SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 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
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Cooper Industries, Ltd.
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(Exact name of registrant as specified in its charter)
Bermuda 98-0355628
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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 [ ]
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 October 31, 2003 was
93,351,931 Class A common shares that are held by the public, 173,317 Class A
common shares that are held by the issuer's subsidiary, Cooper Industries, Inc.,
and 56,630,369 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
(in millions, where applicable)
Revenues............................................. $ 1,048.7 $ 999.3 $ 3,017.4 $ 2,975.5
Cost of sales........................................ 744.8 710.3 2,136.2 2,128.3
Selling and administrative expenses.................. 197.3 186.5 584.5 549.5
Restructuring........................................ - - (14.3) -
------------- ------------- ------------- -------------
Operating earnings............................... 106.6 102.5 311.0 297.7
Interest expense, net................................ 18.3 19.6 57.9 53.9
------------- ------------- ------------- -------------
Income before income taxes....................... 88.3 82.9 253.1 243.8
Income taxes......................................... 17.7 19.7 53.5 57.9
------------- ------------- ------------- -------------
Net income....................................... $ 70.6 $ 63.2 $ 199.6 $ 185.9
============= ============ ============= =============
Income per common share:
Basic............................................ $ .76 $ .68 $ 2.16 $ 1.99
============== ============= ============= =============
Diluted.......................................... $ .75 $ .68 $ 2.14 $ 1.98
============== ============= ============= =============
Cash dividends per common share...................... $ .35 $ .35 $ 1.05 $ 1.05
============== ============= ============= =============
The accompanying notes are an integral part of these statements.
-2-
COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- ------------
ASSETS (in millions)
Cash and cash equivalents........................................................ $ 293.9 $ 302.0
Receivables...................................................................... 805.7 706.7
Inventories...................................................................... 568.3 580.5
Deferred income taxes and other current assets................................... 119.5 99.8
----------- -----------
Total current assets.................................................... 1,787.4 1,689.0
----------- -----------
Property, plant and equipment, less accumulated depreciation..................... 716.3 750.2
Goodwill......................................................................... 2,022.4 1,996.2
Deferred income taxes and other noncurrent assets................................ 211.1 252.5
----------- -----------
Total assets............................................................ $ 4,737.2 $ 4,687.9
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt.................................................................. $ 8.0 $ 4.1
Accounts payable................................................................. 328.4 312.2
Accrued liabilities.............................................................. 430.9 489.4
Current maturities of long-term debt............................................. 0.5 153.8
----------- -----------
Total current liabilities............................................... 767.8 959.5
----------- -----------
Long-term debt................................................................... 1,308.4 1,280.7
Postretirement benefits other than pensions...................................... 183.3 189.1
Other long-term liabilities...................................................... 303.3 256.2
----------- -----------
Total liabilities....................................................... 2,562.8 2,685.5
----------- -----------
Common stock, $.01 par value .................................................... 0.9 0.9
Capital in excess of par value................................................... 482.0 422.7
Retained earnings................................................................ 1,846.7 1,744.2
Accumulated other nonowner changes in equity..................................... (155.2) (165.4)
----------- -----------
Total shareholders' equity.............................................. 2,174.4 2,002.4
----------- -----------
Total liabilities and shareholders' equity.............................. $ 4,737.2 $ 4,687.9
=========== ===========
The accompanying notes are an integral part of these statements.
-3-
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2003 2002
--------------- ---------------
(in millions)
Cash flows from operating activities:
Net income.................................................................. $ 199.6 $ 185.9
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization............................................... 91.6 91.7
Deferred income taxes....................................................... 61.6 (2.2)
Restructuring charge payments............................................... (15.0) (20.4)
Changes in assets and liabilities: (1)
Receivables............................................................. (81.2) (0.3)
Inventories............................................................. 23.4 63.5
Accounts payable and accrued liabilities................................ (25.6) (56.1)
Other assets and liabilities, net....................................... 1.2 42.9
--------------- ---------------
Net cash provided by operating activities......................... 255.6 305.0
Cash flows from investing activities:
Capital expenditures........................................................ (53.9) (43.1)
Capital paid for acquired businesses........................................ - (1.1)
Proceeds from sales of property, plant and equipment and other.............. 9.9 5.1
--------------- ---------------
Net cash used in investing activities............................. (44.0) (39.1)
Cash flows from financing activities:
Proceeds from issuances of debt............................................. 4.3 333.3
Repayments of debt.......................................................... (170.8) (396.6)
Debt issuance costs......................................................... - (2.1)
Dividends................................................................... (97.1) (97.5)
Acquisition of treasury shares.............................................. - (37.9)
Subsidiary purchase of parent shares........................................ (5.4) (35.4)
Activity under employee stock plans and other............................... 41.4 2.7
--------------- ---------------
Net cash used in financing activities............................. (227.6) (233.5)
Effect of exchange rate changes on cash and cash equivalents.................... 7.9 (0.3)
--------------- ---------------
Increase (decrease) in cash and cash equivalents................................ (8.1) 32.1
Cash and cash equivalents, beginning of period.................................. 302.0 11.5
--------------- ---------------
Cash and cash equivalents, end of period........................................ $ 293.9 $ 43.6
=============== ===============
(1) Net of the effects of 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.
Recently Issued Accounting Standards - In January 2003, the Financial
Accounting Standards Board issued Interpretation No. 46, Consolidation of
Variable Interest Entities (the "Interpretation"), an interpretation of
Accounting Research Bulletin No. 51. The Interpretation requires the
consolidation of variable interest entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or
other financial interest in the entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling financial interest
through ownership of a majority voting interest in the entity. For variable
interest entities created before February 1, 2003 the Interpretation is
effective during the first interim period ending after December 15, 2003. Cooper
has evaluated the effects of adopting the Interpretation and has concluded it
will have no effect on Cooper's consolidated results of operations, financial
position or cash flows.
NOTE 2. STOCK-BASED COMPENSATION
Under Cooper stock option plans, officers, directors and key employees
may be granted options to purchase Cooper's common stock at no less than 100% of
the market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the grant
date and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards and restricted stock awards to
certain key executives that generally vest over periods ranging from three to
five years. Cooper also has an Employee Stock Purchase Plan which provides
employees an option to purchase common stock 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. There is currently no outstanding offering under the Plan.
-5-
Effective January 1, 2003, Cooper adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), as amended. Cooper utilized the prospective method of adoption. Cooper
accounts for stock-based compensation awards granted, modified or settled prior
to January 1, 2003 using the intrinsic value method of accounting as prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations ("APB No. 25"). SFAS No. 123 provides an
alternative fair value based method for recognizing stock-based compensation in
which compensation expense is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. The fair value of stock options granted in 2003 was estimated
using the Black-Scholes option-pricing model. The fair value of restricted stock
and performance-based awards granted in 2003 was measured at the market price on
the grant date. Total stock-based compensation expense was $7.6 million for the
nine months ended September 30, 2003. Previously accrued stock-based
compensation of $1.7 million related to performance based awards was reversed to
income during the nine months ended September 30, 2002 as it was determined that
certain performance targets would not be met.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
--------------- ------------- ------------- -------------
(in millions)
Net income, as reported......................... $ 70.6 $ 63.2 $ 199.6 $ 185.9
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects................... 1.7 - 4.5 (1.0)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects.................... (3.9) (4.7) (12.0) (9.0)
--------------- ------------- ------------- -------------
Pro forma net income............................ $ 68.4 $ 58.5 $ 192.1 $ 175.9
=============== ============= ============= =============
Earnings per share:
Basic - as reported........................ $ .76 $ .68 $ 2.16 $ 1.99
Basic - pro forma.......................... $ .74 $ .63 $ 2.08 $ 1.88
Diluted - as reported...................... $ .75 $ .68 $ 2.14 $ 1.98
Diluted - pro forma........................ $ .73 $ .63 $ 2.07 $ 1.88
NOTE 3. ACQUISITIONS
During the first nine months 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.
-6-
NOTE 4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
(in millions)
Raw materials................................................................ $ 183.3 $ 184.3
Work-in-process.............................................................. 127.3 99.5
Finished goods............................................................... 349.5 389.1
Perishable tooling and supplies.............................................. 20.6 20.8
----------- -----------
680.7 693.7
Allowance for excess and obsolete inventory.................................. (45.4) (41.0)
Excess of current standard costs over LIFO costs............................. (67.0) (72.2)
----------- -----------
Net inventories................................................... $ 568.3 $ 580.5
=========== ===========
NOTE 5. LONG-TERM DEBT
At September 30, 2003, $225 million of Cooper Ohio's existing shelf
registration to issue up to $500 million of debt securities remained available.
NOTE 6. COMMON STOCK
At September 30, 2003, 93,155,964 Class A common shares, $.01 par value
were issued and outstanding (excluding 342,710 Class A common shares held by
Cooper Ohio) compared to 91,709,144 Class A common shares, $.01 par value
(excluding 1,519,214 Class A common shares held by Cooper Ohio) at December 31,
2002. During the first nine months of 2003, Cooper issued 1,599,320 Class A
common shares, including 1,329,004 shares held by Cooper Ohio, primarily in
connection with employee benefit plans and Cooper's dividend reinvestment
program. During the first nine months 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.
Cooper Ohio 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 nine months
of 2003, Cooper Ohio waived its rights to receive the regular quarterly
dividends of $.35 per share (or an aggregate of $60.8 million) from its parent,
Cooper, on all shares held.
NOTE 7. SEGMENT INFORMATION
REVENUES
---------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(in millions)
Electrical Products................................... $ 861.2 $ 844.6 $ 2,504.4 $ 2,507.4
Tools & Hardware...................................... 187.5 154.7 513.0 468.1
------------ ------------ ------------ -------------
Total revenues..................................... $ 1,048.7 $ 999.3 $ 3,017.4 $ 2,975.5
============ ============ ============ =============
-7-
OPERATING EARNINGS
---------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(in millions)
Electrical Products................................... $ 115.2 $ 104.8 $ 324.7 $ 304.5
Tools & Hardware...................................... 9.0 7.4 22.5 16.7
------------ ------------ ------------ -------------
Segment operating earnings......................... 124.2 112.2 347.2 321.2
Restructuring......................................... - - (14.3) -
General Corporate expenses............................ 17.6 9.7 50.5 23.5
------------ ------------ ------------ -------------
Total operating earnings........................... 106.6 102.5 311.0 297.7
Interest expense, net................................. 18.3 19.6 57.9 53.9
------------ ------------ ------------ -------------
Income before income taxes............................ $ 88.3 $ 82.9 $ 253.1 $ 243.8
============ ============ ============ =============
NOTE 8. INCOME TAXES
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
U.S. Federal statutory rate....................... 35.0% 35.0% 35.0% 35.0%
State and local income taxes...................... 2.7 2.5 2.7 2.5
Non U.S. Operations............................... (16.0) (12.1) (16.0) (12.1)
Extraterritorial income exclusion................. (1.2) (1.3) (1.2) (1.3)
Tax credits....................................... (0.2) (0.2) (0.2) (0.2)
Restructuring..................................... - - 1.1 -
Other............................................. (0.3) (0.1) (0.3) (0.1)
------------ ------------ ------------ -------------
Effective tax rate .......................... 20.0% 23.8% 21.1% 23.8%
============ ============ ============ =============
Subject to review and approval by the Joint Committee on Taxation of
Congress, Cooper entered into a settlement with the Internal Revenue Service
covering taxable years 1994-1996 which also included final disposition of
certain refund claims relating to tax years prior to 1994. During October 2003,
Cooper received a refund of $75.9 million including interest. Cooper is
currently analyzing the components of the settlement and anticipates that as a
result of the settlement there will not be a significant impact on the Company's
effective tax rate and that net interest income in the range of $20 million to
$29 million may be recognized in the fourth quarter of 2003.
-8-
NOTE 9. NET INCOME PER COMMON SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
BASIC: (in millions)
Net income applicable to common stock................. $ 70.6 $ 63.2 $ 199.6 $ 185.9
============ ============ ============ =============
Weighted average common shares outstanding............ 92.7 93.0 92.3 93.4
============ ============ ============ =============
DILUTED:
Net income applicable to common stock................. $ 70.6 $ 63.2 $ 199.6 $ 185.9
============ ============ ============ =============
Weighted average common shares outstanding............ 92.7 93.0 92.3 93.4
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards............... 1.4 0.2 0.8 0.7
------------ ------------ ------------ -------------
Weighted average common shares
and common share equivalents...................... 94.1 93.2 93.1 94.1
============ ============ ============ =============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(in millions)
Net income.................................... $ 70.6 $ 63.2 $ 199.6 $ 185.9
Foreign currency translation gains and
(losses).................................. (1.2) (5.6) 12.3 (8.7)
Change in fair value of derivatives........... 0.9 (0.3) (2.1) 0.1
--------------- --------------- --------------- ---------------
Net income and other nonowner
changes in equity......................... $ 70.3 $ 57.3 $ 209.8 $ 177.3
=============== =============== =============== ===============
NOTE 11. RESTRUCTURING
In 2001, Cooper accrued $35 million reflecting the contractual amounts
due to financial advisors associated with Cooper's strategic alternatives
review. Cooper paid $5 million to the advisors in the 2001 fourth quarter and
$15.7 million during 2002, leaving a balance of $14.3 million payable upon the
occurrence of certain events. During the second quarter of 2003, the terms of
the agreements with the financial advisors expired with the contingent events
that required payment not occurring. Accordingly, the accrual was reversed and
reflected as a $14.3 million negative restructuring charge ($8.6 million, net of
taxes) on the consolidated income statement.
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
-9-
demand levels. In connection with these commitments, certain production capacity
and related assets are being 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.............................. (943) - -
Cash expenditures................................. - (13.3) (1.7)
-------------------- ------------------ -----------------
Balance at September 30, 2003..................... 79 $ 2.9 $ 4.1
==================== ================== =================
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" 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 September 30, 2003, a
total of 113,396 Abex Claims were filed, of which 51,214 claims have been
resolved leaving 62,182 Abex Claims pending at September 30, 2003, that are the
responsibility of Federal-Mogul. During the three months ended September 30,
2003, 4,657 claims were filed and 525 claims were resolved. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $1,206 before
insurance. A total of $47.2 million was spent on defense costs for the period
August 28, 1998 through September 30, 2003. Historically, existing insurance
coverage has provided 50% to 80% of the total defense and indemnity payments for
Abex Claims.
-10-
With the assistance of independent advisors, Bates White, LLC, in the
fourth quarter of 2001 Cooper completed a thorough analysis of its potential
exposure for asbestos liabilities in the event Federal-Mogul rejects the 1998
Agreement. The analysis included a review of the twenty-year history of Abex
Claims; the average indemnity payments for resolved claims; the jurisdictions in
which claims had been filed; Bates White, LLC data on the incidence of asbestos
exposure and diseases in various industries; existing insurance coverage
including the insurance recovered by Pneumo and Federal-Mogul for pre-bankruptcy
claims and the contractual indemnities. Assumptions were made regarding future
claim filings and indemnity payments, and, based on the advisor's data, the
expected population of persons exposed to asbestos in particular industries. All
of this data was used to determine a reasonable expectation of future claims,
indemnity payments and insurance coverage. 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
September 30, 2003, the accrual for potential liabilities related to the
Federal-Mogul bankruptcy was $70.7 million.
NOTE 13. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
During August 2003, Cooper entered into interest-rate swaps to
effectively convert $300 million of 5.25% long-term fixed rate debt to variable
rate debt at the six-month LIBOR rate plus 1.9% (with semi-annual reset). The
notional principal amount and maturity dates of the interest-rate swaps match
the underlying long-term debt. Cooper accounts for the interest-rate swaps as
fair value hedges. During the three months ended September 30, 2003, Cooper
recognized a $0.8 million reduction of interest expense, net related to the
interest-rate swaps.
NOTE 14. 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.
-11-
CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Revenues.............................. $ - $ 72.9 $ 980.8 $ (5.0) $ 1,048.7
Cost of sales......................... - 48.5 701.3 (5.0) 744.8
Selling and administrative expenses... 1.7 26.5 169.1 - 197.3
Interest expense, net................. (0.1) 12.9 5.5 - 18.3
Equity in earnings of subsidiaries,
net of tax....................... 78.5 92.8 32.7 (204.0) -
Intercompany income (expense)........ 0.2 (76.4) 82.7 (6.5) -
-----------------------------------------------------------------------------------
Income before income taxes....... 77.1 1.4 220.3 (210.5) 88.3
Income tax expense (benefit).......... - (31.3) 49.0 - 17.7
-----------------------------------------------------------------------------------
Net income........................ $ 77.1 $ 32.7 $ 171.3 $ (210.5) $ 70.6
===================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Revenues.............................. $ - $ 70.8 $ 933.0 $ (4.5) $ 999.3
Cost of sales......................... - 43.6 671.2 (4.5) 710.3
Selling and administrative expenses... 1.1 22.0 163.4 - 186.5
Interest expense, net................. - 14.1 5.5 - 19.6
Equity in earnings of subsidiaries,
net of tax....................... 64.0 89.3 19.3 (172.6) -
Intercompany income (expense)......... 0.6 (107.9) 107.6 (0.3) -
-----------------------------------------------------------------------------------
Income (loss) before income taxes 63.5 (27.5) 219.8 (172.9) 82.9
Income tax expense (benefit).......... - (46.8) 66.5 - 19.7
-----------------------------------------------------------------------------------
Net income........................ $ 63.5 $ 19.3 $ 153.3 $ (172.9) $ 63.2
===================================================================================
-12-
CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Revenues.............................. $ - $ 210.3 $ 2,822.1 $ (15.0) $ 3,017.4
Cost of sales......................... - 138.8 2,012.4 (15.0) 2,136.2
Selling and administrative expenses... 5.6 76.0 502.9 - 584.5
Restructuring......................... - (14.3) - - (14.3)
Interest expense, net................. (0.2) 42.0 16.1 - 57.9
Equity in earnings of subsidiaries,
net of tax....................... 212.0 274.3 75.5 (561.8) -
Intercompany income (expense)......... 0.5 (262.4) 269.4 (7.5) -
-----------------------------------------------------------------------------------
Income (loss) before income taxes 207.1 (20.3) 635.6 (569.3) 253.1
Income tax expense (benefit).......... - (95.8) 149.3 - 53.5
-----------------------------------------------------------------------------------
Net income....................... $ 207.1 $ 75.5 $ 486.3 $ (569.3) $ 199.6
===================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Revenues.............................. $ - $ 212.8 $ 2,776.1 $ (13.4) $ 2,975.5
Cost of sales......................... - 132.1 2,009.6 (13.4) 2,128.3
Selling and administrative expenses... 1.2 61.9 486.4 - 549.5
Interest expense, net................. - 38.1 15.8 - 53.9
Equity in earnings of subsidiaries,
net of tax.......................... 83.6 262.0 19.3 (364.9) -
Intercompany income (expense)......... 66.0 (268.8) 203.1 (0.3) -
-----------------------------------------------------------------------------------
Income (loss) before income taxes 148.4 (26.1) 486.7 (365.2) 243.8
Income tax expense (benefit).......... - (83.2) 141.1 - 57.9
-----------------------------------------------------------------------------------
Net income........................ $ 148.4 $ 57.1 $ 345.6 $ (365.2) $ 185.9
===================================================================================
-13-
CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Cash and cash equivalents............. $ 36.9 $ 182.2 $ 74.8 $ - $ 293.9
Receivables........................... - 60.0 745.7 - 805.7
Intercompany receivables.............. 464.2 - 535.0 (999.2) -
Inventories........................... - 11.3 557.0 - 568.3
Deferred income taxes and other
current assets.................... 2.2 78.2 39.1 - 119.5
-----------------------------------------------------------------------------------
Total current assets........... 503.3 331.7 1,951.6 (999.2) 1,787.4
-----------------------------------------------------------------------------------
Property, plant and equipment, less
accumulated depreciation.......... - 55.4 660.9 - 716.3
Goodwill.............................. - 41.4 1,981.0 - 2,022.4
Investment in subsidiaries............ 2,533.8 5,749.2 54.0 (8,337.0) -
Investment in parent.................. - 2,331.8 - (2,331.8) -
Intercompany notes receivable......... 0.5 84.6 4,751.8 (4,836.9) -
Deferred income taxes and other
noncurrent assets................. - 160.4 50.7 - 211.1
-----------------------------------------------------------------------------------
Total assets................... $ 3,037.6 $ 8,754.5 $ 9,450.0 $ (16,504.9) $ 4,737.2
===================================================================================
Short-term debt....................... $ - $ - $ 8.0 $ - $ 8.0
Accounts payable...................... 32.6 26.9 268.9 - 328.4
Accrued liabilities................... 1.1 166.1 263.7 - 430.9
Intercompany payables................. - 999.2 - (999.2) -
Current maturities of long-term debt.. - - 0.5 - 0.5
-----------------------------------------------------------------------------------
Total current liabilities...... 33.7 1,192.2 541.1 (999.2) 767.8
-----------------------------------------------------------------------------------
Long-term debt........................ - 924.3 384.1 - 1,308.4
Intercompany notes payable............ - 4,751.8 85.1 (4,836.9) -
Other long-term liabilities........... - 329.9 156.7 - 486.6
-----------------------------------------------------------------------------------
Total liabilities.............. 33.7 7,198.2 1,167.0 (5,836.1) 2,562.8
-----------------------------------------------------------------------------------
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........ 2,804.9 0.4 7,036.7 (9,360.0) 482.0
Retained earnings..................... 222.2 1,711.1 1,273.3 (1,359.9) 1,846.7
Accumulated other nonowner changes
in equity.......................... (24.7) (155.2) (168.0) 192.7 (155.2)
-----------------------------------------------------------------------------------
Total shareholders' equity..... 3,003.9 1,556.3 8,283.0 (10,668.8) 2,174.4
-----------------------------------------------------------------------------------
Total liabilities and
shareholders' equity........... $ 3,037.6 $ 8,754.5 $ 9,450.0 $ (16,504.9) $ 4,737.2
===================================================================================
-14-
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
=================================================================================
-15-
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities................. $ (5.4) $ (195.6) $ 456.6 $ - $ 255.6
Cash flows from investing activities:
Capital expenditures................. - (9.4) (44.5) - (53.9)
Loans to affiliates.................. (15.5) (26.2) (15.0) 56.7 -
Repayments of loans from affiliates.. 15.1 21.9 15.0 (52.0) -
Dividends from subsidiaries.......... 101.0 2.0 - (103.0) -
Other................................ - 2.5 6.4 1.0 9.9
-----------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities........... 100.6 (9.2) (38.1) (97.3) (44.0)
Cash flows from financing activities:
Proceeds from issuances of debt...... - - 4.3 - 4.3
Repayments of debt................... - (169.7) (1.1) - (170.8)
Borrowings from affiliates........... - 15.0 41.7 (56.7) -
Repayments of loans to affiliates.... - (15.0) (37.0) 52.0 -
Other intercompany financing
activities........................ 3.8 277.5 (281.3) - -
Dividends............................ (97.1) - - - (97.1)
Dividends paid to parent............. - - (103.0) 103.0 -
Subsidiary purchase of parent shares. - (5.4) - - (5.4)
Employee stock plan activity and
other.............................. 1.1 40.3 1.0 (1.0) 41.4
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities........... (92.2) 142.7 (375.4) 97.3 (227.6)
Effect of exchange rate changes on
cash and cash equivalents......... - - 7.9 - 7.9
-----------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents....................... 3.0 (62.1) 51.0 - (8.1)
Cash and cash equivalents, beginning
of period......................... 33.9 244.3 23.8 - 302.0
-----------------------------------------------------------------------------------
Cash and cash equivalents, end of
period............................ $ 36.9 $ 182.2 $ 74.8 $ - $ 293.9
===================================================================================
-16-
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities................. $ 31.8 $ (210.9) $ 484.1 $ - $ 305.0
Cash flows from investing activities:
Capital expenditures................. - (4.3) (38.8) - (43.1)
Loans to affiliates.................. - (11.8) (39.0) 50.8 -
Dividends from subsidiaries.......... - 1.4 - (1.4) -
Other................................ - (0.4) 4.0 0.4 4.0
-----------------------------------------------------------------------------------
Net cash used in investing
activities..................... - (15.1) (73.8) 49.8 (39.1)
Cash flows from financing activities:
Proceeds from issuances of debt...... - 300.0 33.3 - 333.3
Repayments of debt................... - (300.4) (96.2) - (396.6)
Borrowings from affiliates........... 0.4 39.0 11.4 (50.8) -
Other intercompany financing
activities........................ 0.1 345.0 (345.1) - -
Dividends............................ (32.2) (65.3) - - (97.5)
Dividends paid to affiliates......... - - (1.4) 1.4 -
Acquisition of treasury shares....... - (37.9) - - (37.9)
Subsidiary purchase of parent shares. - (35.4) - - (35.4)
Employee stock plan activity and
other.............................. - 0.6 0.4 (0.4) 0.6
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities........... (31.7) 245.6 (397.6) (49.8) (233.5)
Effect of exchange rate changes on
cash and cash equivalents......... - - (0.3) - (0.3)
-----------------------------------------------------------------------------------
Increase in cash and cash
equivalents....................... 0.1 19.6 12.4 - 32.1
Cash and cash equivalents, beginning
of period......................... - 2.8 8.7 - 11.5
-----------------------------------------------------------------------------------
Cash and cash equivalents, end of
period............................ $ 0.1 $ 22.4 $ 21.1 $ - $ 43.6
===================================================================================
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net income for the third quarter of 2003 was $70.6 million on revenues
of $1,048.7 million compared with 2002 third quarter net income of $63.2 million
on revenues of $999.3 million. Third quarter diluted earnings per share were
$.75 in 2003 and $.68 in 2002.
REVENUES:
Revenues for the third quarter of 2003 grew 5% over the third quarter
of 2002. Foreign currency translation increased reported revenues by
approximately 2% for the 2003 third quarter.
Revenues in Cooper's Electrical Products segment increased 2% in the
third quarter of 2003 compared with the prior year's third quarter. Revenues
improved in all of the Electrical Products businesses, except the support
systems business, which continued to be pressured by weak non-residential
construction and telecommunications markets. Cooper's hazardous duty, circuit
protection and wiring devices businesses were positively impacted by activity in
the industrial and electronics markets. The Company's lighting business also
experienced an increase in commercial and industrial shipments. However, this
improvement was somewhat offset by inventory reductions within the retail
channel. International activity provided modest growth in the power transmission
and distribution equipment business. European industrial markets generally
remained weak, impacting the Company's European lighting and security business
which, absent favorable currency translation, experienced slightly reduced sales
compared to the prior year period. A weak U.S. Dollar increased total Electrical
Products revenues during the quarter by approximately 1%.
Tools & Hardware segment revenues for the quarter increased 21% from
the third quarter of 2002. Power tools revenues were higher due to international
shipments of automated assembly equipment systems. Hand tool revenues increased
over the prior year, driven by new product introductions, primarily in the
retail channel. North American industrial, automotive and commercial aircraft
markets remained weak during the quarter. Currency translation increased third
quarter 2003 Tools & Hardware revenues by approximately 5%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 71.0% for the third
quarter of 2003 compared to 71.1% for the comparable 2002 quarter. Cooper's
continued successful cost reduction efforts were partially offset by a higher
proportion of lower margin Tools & Hardware revenues.
Electrical Products segment cost of sales, as a percentage of revenues,
was 69.7% for the third quarter of 2003 compared to 70.9% for the third quarter
of 2002. The decrease in the cost of sales percentage was primarily a result of
manufacturing cost reduction initiatives. Tools & Hardware segment cost of
sales, as a percentage of revenues, was 76.9% for the third quarter of 2003
compared to 74.4% for the third quarter of 2002. The increase in cost of sales
percentage reflects a higher proportion of lower margin assembly systems sales.
Selling and administrative expenses, as a percentage of revenues, for
the third quarter of 2003 were 18.8% compared to 18.7% for the third quarter of
2002. Favorable leverage from the impact of increased revenues were offset by
higher medical costs, pension expenses, insurance premiums and stock-based
compensation.
-18-
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the third quarter of 2003 were 16.9% compared to
16.7% for the third quarter of 2002. The increase in selling and administrative
expenses percentage is primarily due to increases in insurance and pension
expenses. Tools & Hardware segment selling and administrative expenses, as a
percentage of revenues, for the third quarter of 2003 were 18.3% compared to
20.8% for the third quarter of 2002. The decrease in the selling and
administrative expenses percentage is primarily due to the favorable leverage
from higher revenues more than offsetting an increase in employee
benefit-related expenses.
Interest expense, net for the third quarter of 2003 decreased $1.3
million compared to the third quarter of 2002 primarily as a result of lower
average interest rates and lower average debt balances. Average debt balances
were $1.31 billion and $1.33 billion and average interest rates were 5.7% and
5.8% for the third quarter of 2003 and 2002, respectively. The decrease in
average interest rates primarily resulted from the interest rate swaps discussed
in Note 13 of the Notes to the Consolidated Financial Statements.
OPERATING EARNINGS:
Electrical Products segment third quarter 2003 operating earnings
increased 10% to $115.2 million from $104.8 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, coupled with increased revenues. Partially offsetting the
improvement in margins was higher costs for insurance and employee benefit
programs.
Tools & Hardware segment operating earnings were $9.0 million for the
2003 third quarter, compared to $7.4 million in the third quarter of 2002. The
increased operating earnings primarily reflect higher revenues and the impact of
Cooper's cost control and manufacturing rationalization efforts, partially
offset by increased employee benefit-related expenses.
General Corporate expense increased $7.9 million to $17.6 million
during the third quarter of 2003 compared to $9.7 million during the third
quarter of 2002. During the third 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. Cooper concluded that, for the third quarter of
2003, no income would be recognized under the agreement. The remaining General
Corporate expense increase resulted primarily from increased employee
benefit-related expenses, pension expense and stock-based compensation expense.
INCOME TAXES:
The effective tax rate was 20.0% for the three months ended September
30, 2003 and 23.8% for the three months ended September 30, 2002. See Note 8 of
the Notes to the Consolidated Financial Statements for additional information
regarding the effective tax rate.
-19-
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net income for the first nine months of 2003 was $199.6 million on
revenues of $3,017.4 million compared with 2002 first nine months net income of
$185.9 million on revenues of $2,975.5 million. Diluted earnings per share for
the 2003 nine-month period were $2.14 compared to $1.98 in 2002.
REVENUES:
Revenues for the first nine months of 2003 exceeded the first nine
months of 2002 by 1%. Foreign currency translation increased reported revenues
during the first nine months by approximately 2%.
Electrical Products segment revenues for the first nine months of 2003
were slightly lower than the same period in 2002. Retail channel revenues were
up modestly reflecting Cooper's alignment with major retailers. Revenues in
Cooper's North American lighting, wiring devices and support systems businesses
were impacted by continued soft commercial construction and industrial markets,
particularly in the first half of the year. Controls over discretionary capital
spending by utilities has negatively impacted the power transmission and
distribution equipment market. Modest improvements in selected industrial
markets resulted in modest revenue gains in Cooper's hazardous duty and circuit
protection businesses. A weak U.S. Dollar increased total Electrical Products
revenues during the first nine months of 2003 by approximately 2%.
Tools & Hardware segment revenues for the first nine months of 2003
were 10% higher than the first nine months of 2002. Power tools experienced
growth in European-based industrial power tools and assembly equipment markets.
Hand tools sales improved over the prior year period primarily as a result of
increased demand from the retail channel, driven by new product offerings. North
American industrial demand declined from the previous year. A weak U.S. Dollar
increased total Tools & Hardware revenues during the first nine months of 2003
by approximately 4%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 70.8% for the first
nine months of 2003 compared to 71.5% for the comparable 2002 period. The
decrease in the cost of sales percentage was due primarily to Cooper's continued
cost reduction efforts.
Electrical Products segment cost of sales, as a percentage of revenues,
was 69.9% for the first nine months of 2003 compared to 71.3% for the first nine
months of 2002. The decrease in the cost of sales percentage was primarily a
result of the continued focus on adjusting the Company's cost structure and
productivity improvements. Tools & Hardware segment cost of sales, as a
percentage of revenues, was 75.4% for the first nine months of 2003 compared to
75.3% for the first nine months of 2002. Cost reduction actions were offset by
the higher proportion of lower margin assembly equipment revenues.
Selling and administrative expenses, as a percentage of revenues, for
the first nine months of 2003 were 19.4% compared to 18.5% for the first nine
months of 2002. The increase in the selling and administrative expenses
percentage reflects the impact of increases in pension, medical, insurance and
stock-based compensation expenses.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the first nine months of 2003 were 17.1% compared to
16.6% for the first nine months of 2002. The increase in the selling and
administrative expenses percentage is attributable to higher employee
benefits-related costs and increased sales and marketing costs resulting from
initiatives to expand market share. Tools & Hardware segment selling and
administrative expenses, as a percentage of revenues, for the first nine months
of 2003 were 20.2% compared to 21.2% for the first nine months of 2002. The
decrease in the selling and administrative expenses percentage reflects
increased leveraging of costs offset by a modest increase in expenses,
particularly related to employee benefits.
-20-
Interest expense, net for the first nine months of 2003 increased $4.0
million compared to the first nine months of 2002 primarily as a result of
higher average interest rates on lower average debt balances. Average debt
balances were $1.34 billion and $1.39 billion and average interest rates were
5.9% and 5.2% for the first nine months of 2003 and 2002, respectively. The
increase in average interest rates primarily resulted from Cooper's replacement
in 2002 of substantially all variable rate commercial paper borrowings with
long-term fixed-rate debt.
OPERATING EARNINGS:
Year-to-date 2003 operating earnings for the Electrical Products
segment were $324.7 million compared to $304.5 million for the same period of
last year. The increase from prior year was primarily due to the improvement in
margins as a result of cost reduction and productivity actions targeting
manufacturing costs, partially offset by increased insurance, pension and
employee benefit expenses and investments in sales and marketing initiatives.
Tools & Hardware segment operating earnings were $22.5 million for the
first nine months of 2003, compared to $16.7 million for the same period of
2002. The increased operating earnings largely reflect the increase in revenues
and the impact of Cooper's cost control and manufacturing rationalization
efforts, partially offset by unfavorable product mix and higher insurance,
pension and employee benefit expenses.
General Corporate expense increased $27.0 million to $50.5 million
during the first nine months of 2003 compared to $23.5 million during the first
nine months of 2002. During the first nine months of 2002, General Corporate
expense was reduced by income of $9.0 million under the agreement with Belden,
discussed previously. The remaining increase in General Corporate expense
resulted primarily from increased employee benefits and stock-based compensation
expenses.
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 21.1% for the nine months ended September 30, 2003
and 23.8% for the nine months ended September 30, 2002. Excluding the impact of
the reversal of the restructuring accrual discussed at Note 11 of the Notes to
the Consolidated Financial Statements, the effective tax rate was 20.0% for the
nine months ended September 30, 2003. See Note 8 of the Notes to the
Consolidated Financial Statements for additional information regarding the
effective tax rate.
RESTRUCTURING:
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 are being sold, outsourced, discontinued or moved to a lower cost
environment. Cooper recorded a provision for these announced actions of $39.1
million ($15.0 million of which was non-cash). Of this amount, $24.0 million
($11.0 million of which was non-cash) was associated with the Electrical
Products segment, $12.7 million ($3.4 million of which was non-cash) was
associated with the Tools & Hardware segment and the remainder was related to
General Corporate. Of the $24.1 million of charges resulting in cash
expenditures, $7.0 million remained to be expended at September 30, 2003.
-21-
The following table reflects activity related to the fourth quarter
2002 restructuring charge.
FACILITIES
NUMBER OF ACCRUED CLOSURE AND
EMPLOYEES SEVERANCE RATIONALIZATION
------------------ ----------------- -----------------
($ 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................................ (943) - -
Cash expenditures................................... - (13.3) (1.7)
------------------ ----------------- -----------------
Balance at September 30, 2003....................... 79 $ 2.9 $ 4.1
================== ================= =================
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 will be incurred during
2003 and are being funded from cash provided by operating activities.
As of September 30, 2003, Cooper anticipates incurring approximately
$4.1 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 is being
realized during 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 million
and will largely be reflected as lower cost of sales.
During the fourth quarter of 2001, Cooper recorded a restructuring
charge that resulted 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 Cooper's
review of strategic alternatives. These charges resulted in restructuring
accruals of $41.4 million (non-cash charges were $1.7 million).
-22-
The following table reflects activity related to the fourth quarter
2001 severance, facility consolidation and closure and financial advisors and
other cost accruals.
FACILITIES FINANCIAL
NUMBER OF ACCRUED CONSOLIDATION ADVISORS AND
EMPLOYEES SEVERANCE AND CLOSURE OTHER
--------------- ----------------- --------------- ----------------
($ 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
Reversal of accrual.......................... - - - (14.3)
--------------- ----------------- --------------- ----------------
Balance at September 30, 2003................ - $ - $ - $ -
=============== ================= =============== ================
Cash expenditures were funded with cash provided by operating
activities.
In 2001, Cooper accrued $35 million reflecting the contractual amounts
due to financial advisors associated with Cooper's strategic alternatives
review. Cooper paid $5 million to the advisors in the 2001 fourth quarter and
$15.7 million during 2002, leaving a balance of $14.3 million payable upon the
occurrence of certain events. During the second quarter of 2003, the terms of
the agreements with the financial advisors expired with the contingent events
that required payment not occurring. Accordingly, the accrual was reversed and
reflected as a $14.3 million negative restructuring charge ($8.6 million, net of
taxes) on the consolidated income statement. See Note 11 of the Notes to the
Consolidated Financial Statements for additional information on restructuring.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY:
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $70.6 million during the first nine
months of 2003. The increase in operating working capital for the first nine
months of 2003 is primarily a result of an increase in receivables, reflecting
the current quarter's sales levels, partially offset by a reduction in operating
working capital from inventory and payables. Inventory levels have been reduced
during the first nine months of 2003 as builds that occurred during the first
half of the year in support of factory consolidation programs have been worked
off and progress continues on inventory management programs. Also contributing
to inventory reduction was an increase in the allowance for excess and obsolete
inventories as the Company continues to actively manage the ultimate disposition
of inventories in light of current market conditions. Operating working capital
turnover (defined as annualized revenues divided by average operating working
capital) for the first nine months of 2003 of 4.0 turns increased from 3.8 turns
in the same period of 2002 reflecting the impact of reductions in average trade
receivables and inventory balances offset, in part, by a decrease in average
accounts payable.
Cash provided by operating activities was $256 million in the first
nine months of 2003. The decline in net cash provided by operating activities
compared to the first nine months of 2002 was driven by the receivables increase
discussed above and prepayments of employee benefits partially offset by lower
income taxes. Cash provided by operating activities plus cash provided from
employee stock plan activity and proceeds from sales of property, plant and
equipment and other, were used to fund capital expenditures of $54 million,
dividends of $97 million, share purchases of $5 million and net debt repayments
of $167 million during the first nine months of 2003. Cash provided by operating
activities of $305 million in the first nine months of 2002 was used to fund
capital expenditures of $43 million, dividends of $98 million, share repurchases
of $73 million and a net reduction in debt of $63 million.
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Cooper is continuing to focus on initiatives to maximize cash flows.
Cooper currently anticipates a continuation of its long-term ability to annually
generate in excess of $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 was $8.1
million and $5.2 million during the nine months ended September 30, 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 37.7% at September 30, 2003, 41.8% at December 31, 2002 and 38.2% at
September 30, 2002.
Cooper typically relies on commercial paper markets as its principal
source of short-term financing. At September 30, 2003 and December 31, 2002,
Cooper had no commercial paper outstanding and cash and cash equivalents of
$293.9 million and $302.0 million, respectively.
Cooper's practice is to back up its outstanding commercial paper with a
combination of cash and committed bank credit facilities. As of September 30,
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 September 30, 2003, $225 million of Cooper Ohio's existing shelf
registration to issue up to $500 million of debt securities remained available.
During August 2003, Cooper entered into interest-rate swaps to
effectively convert $300 million of 5.25% long-term fixed rate debt to variable
rate debt at the six month LIBOR rate plus 1.90% (with semi-annual reset). The
swaps mature concurrent with the long-term debt and have been designated as a
fair-value hedge. As of the date of this filing, there have been no other
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.
Subject to review and approval by the Joint Committee on Taxation of
Congress, Cooper entered into a settlement with the Internal Revenue Service
covering taxable years 1994-1996 which also included final disposition of
certain refund claims relating to tax years prior to 1994. During October 2003,
Cooper received a refund of $75.9 million including interest. Cooper is
currently analyzing the components of the settlement and anticipates that as a
result of the settlement there will not be a significant impact on the Company's
effective tax rate and that net interest income in the range of $20 million to
$29 million may be recognized in the fourth quarter of 2003.
-24-
The Company is currently evaluating various potential actions that it
may undertake in the 2003 fourth quarter to accelerate cost reduction efforts.
These actions include, but are not limited to: further employment reductions;
acceleration of relocation activities for the Company's wiring devices business;
annuatization of certain pension plan obligations; and a cash contribution to
the Cooper Industries Foundation.
BACKLOG
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
September 30,
-----------------------------------------
2003 2002
------------------- -------------------
(in millions)
Electrical Products......................................................... $ 254.8 $ 248.1
Tools & Hardware............................................................ 87.5 96.7
------------------- -------------------
$ 342.3 $ 344.8
=================== ===================
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 of the Notes to the Consolidated Financial Statements.
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, 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
As of the end of the period covered by this quarterly 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.
-25-
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 September 30, 2003, a
total of 113,396 Abex Claims were filed, of which 51,214 claims have been
resolved leaving 62,182 Abex Claims pending at September 30, 2003, that are the
responsibility of Federal-Mogul. During the three months ended September 30,
2003, 4,657 claims were filed and 525 claims were resolved. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $1,206 before
insurance. A total of $47.2 million was spent on defense costs for the period
August 28, 1998 through September 30, 2003. Historically, existing insurance
coverage has provided 50% to 80% of the total defense and indemnity payments for
Abex Claims.
With the assistance of independent advisors, Bates White, LLC, in the
fourth quarter of 2001 Cooper completed a thorough analysis of its potential
exposure for asbestos liabilities in the event Federal-Mogul rejects the 1998
Agreement. The analysis included a review of the twenty-year history of Abex
Claims; the average indemnity payments for resolved claims; the jurisdictions in
which claims had been filed; Bates White, LLC data on the incidence of asbestos
exposure and diseases in various industries; existing insurance coverage
including the insurance recovered by Pneumo and Federal- Mogul for
pre-bankruptcy claims and the contractual indemnities. Assumptions were made
regarding future claim filings and indemnity payments, and, based on the
advisor's data, the expected population of persons exposed to asbestos in
particular industries. All of this data was used to determine a reasonable
expectation of future claims, indemnity payments and insurance coverage. 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 September 30, 2003, the accrual for potential
liabilities related to the Federal-Mogul bankruptcy was $70.7 million.
-26-
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 Nine Months Ended September 30, 2003
and 2002.
23. Consent of Bates White, LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Cooper furnished the following reports on Form 8-K during the third
quarter of 2003:
Form 8-K dated July 1, 2003, which furnished a copy of a press
release announcing Cooper Industries Board elected a new director.
Form 8-K dated July 24, 2003, which furnished a copy of a press
release containing Cooper's financial results for the quarter
ended June 30, 2003 and "Sales Trends" information to be posted on
Cooper's website.
Form 8-K dated August 19, 2003, which furnished "Sales Trends"
information to be posted on Cooper's website.
Form 8-K dated August 21, 2003, which furnished a copy of a slide
presentation of the mid-year update and business review conducted with
investment analysts.
Form 8-K dated September 23, 2003, which furnished "Sales Trends"
information to be posted on Cooper's website.
-27-
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: November 14, 2003 /s/ Terry A. Klebe
- ------------------------ -------------------------------
Terry A. Klebe
Senior Vice President and
Chief Financial Officer
Date: November 14, 2003 /s/ Jeffrey B. Levos
- ------------------------ -------------------------------
Jeffrey B. Levos
Vice President and Controller
and Chief Accounting Officer
-28-
Exhibit Index
Exhibit No.
12. Computation of Ratios of Earnings to Fixed Charges for the Calendar
Years 2002 through 1998 and the Nine Months Ended September 30, 2003
and 2002.
23. Consent of Bates White, LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-29-