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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-31330
Cooper Industries, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-0355628
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 209-8400
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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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Number of registrant's common stock outstanding as of April 30, 2003 was
91,830,173 Class A common shares that are held by the public, 1,429,408 Class A
common shares that are held by the issuer's subsidiary, Cooper Industries, Inc.,
and 56,879,215 Class B common shares that are held by Cooper Industries, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------ ------------
(in millions, where applicable)
Revenues................................................................................ $ 957.8 $ 975.0
Cost of sales........................................................................... 674.7 701.4
Selling and administrative expenses..................................................... 192.3 185.2
------------ ------------
Operating earnings.................................................................. 90.8 88.4
Interest expense, net................................................................... 20.1 16.9
------------ ------------
Income before income taxes.......................................................... 70.7 71.5
Income taxes............................................................................ 14.1 22.7
------------ ------------
Net income.......................................................................... $ 56.6 $ 48.8
============ ============
Income per common share:
Basic............................................................................... $ .62 $ .52
============ ============
Diluted............................................................................. $ .61 $ .52
============ ============
Cash dividends per common share......................................................... $ .35 $ .35
============ ============
The accompanying notes are an integral part of these statements.
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COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(in millions)
ASSETS
Cash and cash equivalents........................................................ $ 71.3 $ 302.0
Receivables...................................................................... 712.1 706.7
Inventories...................................................................... 630.1 580.5
Deferred income taxes and other current assets................................... 154.4 99.8
------------ -----------
Total current assets.................................................... 1,567.9 1,689.0
------------ -----------
Property, plant and equipment, less accumulated depreciation..................... 735.5 750.2
Goodwill......................................................................... 1,994.1 1,996.2
Deferred income taxes and other noncurrent assets................................ 239.9 252.5
------------ -----------
Total assets............................................................ $ 4,537.4 $ 4,687.9
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt.................................................................. $ 4.4 $ 4.1
Accounts payable................................................................. 342.4 312.2
Accrued liabilities.............................................................. 448.3 489.4
Current maturities of long-term debt............................................. 3.5 153.8
------------ -----------
Total current liabilities............................................... 798.6 959.5
------------ -----------
Long-term debt................................................................... 1,275.6 1,280.7
Postretirement benefits other than pensions...................................... 186.9 189.1
Other long-term liabilities...................................................... 255.6 256.2
------------ -----------
Total liabilities....................................................... 2,516.7 2,685.5
------------ -----------
Common stock, $.01 par value .................................................... 0.9 0.9
Capital in excess of par value................................................... 425.1 422.7
Retained earnings................................................................ 1,768.7 1,744.2
Accumulated other nonowner changes in equity..................................... (174.0) (165.4)
------------ -----------
Total shareholders' equity.............................................. 2,020.7 2,002.4
------------ -----------
Total liabilities and shareholders' equity.............................. $ 4,537.4 $ 4,687.9
============ ===========
The accompanying notes are an integral part of these statements.
- 3 -
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2003 2002
--------------- ------------
(in millions)
Cash flows from operating activities:
Net income.................................................................. $ 56.6 $ 48.8
Adjustments to reconcile to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................... 30.7 30.0
Deferred income taxes....................................................... 31.8 6.0
Restructuring charge payments............................................... (5.2) (2.4)
Changes in assets and liabilities: (1)
Receivables............................................................... (3.2) 0.1
Inventories............................................................... (48.4) 12.4
Accounts payable and accrued liabilities.................................. (1.3) (62.3)
Other assets and liabilities, net......................................... (71.3) 13.2
--------------- ------------
Net cash provided by (used in) operating activities............... (10.3) 45.8
Cash flows from investing activities:
Capital expenditures........................................................ (19.4) (14.5)
Cash paid for acquired businesses........................................... - (1.1)
Proceeds from sales of property, plant and equipment and other.............. 3.9 (0.2)
--------------- ------------
Net cash used in investing activities............................. (15.5) (15.8)
Cash flows from financing activities:
Proceeds from issuances of debt............................................. 0.3 33.3
Repayments of debt.......................................................... (166.7) (0.4)
Dividends................................................................... (32.1) (32.7)
Acquisition of treasury shares.............................................. - (34.5)
Subsidiary purchase of parent shares........................................ (5.4) -
Activity under employee stock plans and other............................... 0.4 0.5
--------------- ------------
Net cash used in financing activities............................. (203.5) (33.8)
Effect of exchange rate changes on cash and cash equivalents.................... (1.4) (0.2)
--------------- ------------
Increase (decrease) in cash and cash equivalents................................ (230.7) (4.0)
Cash and cash equivalents, beginning of period.................................. 302.0 11.5
--------------- ------------
Cash and cash equivalents, end of period........................................ $ 71.3 $ 7.5
=============== ============
(1) Net of the effects of acquisitions and translation.
The accompanying notes are an integral part of these statements.
- 4 -
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements of Cooper
Industries, Ltd., a Bermuda company ("Cooper"), have been prepared in accordance
with generally accepted accounting principles in the United States. Cooper is
the parent company of Cooper Industries, Inc., an Ohio corporation ("Cooper
Ohio"), following a corporate reorganization ("the reorganization") that became
effective on May 22, 2002. The reorganization was effected through the merger of
Cooper Mergerco, Inc., an Ohio corporation, into Cooper Ohio. Cooper Ohio was
the surviving company in the merger and became an indirect, wholly-owned
subsidiary of Cooper. All outstanding shares of Cooper Ohio common stock were
automatically converted to Cooper Class A common shares. Cooper and its
subsidiaries continue to conduct the business previously conducted by Cooper
Ohio and its subsidiaries. The reorganization was accounted for as a
reorganization of entities under common control and accordingly, did not result
in changes in the historical consolidated carrying amounts of assets,
liabilities and shareholders' equity.
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, 2002
included in Part IV of Cooper's 2002 Annual Report on Form 10-K.
NOTE 2. STOCK-BASED COMPENSATION
Under Cooper stock option plans, officers, directors and key employees
may be granted options to purchase Cooper's common stock at no less than 100% of
the market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the grant
date and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards and restricted stock awards to
certain key executives that vest over periods ranging from three to five years.
Cooper also has an Employee Stock Purchase Plan which provides employees an
option to purchase common stock at a price that is the lesser of 85% of the
market value on the offering date or 85% of the market value on the purchase
date.
Effective January 1, 2003, Cooper adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), as amended. Cooper utilized the prospective method of adoption. Cooper
accounts for stock-based compensation awards granted, modified or settled prior
to January 1, 2003 using the intrinsic value method of accounting as prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations ("APB No. 25"). SFAS No. 123 provides an
alternative fair value based method for recognizing stock-based compensation in
which compensation expense is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. During the first quarter of 2003, Cooper granted five-year
options to purchase 1,390,100 shares of common stock to officers and employees
at the market price on the grant date. The fair value on the grant date was
estimated using the Black-Scholes option-pricing model. In addition, Cooper
granted 111,000 restricted stock awards and up to 283,500 performance-based
awards to officers with vesting contingent on cumulative earnings per share
growth. The fair value of the restricted stock and performance-based awards was
measured at the market price on the grant date. During the first quarter of
2003, total expense for stock-based compensation was $2.1 million and for the
first quarter of 2002 total expense was $0.
- 5 -
The following table presents pro forma income and earnings per share as
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2003 2002
------------ -------------
(in millions)
Net income, as reported....................................................... $ 56.6 $ 48.8
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects............... 1.2 -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................................ (4.7) (3.9)
------------ -------------
Pro forma net income.......................................................... $ 53.1 $ 44.9
============ =============
Earnings per share:
Basic - as reported...................................................... $ .62 $ .52
Basic - pro forma........................................................ $ .58 $ .48
Diluted - as reported.................................................... $ .61 $ .52
Diluted - pro forma...................................................... $ .58 $ .48
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.
NOTE 4. INVENTORIES
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(in millions)
Raw materials................................................................ $ 180.1 $ 184.3
Work-in-process.............................................................. 117.3 99.5
Finished goods............................................................... 424.0 389.1
Perishable tooling and supplies.............................................. 21.3 20.8
----------- -----------
742.7 693.7
Allowance for excess and obsolete inventory.................................. (44.6) (41.0)
Excess of current standard costs over LIFO costs............................. (68.0) (72.2)
----------- -----------
Net inventories................................................... $ 630.1 $ 580.5
=========== ===========
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NOTE 5. LONG-TERM DEBT
At March 31, 2003, $225 million of Cooper Ohio's existing shelf
registration to issue up to $500 million of debt securities remained available
to be issued. Cooper did not renew its $375 million committed bank credit
facility which matured April 30, 2003.
NOTE 6. SHAREHOLDERS' EQUITY
At March 31, 2003, 91,730,780 Class A common shares, $.01 par value
were issued and outstanding (excluding the 1,516,636 Class A common shares held
by Cooper Ohio discussed below) compared to 91,709,144 Class A common shares,
$.01 par value (excluding the 1,519,214 Class A common shares held by Cooper
Ohio) at December 31, 2002. During the first quarter of 2003, Cooper issued
19,058 Class A common shares primarily in connection with employee benefit plans
and Cooper's dividend reinvestment program. During the first quarter of 2003,
Cooper Ohio purchased 152,500 Cooper Class A common shares for $5.4 million. The
share purchases are recorded by Cooper Ohio as an investment in its parent
company that is eliminated in consolidation. During the first quarter of 2003,
155,078 Cooper Class A common shares held by Cooper Ohio were issued primarily
to satisfy the matching obligation under the Cooper Ohio Retirement Savings and
Stock Ownership Plan, leaving 1,516,636 Cooper Class A common shares held by
Cooper Ohio at March 31, 2003.
Cooper Ohio also owns all the issued and outstanding Cooper Class B
common shares. Cooper Ohio's investment in the Class B common shares is
eliminated in consolidation. If at any time a dividend is declared and paid on
the Cooper Class A common shares, a like dividend shall be declared and paid on
the Cooper Class B common shares in an equal amount per share. During the first
quarter of 2003, Cooper Ohio waived its rights to receive the regular quarterly
dividend of $.35 per share (or an aggregate of $20.4 million) from its parent,
Cooper, on all shares held.
NOTE 7. SEGMENT INFORMATION
REVENUES OPERATING EARNINGS
------------------------ ------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- ---------- ----------
(in millions)
Electrical Products................................... $ 804.2 $ 819.5 $ 100.3 $ 91.8
Tools & Hardware...................................... 153.6 155.5 6.5 5.3
--------- --------- ---------- ----------
Total segments..................................... $ 957.8 $ 975.0 106.8 97.1
========= =========
General Corporate expense............................. 16.0 8.7
Interest expense, net................................. 20.1 16.9
---------- ----------
Income before income taxes............................ $ 70.7 $ 71.5
========== ==========
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NOTE 8. INCOME TAXES
Cooper's effective tax rate was 19.9% for the three months ended March
31, 2003 and 31.7% for the three months ended March 31, 2002, prior to the
reorganization. The reconciliation between the income tax rate computed by
applying the U.S. Federal statutory rate and the worldwide tax rate is presented
below.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
----- ----
U.S. Federal statutory rate......................................... 35.0% 35.0%
State and local income taxes........................................ 2.5 1.7
Non U.S. Operations................................................. (15.9) (2.5)
Foreign Sales Corporation........................................... (1.2) (0.9)
Tax credits......................................................... (0.2) (0.1)
Other............................................................... (0.3) (1.5)
----- ----
Effective tax rate .............................................. 19.9% 31.7%
===== ====
NOTE 9. NET INCOME PER COMMON SHARE
BASIC DILUTED
------------------------ -----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in millions)
Net income applicable to common stock................. $ 56.6 $ 48.8 $ 56.6 $ 48.8
========= ========= ========= =========
Weighted average common shares outstanding............ 92.0 93.9 92.0 93.9
========= =========
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards................ 0.4 0.6
--------- ---------
Weighted average common shares
and common share equivalents...................... 92.4 94.5
========= =========
Options and employee awards are not considered in the calculations if the effect
would be antidilutive.
NOTE 10. NET INCOME AND OTHER NONOWNER CHANGES IN EQUITY
The components of net income and other nonowner changes in equity, net
of related taxes, were as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
----------- -----------
(in millions)
Net income........................................................................ $ 56.6 $ 48.8
Foreign currency translation losses............................................... (8.5) (5.2)
Change in fair value of derivatives............................................... (0.1) 0.3
----------- -----------
Net income and other nonowner changes in equity................................... $ 48.0 $ 43.9
=========== ===========
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NOTE 11. RESTRUCTURING CHARGES
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size Cooper's workforce to market conditions, and (3) the
write-off of assets related to production rationalization activities. These
actions were taken as a part of Cooper management's ongoing assessment of
required production capacity in consideration of current demand levels. In
connection with these commitments, certain production capacity and related
assets will be sold, outsourced, discontinued or moved to a lower cost
environment. Cooper recorded a provision for these announced actions of $39.1
million ($15.0 million of which is non-cash). Of this amount, $24.0 million
($11.0 million of which is non-cash) was associated with the Electrical Products
segment, $12.7 million ($3.4 million of which was non-cash) was associated with
the Tools & Hardware segment and the remainder was related to General Corporate.
The following table reflects activity related to the fourth quarter
2002 restructuring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
--------- --------- ---------------
($ in millions)
2002 Restructuring charge......................... 1,206 $ 18.3 $ 20.8
Asset write-offs.................................. - - (15.0)
Employees terminated.............................. (184) - -
Cash expenditures................................. - (2.1) -
----- -------- --------
Balance at December 31, 2002...................... 1,022 16.2 5.8
Employees terminated.............................. (220) - -
Cash expenditures................................. - (4.9) (0.3)
----- -------- --------
Balance at March 31, 2003......................... 802 $ 11.3 $ 5.5
===== ======== ========
A total of 435 salaried and 771 hourly positions are scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions will be
replaced ultimately as a result of Cooper's ongoing efforts to relocate
production capacity to lower cost locations. Substantially all of the closure
and rationalization activities will be initiated by the end of 2003 and are
scheduled to be substantially completed by the end of 2004.
See "Restructuring Charges" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
NOTE 12. 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, 2003, a
total of 103,301 Abex Claims were filed, of which 35,941 claims
- 9 -
have been resolved leaving 67,360 Abex Claims pending at March 31, 2003, that
are the responsibility of Federal-Mogul. During the three months ended March 31,
2003, 168 claims were filed and 3,950 claims were resolved. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $1,368 before
insurance. A total of $40.4 million was spent on defense costs for the period
August 28, 1998 through March 31, 2003. Historically, existing insurance
coverage has provided 50% to 80% of the total defense and indemnity payments for
Abex Claims. During the first quarter, negotiations took place that resulted in
the settlements of several blocks of cases totaling approximately 13,400 claims
early in the second quarter of 2003. Including these settlements, the average
indemnity for Abex claims resolved since August 28, 1998 is $1,075.
With the assistance of independent advisors, Bates White & Ballentine,
LLC, in the fourth quarter of 2001 Cooper completed a thorough analysis of its
potential exposure for asbestos liabilities in the event Federal-Mogul rejects
the 1998 Agreement. The analysis included a review of the twenty-year history of
Abex Claims; the average indemnity payments for resolved claims; the
jurisdictions in which claims had been filed; Bates White & Ballentine, LLC data
on the incidence of asbestos exposure and diseases in various industries;
existing insurance coverage including the insurance recovered by Pneumo and
Federal-Mogul for pre-bankruptcy claims and the contractual indemnities.
Assumptions were made regarding future claim filings and indemnity payments,
and, based on the advisor's data, the expected population of persons exposed to
asbestos in particular industries. All of this data was used to determine a
reasonable expectation of future claims, indemnity payments and insurance
coverage. At this time, the manner in which this issue ultimately will be
resolved is not known. Cooper is preserving its rights as a creditor for breach
of Federal-Mogul's indemnification to Cooper and its rights against all
Federal-Mogul subsidiaries. Cooper intends to take all actions to seek a
resolution of the indemnification issues and future handling of the Abex-related
claims within the Federal-Mogul bankruptcy proceedings. At March 31, 2003, the
accrual for potential liabilities related to the Federal-Mogul bankruptcy was
$85.1 million.
NOTE 13. CONSOLIDATING FINANCIAL INFORMATION
Cooper fully and unconditionally guarantees the registered debt
securities of Cooper Ohio, a wholly-owned indirect subsidiary. The following
condensed consolidating financial information is included so that separate
financial statements of Cooper Ohio are not required to be filed with the
Securities and Exchange Commission. The consolidating financial statements
present investments in subsidiaries using the equity method of accounting.
Intercompany investments in the Class A and Class B common shares are accounted
for using the cost method.
- 10 -
CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ---------- ------------ ------------- ---------
Revenues.............................. $ - $ 67.4 $ 896.7 $ (6.3) $ 957.8
Cost of sales......................... - 44.1 636.9 (6.3) 674.7
Selling and administrative expenses... 2.1 23.9 166.3 - 192.3
Interest expense, net................. - 15.0 5.1 - 20.1
Equity in earnings of subsidiaries,
net of tax....................... 59.0 86.8 13.8 (159.6) -
Intercompany income (expense)......... - (103.2) 103.5 (0.3) -
---------- ---------- ------------ ---------- ---------
Income (loss) before income taxes 56.9 (32.0) 205.7 (159.9) 70.7
Income tax expense (benefit).......... - (45.8) 59.9 - 14.1
---------- ---------- ------------ ---------- ---------
Net income........................ $ 56.9 $ 13.8 $ 145.8 $ (159.9) $ 56.6
========== ========== ============ ========== =========
CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ---------- ------------ ------------- ---------
Revenues.............................. $ - $ 66.3 $ 913.0 $ (4.3) $ 975.0
Cost of sales......................... - 42.0 663.7 (4.3) 701.4
Selling and administrative expenses... - 21.5 163.7 - 185.2
Interest expense, net................. - 11.8 5.1 - 16.9
Equity in earnings of subsidiaries,
net of tax....................... - 85.6 - (85.6) -
Intercompany income (expense) ........ - (51.0) 51.0 - -
---------- ---------- ------------ ---------- ---------
Income before income taxes....... - 25.6 131.5 (85.6) 71.5
Income tax expense (benefit).......... - (23.2) 45.9 - 22.7
---------- ---------- ------------ ---------- ---------
Net income........................ $ - $ 48.8 $ 85.6 $ (85.6) $ 48.8
========== ========== ============ ========== =========
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CONSOLIDATING BALANCE SHEETS
MARCH 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ----------
Cash and cash equivalents................. $ 1.4 $ 33.0 $ 36.9 $ - $ 71.3
Receivables............................... - 69.7 642.4 - 712.1
Intercompany receivables.................. 463.4 - 368.9 (832.3) -
Inventories............................... - 19.3 610.8 - 630.1
Deferred income taxes and
other current assets................... 0.6 137.2 16.6 - 154.4
--------- ------------ ------------ ------------ ----------
Total current assets............... 465.4 259.2 1,675.6 (832.3) 1,567.9
--------- ------------ ------------ ------------ ----------
Property, plant and equipment, less
accumulated depreciation............... - 55.7 679.8 - 735.5
Goodwill.................................. - 41.4 1,952.7 - 1,994.1
Investment in subsidiaries................ 2,463.0 5,475.5 (26.5) (7,912.0) -
Investment in parent...................... - 2,377.3 - (2,377.3) -
Intercompany notes receivable............. 0.1 79.3 6,305.1 (6,384.5) -
Deferred income taxes and other
noncurrent assets...................... - 203.5 36.4 - 239.9
--------- ------------ ------------ ------------ ----------
Total assets....................... $ 2,928.5 $ 8,491.9 $ 10,623.1 $ (17,506.1) $ 4,537.4
========= ============ ============ ============ ==========
Short-term debt........................... $ - $ - $ 4.4 $ - $ 4.4
Accounts payable.......................... 32.4 34.5 275.5 - 342.4
Accrued liabilities....................... 0.4 186.8 261.1 - 448.3
Intercompany payables..................... - 832.3 - (832.3) -
Current maturities of long-term debt...... - 3.1 0.4 - 3.5
--------- ------------ ------------ ------------ ----------
Total current liabilities.......... 32.8 1,056.7 541.4 (832.3) 798.6
--------- ------------ ------------ ------------ ----------
Long-term debt............................ - 917.0 358.6 - 1,275.6
Intercompany notes payable................ - 4,751.8 1,632.7 (6,384.5) -
Other long-term liabilities............... - 290.7 151.8 - 442.5
--------- ------------ ------------ ------------ ----------
Total liabilities.................. 32.8 7,016.2 2,684.5 (7,216.8) 2,516.7
--------- ------------ ------------ ------------ ----------
Class A common stock...................... 0.9 - - - 0.9
Class B common stock...................... 0.6 - - (0.6) -
Subsidiary common stock................... - - 141.0 (141.0) -
Capital in excess of par value............ 2,800.7 0.4 7,035.7 (9,411.7) 425.1
Retained earnings......................... 137.0 1,649.4 1,035.8 (1,053.5) 1,768.7
Accumulated other nonowner changes
in equity.............................. (43.5) (174.1) (273.9) 317.5 (174.0)
--------- ------------ ------------ ------------ ----------
Total shareholders' equity......... 2,895.7 1,475.7 7,938.6 (10,289.3) 2,020.7
--------- ------------ ------------ ------------ ----------
Total liabilities and shareholders'
equity......................... $ 2,928.5 $ 8,491.9 $ 10,623.1 $ (17,506.1) $ 4,537.4
========= ============ ============ ============ ==========
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CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ------------ ------------ ------------- ----------
Cash and cash equivalents................ $ 33.9 $ 244.3 $ 23.8 $ - $ 302.0
Receivables.............................. 0.2 65.3 641.2 - 706.7
Intercompany receivables................. 462.9 - 252.0 (714.9) -
Inventories.............................. - 19.9 560.6 - 580.5
Deferred income taxes and other
current assets........................ 1.0 71.9 26.9 - 99.8
------------ ------------ ------------ ------------ ----------
Total current assets............... 498.0 401.4 1,504.5 (714.9) 1,689.0
------------ ------------ ------------ ------------ ----------
Property, plant and equipment, less
accumulated depreciation.............. - 53.9 696.3 - 750.2
Goodwill................................. - 41.4 1,954.8 - 1,996.2
Investment in subsidiaries............... 2,412.5 5,401.6 (31.7) (7,782.4) -
Investment in parent..................... - 2,377.8 - (2,377.8) -
Intercompany notes receivable............ 0.1 80.3 6,305.1 (6,385.5) -
Deferred income taxes and other
noncurrent assets..................... - 204.2 48.3 - 252.5
------------ ------------ ------------ ------------ ----------
Total assets....................... $ 2,910.6 $ 8,560.6 $ 10,477.3 $ (17,260.6) $ 4,687.9
============ ============ ============ ============ ==========
Short-term debt.......................... $ - $ - $ 4.1 $ - $ 4.1
Accounts payable......................... 32.1 40.9 239.2 - 312.2
Accrued liabilities...................... 0.7 200.7 288.0 - 489.4
Intercompany payables.................... - 714.9 - (714.9) -
Current maturities of long-term debt..... - 153.2 0.6 - 153.8
------------ ------------ ------------ ------------ ----------
Total current liabilities.......... 32.8 1,109.7 531.9 (714.9) 959.5
------------ ------------ ------------ ------------ ----------
Long-term debt........................... - 933.4 347.3 - 1,280.7
Intercompany notes payable............... - 4,751.8 1,633.7 (6,385.5) -
Other long-term liabilities.............. - 295.1 150.2 - 445.3
------------ ------------ ------------ ------------ ----------
Total liabilities.................. 32.8 7,090.0 2,663.1 (7,100.4) 2,685.5
------------ ------------ ------------ ------------ ----------
Class A common stock..................... 0.9 - - - 0.9
Class B common stock..................... 0.6 - - (0.6) -
Subsidiary common stock.................. - - 141.0 (141.0) -
Capital in excess of par value........... 2,799.1 0.5 7,035.6 (9,412.5) 422.7
Retained earnings........................ 112.1 1,635.6 890.0 (893.5) 1,744.2
Accumulated other nonowner changes
in equity............................. (34.9) (165.5) (252.4) 287.4 (165.4)
------------ ------------ ------------ ------------ ----------
Total shareholders' equity......... 2,877.8 1,470.6 7,814.2 (10,160.2) 2,002.4
------------ ------------ ------------ ------------ ----------
Total liabilities and shareholders'
equity.......................... $ 2,910.6 $ 8,560.6 $ 10,477.3 $ (17,260.6) $ 4,687.9
============ ============ ============ ============ ==========
- 13 -
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ----------- ------------ ------------- ----------
Net cash provided by (used in)
operating activities................... $ (1.5) $ (152.0) $ 143.2 $ - $ (10.3)
Cash flows from investing activities:
Capital expenditures................... - (4.5) (14.9) - (19.4)
Loans to affiliates.................... - 1.0 - (1.0) -
Other.................................. - - 3.9 - 3.9
------------ ----------- ------------ ----------- ----------
Net cash used in investing activities - (3.5) (11.0) (1.0) (15.5)
Cash flows from financing activities:
Proceeds from issuances of debt........ - - 0.3 - 0.3
Repayments of debt..................... - (166.6) (0.1) - (166.7)
Borrowings from affiliates............. - - (1.0) 1.0 -
Other intercompany financing
activities........................... 1.1 115.8 (116.9) - -
Dividends.............................. (32.1) - - - (32.1)
Subsidiary purchase of parent shares - (5.4) - - (5.4)
Employee stock plan activity and
other................................ - 0.4 - - 0.4
------------ ----------- ------------ ----------- ----------
Net cash used in financing activities (31.0) (55.8) (117.7) 1.0 (203.5)
Effect of exchange rate changes on
cash and cash equivalents............. - - (1.4) - (1.4)
------------ ----------- ------------ ----------- ----------
Increase (decrease) in cash and cash
equivalents........................... (32.5) (211.3) 13.1 - (230.7)
Cash and cash equivalents, beginning
of period............................. 33.9 244.3 23.8 - 302.0
------------ ----------- ------------ ----------- ----------
Cash and cash equivalents, end of
period................................ $ 1.4 $ 33.0 $ 36.9 $ - $ 71.3
============ =========== ============ =========== ==========
- 14 -
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ----------- ------------ ------------- ----------
Net cash provided by (used in)
operating activities.................... $ - $ (73.9) $ 119.7 $ - $ 45.8
Cash flows from investing activities:
Capital expenditures..................... - (1.5) (13.0) - (14.5)
Loans to affiliates...................... - - (3.6) 3.6 -
Other.................................... - - (1.3) - (1.3)
------------ ----------- ------------ ----------- ----------
Net cash used in investing activities - (1.5) (17.9) 3.6 (15.8)
Cash flows from financing activities:
Proceeds from issuances of debt.......... - - 33.3 - 33.3
Repayments of debt....................... - (0.1) (0.3) - (0.4)
Borrowings from affiliates............... - 3.6 - (3.6) -
Other intercompany financing
activities............................. - 136.2 (136.2) - -
Dividends................................ - (32.7) - - (32.7)
Acquisition of treasury shares........... - (34.5) - - (34.5)
Employee stock plan activity and
other.................................. - 0.5 - - 0.5
------------ ----------- ------------ ----------- ----------
Net cash provided by (used in)
financing activities................. - 73.0 (103.2) (3.6) (33.8)
Effect of exchange rate changes on
cash and cash equivalents................ - - (0.2) - (0.2)
------------ ----------- ------------ ----------- ----------
Decrease in cash and cash
equivalents.............................. - (2.4) (1.6) - (4.0)
Cash and cash equivalents, beginning
of period................................ - 2.8 8.7 - 11.5
------------ ----------- ------------ ----------- ----------
Cash and cash equivalents, end of
period................................... $ - $ 0.4 $ 7.1 $ - $ 7.5
============ =========== ============ =========== ==========
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
Net income for the first quarter of 2003 was $56.6 million on revenues
of $957.8 million compared with 2002 first quarter net income of $48.8 million
on revenues of $975.0 million. First quarter diluted earnings per share
increased 17% to $.61 from $.52 in 2002.
REVENUES:
Revenues for the first quarter of 2003 decreased 2% compared to the
first quarter of 2002. The impact of foreign currency translation increased
reported revenues by approximately 2% for the quarter.
Revenues in the Company's Electrical Products segment declined 2% in
the first quarter of 2003 compared with the prior year's first quarter,
reflecting continued weakness in several of Cooper's key markets. Revenues in
Cooper's North American lighting, wiring devices and support systems businesses
were down slightly when compared to first quarter of 2002 due to continued soft
commercial construction markets and reduced retail channel sales, primarily a
result of customers adjusting inventory levels. The Company's power transmission
and distribution equipment sales fell when compared to the 2002 first quarter
impacted by the delay by many utilities of commitment to major capital projects.
Modest improvements in selected industrial markets were reflected in revenue
gains in the Company's hazardous duty and circuit protection businesses.
Tools & Hardware segment revenues for the quarter decreased 1% from the
first quarter of 2002. Hand tools sales were down compared with the prior year's
first quarter due to lower demand in most markets, with the exception of the
electronics channel which experienced modest growth. Power tools experienced
growth in the industrial power tools market, while assembly equipment revenues
were negatively affected by the timing of shipments. A weak U.S. Dollar
increased total Tools & Hardware revenues during the quarter by approximately
3%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 70.4% for the first
quarter of 2003 compared to 71.9% for the comparable 2002 quarter. The decrease
in the cost of sales percentage was due primarily to the Company's continued
cost reduction efforts to offset the impact of lower sales volumes.
Electrical Products segment cost of sales, as a percentage of revenues,
was 70.0% for the first quarter of 2003 compared to 71.8% for the first quarter
of 2002. The decrease in the cost of sales percentage was primarily a result of
aggressive manufacturing cost reduction actions. Tools & Hardware segment cost
of sales, as a percentage of revenues, was 73.0% for the first quarter of 2003
compared to 74.6% for the first quarter of 2002. The decline in cost of sales
percentage reflects the impact of cost cutting initiatives implemented to reduce
the cost structure to be more closely aligned with current demand levels.
Selling and administrative expenses, as a percentage of revenues, for
the first quarter of 2003 were 20.1% compared to 19.0% for the first quarter of
2002. The increase in the selling and administrative expenses percentage
reflects the impact of lower revenues and continued investment in sales and
marketing personnel and initiatives. Anticipated increases in medical costs,
pension expenses, insurance premiums and charges for stock-based compensation
also contributed to the overall increase.
- 16 -
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the first quarter of 2003 were 17.5% compared to
17.0% for the first quarter of 2002. The increase in selling and administrative
expenses percentage is primarily due to a 2% decline in revenues while investing
in global growth and market share initiatives in the North American electrical
distribution market. Tools & Hardware segment selling and administrative
expenses, as a percentage of revenues, for the first quarter of 2003 were 22.7%
compared to 21.9% for the first quarter of 2002. The increase in the selling and
administrative expenses percentage is primarily due to lower revenues and an
increase in sales and marketing costs, particularly related to increased focus
on international sales.
Interest expense, net for the first quarter of 2003 increased $3.2
million from the 2002 first quarter as a result of slightly lower average debt
balances and higher average interest rates. Average debt balances were $1.37
billion and $1.43 billion and average interest rates were 6.1% and 4.8% for the
first quarter of 2003 and 2002, respectively. The increase in average interest
rates primarily resulted from the Company's replacement in 2002 of substantially
all variable rate commercial paper borrowings with long-term fixed rate debt.
OPERATING EARNINGS:
Electrical Products segment first quarter 2003 operating earnings
increased 9.3% to $100.3 million from $91.8 million for the same quarter of last
year. The increase from prior year was primarily due to the improvement in
margins as a result of actions to reduce manufacturing costs and increase
productivity.
Tools & Hardware segment operating earnings were $6.5 million for the
2003 first quarter, compared to $5.3 million in the first quarter of 2002. The
increased operating earnings primarily reflect the impact of the Company's cost
control and manufacturing rationalization efforts during a period of weak
demand.
General Corporate expense increased $7.3 million to $16.0 million
during the first quarter of 2003 compared to $8.7 million during the first
quarter of 2002. During the first quarter of 2002, General Corporate expense was
reduced by income of $3.0 million under an agreement with Belden, Inc.
("Belden"). In 1993, Cooper completed an initial public offering of the stock of
Belden, formerly a division of Cooper. Under the agreement, Belden and Cooper
made an election that increased the tax basis of certain Belden assets. Belden
is required to pay Cooper ninety percent of the amount by which Belden has
actually reduced tax payments that would otherwise have been payable if the
increase in the tax basis of assets had not occurred, as realized on a quarterly
basis over substantially fifteen years. If Belden does not have sufficient
future taxable income, it is possible that Belden will not be able to utilize
the tax deductions arising from the increases in the tax basis of the assets
resulting in a tax loss carryforward. Belden is not obligated to pay Cooper
until a tax benefit is realized. Belden can carry any loss forward twenty years
to offset future taxable income. The Company concluded that, for the first
quarter of 2003, no income would be recognized under the agreement. The
remaining increase in General Corporate expense resulted from increased
insurance costs, employee benefit-related expenses and charges for stock-based
compensation.
INCOME TAXES:
Taxes on income decreased primarily as a result of the reorganization
as discussed in Note 1 of the Notes to the Consolidated Financial Statements.
The effective tax rate was 19.9% for the three months ended March 31, 2003 and
31.7% for the three months ended March 31, 2002. See Note 8 of the Notes to the
Consolidated Financial Statements for additional information regarding the
effective tax rate.
RESTRUCTURING CHARGES:
During the fourth quarter of 2002, Cooper committed to (1) the closure
of ten manufacturing facilities, (2) further employment reductions to
appropriately size Cooper's workforce to market conditions, and (3) the
write-off of assets related to production rationalization activities. These
actions were taken as a part of Cooper management's ongoing assessment of
required production capacity in consideration of current
- 17 -
demand levels. In connection with these commitments, certain production capacity
and related assets will be sold, outsourced, discontinued or moved to a lower
cost environment. Cooper recorded a provision for these announced actions of
$39.1 million ($15.0 million of which is non-cash). Of this amount, $24.0
million ($11.0 million of which is non-cash) was associated with the Electrical
Products segment, $12.7 million ($3.4 million of which was non-cash) was
associated with the Tools & Hardware segment and the remainder was related to
General Corporate. Of the $24.1 million of charges resulting in cash
expenditures, $16.8 million remained to be expended at March 31, 2003.
The following table reflects activity related to the fourth quarter
2002 restructuring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
--------- --------- ---------------
($ in millions)
2002 Restructuring charge........................... 1,206 $ 18.3 $ 20.8
Asset write-offs.................................... - - (15.0)
Employees terminated................................ (184) - -
Cash expenditures................................... - (2.1) -
-------- --------- ----------
Balance at December 31, 2002........................ 1,022 16.2 5.8
Employees terminated................................ (220) - -
Cash expenditures................................... - (4.9) (0.3)
-------- --------- ----------
Balance at March 31, 2003........................... 802 $ 11.3 $ 5.5
======== ========= ==========
A total of 435 salaried and 771 hourly positions are scheduled to be
eliminated as a result of the planned closure and rationalization actions. Of
those planned position eliminations, approximately 600 positions will be
replaced ultimately as a result of Cooper's ongoing efforts to relocate
production capacity to lower cost locations. Substantially all of the closure
and rationalization activities will be initiated by the end of 2003 and are
scheduled to be substantially completed by the end of 2004. The majority of the
expenditures related to the 2002 restructuring charge are expected to be
incurred during 2003 and will be funded from cash provided by operating
activities.
As of March 31, 2003, Cooper anticipates incurring approximately $15
million related to facility exit costs and disruption of operations under the
2002 facility closure and production rationalization plan that could not be
accrued. These costs are principally related to production inefficiencies and
equipment and personnel relocation and will be expensed as incurred. Cooper
estimates that the earnings impact in 2003 from these actions will be
approximately $5 million in pretax savings, the majority of which will benefit
the second half of the year. The majority of the cost savings will be realized
beginning in 2004 as the facility closures and rationalizations become
finalized. It is expected that the pretax savings will exceed $35.0 million and
will largely be reflected as lower cost of sales.
During the fourth quarter of 2001, Cooper recorded a restructuring
charge that results in certain future cash expenditures. Cooper recorded a $7.1
million accrual for severance and other costs associated with the consolidation
or closure of certain Electrical Products segment facilities as a result of
management's review and modification of their assessment of required production
and distribution facilities and capacity, in consideration of depressed demand
levels. A total of 77 salaried and 196 hourly positions were scheduled to be
eliminated in 2002 as a result of these planned consolidation actions. Also
during the fourth quarter of 2001, Cooper recorded a provision of $36.0 million
for financial advisory, legal and other external costs associated with the
Company's review of strategic alternatives. The source of funding total cash
expenditures of $41.4 million (non-cash charges were $1.7 million) is cash
provided by operating activities.
- 18 -
The following table reflects activity related to the fourth quarter
2001 severance, facility consolidation and closure and financial advisors and
other cost accruals.
FACILITIES FINANCIAL
NUMBER OF ACCRUED CONSOLIDATION ADVISORS AND
EMPLOYEES SEVERANCE AND CLOSURE OTHER
--------- --------- -------------- ------------
($ in millions)
Facility consolidation and closure........... 291 $ 3.2 $ 2.2 $ -
Provision for advisors and other............. - - - 36.0
Employees terminated......................... (18) - - -
Cash expenditures............................ - (0.2) (0.1) (6.0)
-------- -------- --------- ----------
Balance at December 31, 2001................. 273 3.0 2.1 30.0
Employees terminated......................... (273) - - -
Cash expenditures............................ - (3.0) (2.1) (15.7)
-------- -------- --------- ----------
Balance at December 31, 2002................. - - - 14.3
Cash expenditures............................ - - - -
-------- -------- --------- ----------
Balance at March 31, 2003.................... - $ - $ - $ 14.3
======== ======== ========= ==========
The legal requirements for the $14.3 million accrual for financial
advisors expires in the 2003 second quarter. As of March 31, 2003, it is
anticipated that no remaining expenditures related to the accrual will be
required. The Company therefore anticipates the reversal of this accrual in the
2003 second quarter. The transaction will be recorded as a negative
restructuring charge on the consolidated income statement. See Note 11 of the
Notes to the Consolidated Financial Statements for additional information on
restructuring charges.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY:
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $24.8 million during the first
quarter of 2003. This increase in operating working capital for the 2003 first
quarter is primarily related to an increase in inventories resulting from
planned inventory builds in preparation for the consolidation or closure of
certain facilities and lower than expected demand during the quarter. The
increase in inventories was partially offset by an increase in the allowance for
excess and obsolete inventories reflecting the Company's assessment of ultimate
disposition in consideration of continued depressed market conditions. Operating
working capital turnover (defined as annualized revenues divided by average
quarterly operating working capital) for the 2003 first quarter of 3.9 turns
increased from 3.7 turns in the same period of 2002 reflecting the impact of
reductions in average trade receivable and inventory balances offset, in part,
by a decrease in average accounts payable.
Cash used in operating activities was $10 million in the first quarter
of 2003. An approximate $57 million timing-related increase in the funding of
certain employee benefit trusts was the primary cause of the increased cash use
compared to the first quarter of 2002. The benefits prefunded in the first
quarter will be paid during the remainder of 2003. A decrease in Cooper's cash
and cash equivalents balance of $231 million was used for capital expenditures
of $19 million, dividends of $32 million, share purchases of $5 million and net
debt repayments of $166 million. 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.
Cooper is continuing to focus on initiatives to maximize cash flows.
Cooper currently anticipates a continuation of its long-term ability to annually
generate approximately $200 million in cash flow available for acquisitions,
debt 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
- 19 -
the amounts expended against the various accruals established in connection with
each acquisition. Spending against these accruals was $2.0 million during each
of the three months ended March 31, 2003 and 2002, respectively.
CAPITAL RESOURCES:
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-total capitalization ratio
within this range. Excess cash flows are utilized to fund acquisitions or to
purchase shares of Cooper common stock. Cooper's debt-to-total capitalization
ratio was 38.8% at March 31, 2003, 41.8% at December 31, 2002 and 39.8% at March
31, 2002.
Cooper typically relies on commercial paper markets as its principal
source of short-term financing. At March 31, 2003 and December 31, 2002, Cooper
had no commercial paper outstanding and cash and cash equivalents of $71.3
million and $302.0 million, respectively, principally due to the issuance of
$275 million of long-term debt in October 2002.
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, 2003,
the balance of these committed bank credit facilities was $450 million, which
mature on November 17, 2004. Cooper did not renew its $375 million committed
bank credit facility which matured April 30, 2003. Outstanding commercial paper
balances, to the extent not backed up by cash, reduce the amount of available
borrowings under the committed bank credit facilities. The credit facility
agreements do not contain a material adverse change clause. The principal
financial covenants in the agreements limit Cooper's debt-to-total
capitalization ratio to 60% and require Cooper to maintain a minimum earnings
before interest expense, income taxes, depreciation and amortization to interest
ratio of 3 to 1. Cooper is in compliance with all covenants set forth in the
credit facility agreements.
Cooper's access to the commercial paper market could be adversely
affected by a change in the credit ratings assigned to its commercial paper.
Should Cooper's access to the commercial paper market be adversely affected due
to a change in its credit ratings, Cooper would rely on a combination of
available cash and its committed bank credit facilities to provide short-term
funding. The committed bank credit facilities do not contain any provision which
makes their availability to Cooper dependent on Cooper's credit ratings.
At March 31, 2003, $225 million of Cooper Ohio's existing shelf
registration to issue up to $500 million of debt securities remained available
to be issued.
As of March 31, 2003, 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, 2002.
BACKLOG
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
MARCH 31,
-----------------------------------
2003 2002
------------- -------------
(in millions)
Electrical Products......................................................... $ 245.4 $ 256.5
Tools & Hardware............................................................ 96.3 49.1
------------- -------------
$ 341.7 $ 305.6
============= =============
- 20 -
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q includes certain forward-looking statements. The
forward-looking statements reflect Cooper's expectations, objectives and goals
with respect to future events and financial performance, and are based on
assumptions and estimates which Cooper believes are reasonable. Forward-looking
statements include, but are not limited to, statements regarding the facilities
closure and production rationalization plan and cost-reduction programs,
resolution of the potential liability exposure resulting from Federal-Mogul
Corporation's ("Federal-Mogul") bankruptcy filing, anticipated reversal of the
accrual for financial advisors, and any statements regarding future revenues,
cost and expenses, earnings, earnings per share, margins, cash flows, debt
levels and capital expenditures. Cooper wishes to caution readers not to put
undue reliance on these statements and that actual results could differ
materially from anticipated results. Important factors which may affect the
actual results include, but are not limited to, the resolution of
Federal-Mogul's bankruptcy proceedings, political developments, market and
economic conditions, changes in raw material and energy costs, industry
competition, the net effects of Cooper's cost-reduction programs, the timing and
net effects of facility closures and the magnitude of any disruptions from such
closures, changes in financial markets including foreign currency rate
fluctuations and changing legislation and regulations including changes in tax
law, tax treaties or tax regulations. The forward-looking statements contained
in this report are intended to qualify for the safe harbor provisions of Section
21E of the Securities Exchange Act of 1934, as amended.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report,
Cooper's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of the design and operation of Cooper's disclosure controls
and procedures. Based on that evaluation, Cooper's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
disclosure controls and procedures are effective. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
- 21 -
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, 2003, a
total of 103,301 Abex Claims were filed, of which 35,941 claims have been
resolved leaving 67,360 Abex Claims pending at March 31, 2003, that are the
responsibility of Federal-Mogul. During the three months ended March 31, 2003,
168 claims were filed and 3,950 claims were resolved. Since August 28, 1998, the
average indemnity payment for resolved Abex Claims was $1,368 before insurance.
A total of $40.4 million was spent on defense costs for the period August 28,
1998 through March 31, 2003. Historically, existing insurance coverage has
provided 50% to 80% of the total defense and indemnity payments for Abex Claims.
During the first quarter, negotiations took place that resulted in the
settlements of several blocks of cases totaling approximately 13,400 claims
early in the second quarter of 2003. Including these settlements, the average
indemnity for Abex claims resolved since August 28, 1998 is $1,075.
With the assistance of independent advisors, Bates White & Ballentine,
LLC, in the fourth quarter of 2001 Cooper completed a thorough analysis of its
potential exposure for asbestos liabilities in the event Federal-Mogul rejects
the 1998 Agreement. The analysis included a review of the twenty-year history of
Abex Claims; the average indemnity payments for resolved claims; the
jurisdictions in which claims had been filed; Bates White & Ballentine, LLC data
on the incidence of asbestos exposure and diseases in various industries;
existing insurance coverage including the insurance recovered by Pneumo and
Federal- Mogul for pre-bankruptcy claims and the contractual indemnities.
Assumptions were made regarding future claim filings and indemnity payments,
and, based on the advisor's data, the expected population of persons exposed to
asbestos in particular industries. All of this data was used to determine a
reasonable expectation of future claims, indemnity payments and insurance
coverage. At this time, the manner in which this issue ultimately will be
resolved is not known. Cooper is preserving its rights as a creditor for breach
of Federal-Mogul's indemnification to Cooper and its rights against all
Federal-Mogul subsidiaries. Cooper intends to take all actions to seek a
resolution of the indemnification issues and future handling of the Abex-related
claims within the Federal-Mogul bankruptcy proceedings. At March 31, 2003, the
accrual for potential liabilities related to the Federal-Mogul bankruptcy was
$85.1 million.
- 22 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 2002 through 1998 and the Three Months Ended
March 31, 2003 and 2002.
23. Consent of Bates White & Ballentine, LLC.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
Cooper filed or furnished the following reports on Form 8-K during the
first quarter of 2003:
- Form 8-K dated January 23, 2003, which furnished a copy of a
press release containing Cooper's financial results for the
quarter and year ended December 31, 2002 and the business
outlook for 2003, and "Sales Trends" information to be posted
on Cooper's website.
- Form 8-K dated February 20, 2003, which furnished "Sales
Trends" information to be posted on Cooper's website.
- Form 8-K dated March 20, 2003, which furnished "Sales Trends"
information to be posted on Cooper's website.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cooper Industries, Ltd.
------------------------------------
(Registrant)
Date: May 13, 2003 /s/ Terry A. Klebe
----------------------------------
Terry A. Klebe
Senior Vice President and
Chief Financial Officer
Date: May 13, 2003 /s/ Jeffrey B. Levos
----------------------------------
Jeffrey B. Levos
Vice President and Controller and
Chief Accounting Officer
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Certifications
I, H. John Riley, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooper
Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ H. John Riley, Jr.
-------------------------
H. John Riley, Jr.
Chairman, President and
Chief Executive Officer
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I, Terry A. Klebe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooper
Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Terry A. Klebe
------------------------
Terry A. Klebe
Senior Vice President and
Chief Financial Officer
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Exhibit Index
Exhibit No.
12. Computation of Ratios of Earnings to Fixed Charges for the Calendar
Years 2002 through 1998 and the three months ended March 31, 2003 and
2002.
23. Consent of Bates White & Ballentine, LLC.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
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