23. Consent of Bates White Ballentine.
(b) Reports on Form 8-K
Cooper filed a report on Form 8-K dated January 24,
2002, which included a copy of a press release
containing Cooper's financial results for the quarter
and year ended December 31, 2001 and the business
outlook for 2002.
Cooper filed a report on Form 8-K dated January 24,
2002, regarding the impact of the Federal-Mogul
bankruptcy.
-13-
Cooper filed a report on Form 8-K dated January 25,
2002, which included "Sales Trends" information
posted on Cooper's website.
Cooper filed a report on Form 8-K dated February 21,
2002, which included "Sales Trends" information
posted on Cooper's website.
Cooper filed a report on Form 8-K dated March 22,
2002 which included "Sales Trends" information posted
on Cooper's website.
-14-
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, Inc.
------------------------------
(Registrant)
Date: May 13, 2002 /s/ D. B. McWilliams
- -------------------------------------------- ------------------------------
D. B. McWilliams
Senior Vice President and
Chief Financial Officer
Date: May 13, 2002 /s/ Jeffrey B. Levos
- -------------------------------------------- ------------------------------
Jeffrey B. Levos
Vice President and Controller
and Chief Accounting Officer
-15-
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10. Form of Cooper Industries, Inc. Executive Restricted Stock Agreement.
12. Computation of Ratios of Earnings to Fixed Charges for the Calendar Years 2001 through 1997 and the
Three Months Ended March 31, 2002 and 2001.
23. Consent of Bates White Ballentine.
</Table>