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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-1175
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Cooper Industries, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 31-4156620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
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(Address of principal executive offices) (Zip Code)
(713) 209-8400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of issuer's common stock as of April 30, 2001 was
93,611,322.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
(in millions, where applicable)
Revenues $ 1,095.1 $ 1,038.9
Cost of sales 768.9 701.7
Selling and administrative expenses 199.5 176.4
Goodwill amortization 14.8 13.4
Interest expense, net 25.1 18.3
--------- ---------
Income before income taxes 86.8 129.1
Income taxes 30.4 45.2
--------- ---------
Net income $ 56.4 $ 83.9
========= =========
Income per Common Share:
Basic $ .60 $ .89
========= =========
Diluted $ .60 $ .89
========= =========
Cash dividends per Common Share $ .35 $ .35
========= =========
The accompanying notes are an integral part of these statements.
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COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
---- ----
ASSETS (in millions)
Cash and cash equivalents $ 17.8 $ 26.4
Receivables 842.9 828.8
Inventories 737.3 706.9
Deferred income taxes and other current assets 193.2 173.0
-------- --------
Total current assets 1,791.2 1,735.1
-------- --------
Property, plant and equipment, less accumulated depreciation 869.1 870.4
Goodwill, less accumulated amortization 1,987.7 2,013.5
Deferred income taxes and other noncurrent assets 174.2 170.3
-------- --------
Total assets $4,822.2 $4,789.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 174.1 $ 166.1
Accounts payable 406.3 470.1
Accrued liabilities 495.3 486.3
Current maturities of long-term debt 1.2 51.1
-------- --------
Total current liabilities 1,076.9 1,173.6
-------- --------
Long-term debt 1,414.1 1,300.8
Postretirement benefits other than pensions 207.5 211.2
Other long-term liabilities 197.9 199.5
-------- --------
Total liabilities 2,896.4 2,885.1
-------- --------
Common stock, $5.00 par value 615.0 615.0
Capital in excess of par value 661.4 663.3
Retained earnings 2,248.7 2,225.0
Common stock held in treasury, at cost (1,460.5) (1,470.0)
Unearned employee stock ownership plan compensation (5.4) (8.6)
Accumulated other nonowner changes in equity (133.4) (120.5)
-------- --------
Total shareholders' equity 1,925.8 1,904.2
-------- --------
Total liabilities and shareholders' equity $4,822.2 $4,789.3
======== ========
The accompanying notes are an integral part of these statements.
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COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
(in millions)
Cash flows from operating activities:
Net income $ 56.4 $ 83.9
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization 46.1 40.0
Deferred income taxes -- 2.8
Changes in assets and liabilities: (1)
Receivables (21.1) (36.5)
Inventories (50.7) (49.7)
Accounts payable and accrued liabilities (52.2) (2.0)
Accrued income taxes -- 30.3
Other assets and liabilities, net (13.0) (23.4)
------ ------
Net cash provided by (used in) operating activities (34.5) 45.4
Cash flows from investing activities:
Cash received from (paid for) acquired businesses 11.3 (135.2)
Capital expenditures (39.6) (51.5)
Proceeds from sales of property, plant and equipment 0.8 2.9
------ ------
Net cash used in investing activities (27.5) (183.8)
Cash flows from financing activities:
Proceeds from issuances of debt 135.9 208.7
Repayments of debt (51.1) (2.5)
Dividends (32.7) (32.7)
Acquisition of treasury shares -- (39.3)
Activity under employee stock plans 1.4 0.6
------ ------
Net cash provided by financing activities 53.5 134.8
Effect of exchange rate changes on cash and cash equivalents (0.1) 0.1
------ ------
Decrease in cash and cash equivalents (8.6) (3.5)
Cash and cash equivalents, beginning of period 26.4 26.9
------ ------
Cash and cash equivalents, end of period $ 17.8 $ 23.4
====== ======
(1) Net of the effects of acquisitions and translation.
The accompanying notes are an integral part of these statements.
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COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The financial information presented as of any
date other than December 31 has been prepared from the books and records without
audit. Financial information as of December 31 has been derived from Cooper's
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated, have
been included. For further information regarding Cooper's accounting policies,
refer to the Consolidated Financial Statements and related notes for the year
ended December 31, 2000 included as Appendix D to Cooper's Proxy Statement dated
March 8, 2001.
NOTE 2. ADOPTION OF NEW ACCOUNTING STANDARD
On January 1, 2001, Cooper adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133") as amended. SFAS No. 133 requires that all derivatives be
recognized as assets and liabilities and measured at fair value. For derivative
instruments that are not designated as hedges, the gain or loss on the
derivative is recognized in earnings currently. If the derivative is designated
as a fair value hedge, the gain or loss on the derivative and the offsetting
loss or gain on the hedged asset, liability or firm commitment is recognized in
earnings. For derivative instruments designated as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated nonowner changes in equity and reclassified into
earnings in the same period that the hedged transaction affects earnings. The
ineffective portion of the gain or loss is immediately recognized in earnings.
The cumulative effect of adopting the new standard was not material to Cooper's
consolidated results of operations, financial position or cash flows.
Cooper enters into foreign currency forward exchange contracts and commodity
futures contracts to reduce the risks of adverse changes in foreign exchange
rates and commodity prices. Cooper does not enter into speculative derivative
transactions.
As a result of having sales, purchases and certain intercompany transactions
denominated in currencies other than the functional currencies used by Cooper's
businesses, Cooper is exposed to the effect of foreign exchange rate changes on
its cash flows and earnings. Cooper enters into foreign currency forward
exchange contracts to hedge significant foreign currency denominated
transactions for periods consistent with the terms of the underlying
transactions. Contracts generally have maturities that do not exceed one year.
Foreign currency forward exchange contracts executed to hedge a recognized
asset, liability or firm commitment are accounted for as fair value hedges. The
net gain on contracts designated as fair value hedges was not material during
the three months ended March 31, 2001. Foreign currency forward exchange
contracts executed to hedge forecasted transactions are accounted for as cash
flow hedges. The net gain on contracts designated as cash flow hedges was not
material during the three months ended March 31, 2001. Cooper also enters into
certain foreign currency forward exchange contracts that are not designated as
hedges. These contracts are intended to reduce cash flow volatility related to
intercompany financing transactions.
Cooper enters into commodity futures contracts to reduce the volatility of price
fluctuations on a portion of its forecasted annual raw material purchases. These
instruments are designated as cash flow hedges. The net loss on commodity
futures contracts was not material during the three months ended March 31, 2001.
Gains or losses on derivative instruments are reported in the same line item as
the underlying hedged transaction in the consolidated statements of income. At
March 31, 2001, Cooper expects to reclassify $0.2 million of net losses on
derivative instruments designated as cash flow hedges from accumulated nonowner
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changes in equity to earnings during the next twelve months. The amount of
discontinued cash flow hedges during the three months ended March 31, 2001 was
not material.
NOTE 3. ACQUISITIONS AND DIVESTITURES
During the first quarter of 2001, Cooper received purchase price
adjustments of $11.3 million net related to previously acquired businesses.
During the first quarter of 2000, Cooper completed two acquisitions in
its Electrical Products segment. In March 2000, Cooper acquired Eagle Electric
for a total cost of $124.6 million, subject to adjustment as provided in the
acquisition agreements. Eagle manufactures and sells electrical wiring devices
including switches, receptacles, plugs and connectors, cords and other
electrical accessories to the residential and commercial markets. Cooper also
acquired a small Indian manufacturer of electrical products.
The acquisitions have been accounted for as purchase transactions and
the results of the acquisitions are included in Cooper's consolidated income
statements from the date of acquisition.
NOTE 4. INVENTORIES
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(in millions)
Raw materials....................................... $238.9 $230.1
Work-in-process..................................... 140.7 134.6
Finished goods...................................... 416.2 404.5
Perishable tooling and supplies..................... 19.8 20.5
------ ------
815.6 789.7
Excess of current standard costs over LIFO costs.... (78.3) (82.8)
------ ------
Net inventories........................ $737.3 $706.9
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NOTE 5. LONG-TERM DEBT
At March 31, 2001, commercial paper of $526 million was classified as
long-term debt, reflecting Cooper's intention to refinance this amount during
the 12-month period following the balance sheet date through either continued
short-term borrowing or utilization of available bank credit facilities.
During 1999, Cooper completed a shelf registration statement to issue
up to $500 million of debt securities. At March 31, 2001, all $500 million of
the shelf registration was available to be issued.
NOTE 6. COMMON STOCK
During the first quarter of 2000, Cooper repurchased 1.1 million shares
of its common stock at a cost of $39.3 million.
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NOTE 7. SEGMENT INFORMATION
REVENUES OPERATING EARNINGS
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Electrical Products.................. $ 910.0 $ 839.1 $102.6 $133.2
Tools & Hardware..................... 185.1 199.8 16.9 22.0
-------- -------- ------ ------
Total management reporting........ $1,095.1 $1,038.9 119.5 155.2
======== ========
General corporate expenses........... 7.6 7.8
Interest expense, net................ 25.1 18.3
------ ------
Income before income taxes........... $ 86.8 $129.1
====== ======
NOTE 8. NET INCOME PER COMMON SHARE
BASIC DILUTED
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THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
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2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Net income applicable to Common stock............ $56.4 $83.9 $56.4 $83.9
===== ===== ===== =====
Weighted average Common shares outstanding....... 93.8 93.8 93.8 93.8
===== =====
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards.......... 0.9 0.6
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Weighted average Common shares
and Common share equivalents................. 94.7 94.4
===== =====
Options and employee awards are not considered in the calculations if the effect
would be antidilutive.
NOTE 9. NET INCOME AND OTHER NONOWNER CHANGES IN EQUITY
The components of net income and other nonowner changes in equity, net
of related taxes, were as follows:
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
(in millions)
Net income.......................................... $ 56.4 $ 83.9
Foreign currency translation losses................. (12.6) (11.1)
Change in fair value of derivatives................. (0.3) --
------ ------
Net income and other nonowner changes in equity..... $ 43.5 $ 72.8
====== ======
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NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Assets acquired and liabilities assumed or incurred from the acquisition of
businesses during the three months ended March 31, 2000 were as follows (in
millions):
Fair value of assets acquired..................................... $161.3
Liabilities assumed or incurred................................... (26.1)
------
Cash used to acquire businesses, net of cash acquired...... $135.2
======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
Net income for the first quarter of 2001 was $56.4 million on revenues
of $1,095.1 million compared with 2000 first quarter net income of $83.9 million
on revenues of $1,038.9 million. First quarter diluted earnings per share
decreased 33% to $.60 from $.89 in 2000.
REVENUES:
Revenues for the first quarter of 2001 increased 5% compared to the
first quarter of 2000. After excluding the effects of recent acquisitions and
divestitures, revenues decreased 6% when compared to the first quarter of last
year. The impact of foreign currency translation reduced reported revenues by
approximately 2% for the quarter.
First quarter 2001 Electrical Products revenues rose 8% from the first
quarter last year. The year-to-year improvement was driven by acquisitions.
Excluding the incremental impact of acquisitions and a 1% reduction in revenues
due to foreign currency translation, segment revenues were down 4% compared to
last year. The weakness in the overall North American economy affected virtually
all of the markets served by the Electrical Products segment. A contraction in
domestic industrial production and construction activity, excess inventory in
distributor's warehouses and slowed consumer spending impacted demand across all
of the businesses. Additionally, sales of electronic circuit protection
equipment were below the prior year due to weakness in the telecommunications
and electronics markets. Sales of hazardous duty electrical equipment were
impacted by continued softness in the energy related markets. An uncertain
economic environment for utility customers reduced sales of transmission
equipment.
Tools & Hardware segment revenues for the quarter decreased 7% from the
first quarter of 2000. Hand tools sales were down from last year due to lower
demand in both the domestic industrial and retail channels, as distributors and
retailers adjusted inventories. Power tools and domestic assembly equipment were
affected by the overall slowdown in industrial activity, particularly in the
domestic automotive industry. A strong U.S. Dollar reduced total Tools &
Hardware revenues during the quarter by approximately 3%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 70.2% for the first
quarter of 2001 compared to 67.5% for the comparable 2000 quarter. The increase
in the cost of sales percentage was due to lower manufacturing volumes and the
resulting costs of production inefficiencies from adjusting manufacturing
capacity. Selling and administrative expenses, as a percentage of revenues, for
the first quarter of 2001 were 18.2% compared to 17.0% for the first quarter of
2000. Excluding the impact of recent acquisitions, selling and administrative
expense, as a percentage of revenues for the first quarter of 2001, was 18.0%.
The increase in the selling and administrative expense percentage reflects lower
than anticipated revenues.
Goodwill amortization increased as a result of acquisitions completed
during the past year. Interest expense, net for the first quarter of 2001
increased $6.8 million from the 2000 first quarter primarily as a result of
additional borrowings to fund recent acquisitions.
SEGMENT OPERATING EARNINGS:
Electrical Products segment first quarter 2001 operating earnings
decreased 23% to $102.6 million from $133.2 million for the same quarter of last
year. Excluding the earnings effect of recent acquisitions, operating earnings
were down 27% from the previous year quarter. The decrease from prior year was
due to
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lower than anticipated revenues reflective of the overall weakness of the U.S.
economy, competitive market conditions, and production inefficiencies related to
lower manufacturing levels.
Tools & Hardware segment operating earnings were $16.9 million for the
2001 first quarter, compared to $22.0 million, in the first quarter of 2000. The
lower operating earnings primarily reflects the impact of the reduction in
revenues from the prior year.
INCOME TAXES:
Taxes on income decreased primarily as a result of lower taxable
earnings. The effective tax rate was 35% for the three months ended March 31,
2001 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $108 million during the first
quarter of 2001. This increase in operating working capital for the 2001 first
quarter is primarily related to a lower than anticipated level of shipments and
a reduction in accounts payable. Operating working capital turnover for the 2001
first quarter of 3.9 turns declined from 4.2 turns in the same period of 2000
primarily due to the impact of acquisitions.
Cash used in operating activities was $35 million in the first quarter
of 2001. Net proceeds from borrowings of $85 million and cash received of $11
million related to previous acquisitions, were used to fund capital expenditures
of $40 million and dividends of $33 million. During the first quarter of 2000,
cash provided by operating activities totaled $45 million. These funds, along
with $206 million of increased debt, were used to fund capital expenditures of
$52 million, acquisitions of $135 million, share repurchases of $39 million and
dividends of $33 million.
Cooper is conducting several initiatives to maximize cash flows for the
balance of the year. These actions include reduced capital spending, elimination
of discretionary spending and workforce reductions. As a result, Cooper
currently anticipates a continuation of its long-term ability to annually
generate approximately $200 million in cash flow available for acquisitions,
debt repayment and common stock repurchases.
In connection with acquisitions accounted for as purchases, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired businesses
into existing Cooper operations. Cash flows from operating activities are
reduced by the amounts expended against the various accruals established in
connection with each acquisition. Spending against these accruals for the three
months ended March 31, 2001 and 2000 was $2.1 million and $0.7 million,
respectively.
During the fourth quarter of 1998, Cooper announced a voluntary and
involuntary severance program and committed to consolidate several facilities.
The following table reflects the activity during the first quarter of 2001
related to the 1998 employee reduction and facility consolidation plan accruals.
No. of Accrued Facility
Employees Severance Consolidation
(in millions)
Balance at December 31, 2000...... 607 $ 5.1 $ 3.0
Employees terminated.............. (150) -- --
Cash expenditures................. -- (1.0) (0.2)
------ -------- ----------
Balance at March 31, 2001......... 457 $ 4.1 $ 2.8
====== ======== ==========
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Cooper anticipates that the accrued severance and facility
consolidation accruals will be expended during 2001 as terminated employees are
paid, the additional employees leave the employment of Cooper and facility
consolidations are completed. As of March 31, 2001, Cooper anticipates incurring
in excess of $5 million related to severance costs, facility exit costs and
disruptions to operations under the 1998 employee reduction and facility
consolidation plan that could not be accrued. A majority of the $5 million
relates to operating inefficiencies, training, personnel and inventory
relocation costs which are required to be expensed as incurred during 2001. This
paragraph contains forward-looking statements and actual results may differ
materially. The statements are based on a number of assumptions, risks and
uncertainties including the number of employees actually severed, the timing of
the facility consolidations, the magnitude of any disruption from facility
consolidations and the ability to achieve the projected cost reductions. The
estimates also assume, without limitation, no significant change in competitive
conditions and such other risk factors as are discussed from time to time in
Cooper's periodic filings with the Securities and Exchange Commission.
During December 1999, Cooper completed a shelf registration to issue up
to $500 million of debt securities. At March 31, 2001, all $500 million of the
shelf registration was available to be issued.
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 45.2% at March 31, 2001, 42.5% at March 31, 2000 and 44.4% at December
31, 2000.
The statements above concerning anticipated cash flows and the
anticipated debt-to-capitalization ratio contain forward-looking information,
and actual results may differ materially. The statements are based on certain
assumptions, including no significant change in the composition of Cooper's
business segments, no material change in the amount of revenues and no
significant adverse changes in the relationship of the U.S. dollar to the
currencies of countries in which Cooper does business. The statement also
assumes, without limitation, no significant change in competitive conditions and
such other risk factors as are discussed from time to time in Cooper's periodic
filings with the Securities and Exchange Commission.
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,
---------
2001 2000
---- ----
(in millions)
Electrical Products .... $319.1 $373.5
Tools & Hardware ....... 102.5 95.3
------ ------
$421.6 $468.8
====== ======
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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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of Ratios of Earnings to Fixed
Charges for the Calendar Years 2000 through
1996 and the Three Months Ended March 31,
2001 and 2000.
(b) Reports on Form 8-K
Cooper filed a report on Form 8-K dated January 23,
2001, which included a copy of a press release
containing Cooper's financial results for the quarter
and year ended December 31, 2000.
Cooper filed a report on Form 8-K dated January 24,
2001, which included "Sales Trends" information
posted on Cooper's website.
Cooper filed a report on Form 8-K dated February 21,
2001, which included the business outlook for 2001.
Cooper filed a report on Form 8-K dated March 5,
2001, which included "Sales Trends" information
posted on Cooper's website.
Cooper filed a report on Form 8-K dated March 16,
2001, which included a copy of a press release
announcing a downward adjustment to Cooper's earnings
outlook for the first quarter of 2001.
Cooper filed a report on Form 8-K dated March 21,
2001 which included "Sales Trends" information 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, Inc.
-----------------------------------------
(Registrant)
Date: May 14, 2001 /s/ H. John Riley, Jr.
---------------------------- -----------------------------------------
H. John Riley, Jr.
Chairman, President and
Chief Executive Officer
Date: May 14, 2001 /s/ Jeffrey B. Levos
---------------------------- -----------------------------------------
Jeffrey B. Levos
Vice President and Controller
and Chief Accounting Officer
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Exhibit Index
Exhibit No. Description of Exhibit
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 2000 through 1996 and the Three Months Ended
March 31, 2001 and 2000.
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