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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-31330
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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 [ ]
Number of shares outstanding of issuer's common stock as of October 31, 2002 was
92,143,855 publicly traded Class A common shares, 1,082,802 Class A common
shares that are held by the issuer's subsidiary, Cooper Industries, Inc. and
56,888,663 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,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in millions, where applicable)
Revenues ............................. $ 999.3 $ 1,051.8 $ 2,975.5 $ 3,219.9
Cost of sales ........................ 710.3 730.5 2,128.3 2,244.1
Selling and administrative expenses .. 186.5 175.3 549.5 560.8
Goodwill amortization ................ -- 15.3 -- 45.4
--------- --------- --------- ---------
Operating earnings ............... 102.5 130.7 297.7 369.6
Interest expense, net ................ 19.6 18.8 53.9 66.3
--------- --------- --------- ---------
Income before income taxes ....... 82.9 111.9 243.8 303.3
Income taxes ......................... 19.7 37.6 57.9 104.6
--------- --------- --------- ---------
Net Income ....................... $ 63.2 $ 74.3 $ 185.9 $ 198.7
========= ========= ========= =========
Income per Common Share:
Basic ............................ $ .68 $ .79 $ 1.99 $ 2.11
========= ========= ========= =========
Diluted .......................... $ .68 $ .78 $ 1.98 $ 2.09
========= ========= ========= =========
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,
2002 2001
------------- -------------
(in millions)
ASSETS
Cash and cash equivalents ......................................... $ 43.6 $ 11.5
Receivables ....................................................... 781.8 777.1
Inventories ....................................................... 607.5 670.9
Deferred income taxes and other current assets .................... 109.6 191.7
------------- -------------
Total current assets ..................................... 1,542.5 1,651.2
------------- -------------
Property, plant and equipment, less accumulated depreciation ...... 764.9 826.8
Goodwill .......................................................... 1,983.8 1,958.7
Deferred income taxes and other noncurrent assets ................. 216.2 174.7
------------- -------------
Total assets ............................................. $ 4,507.4 $ 4,611.4
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt ................................................... $ 60.8 $ 132.9
Accounts payable .................................................. 366.7 401.4
Accrued liabilities ............................................... 454.6 510.9
Current maturities of long-term debt .............................. 213.5 60.9
------------- -------------
Total current liabilities ................................ 1,095.6 1,106.1
------------- -------------
Long-term debt .................................................... 990.9 1,107.0
Postretirement benefits other than pensions ....................... 190.8 196.7
Other long-term liabilities ....................................... 179.9 178.4
------------- -------------
Total liabilities ........................................ 2,457.2 2,588.2
------------- -------------
Common stock, $.01 and $5.00 par value at September 30, 2002 and
December 31, 2001, respectively ................................. 0.9 615.0
Capital in excess of par value .................................... 437.1 646.0
Retained earnings ................................................. 1,748.6 2,325.0
Common stock held in treasury, at cost ............................ -- (1,435.0)
Accumulated other nonowner changes in equity ...................... (136.4) (127.8)
------------- -------------
Total shareholders' equity ............................... 2,050.2 2,023.2
------------- -------------
Total liabilities and shareholders' equity ............... $ 4,507.4 $ 4,611.4
============= =============
The accompanying notes are an integral part of these statements.
-3-
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
------------- -------------
(in millions)
Cash flows from operating activities:
Net income .......................................................... $ 185.9 $ 198.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization ....................................... 91.7 140.0
Deferred income taxes ............................................... (2.2) 14.6
Nonrecurring charge payments ........................................ (20.4) (4.0)
Changes in assets and liabilities: (1)
Receivables ..................................................... (0.3) (3.1)
Inventories ..................................................... 63.5 (12.1)
Accounts payable and accrued liabilities ........................ (56.1) (83.3)
Other assets and liabilities, net ............................... 42.9 26.4
------------- -------------
Net cash provided by operating activities ................. 305.0 277.2
Cash flows from investing activities:
Cash received from (paid for) acquired businesses ................... (1.1) 8.4
Capital expenditures ................................................ (43.1) (91.5)
Proceeds from sales of property, plant and equipment and other ...... 5.1 2.9
------------- -------------
Net cash used in investing activities ..................... (39.1) (80.2)
Cash flows from financing activities:
Proceeds from issuances of debt ..................................... 333.3 136.9
Repayments of debt .................................................. (396.6) (244.6)
Debt issuance costs ................................................. (2.1) --
Dividends ........................................................... (97.5) (98.5)
Acquisition of treasury shares ...................................... (37.9) (42.0)
Subsidiary purchase of parent shares ................................ (35.4) --
Activity under employee stock plans ................................. 2.7 40.6
------------- -------------
Net cash used in financing activities ..................... (233.5) (207.6)
Effect of exchange rate changes on cash and cash equivalents ............ (0.3) 0.1
------------- -------------
Increase (decrease) in cash and cash equivalents ........................ 32.1 (10.5)
Cash and cash equivalents, beginning of period .......................... 11.5 26.4
------------- -------------
Cash and cash equivalents, end of period ................................ $ 43.6 $ 15.9
============= =============
(1) Net of the effects of acquisitions and translation.
The accompanying notes are an integral part of these statements.
-4-
COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements of Cooper
Industries, Ltd., a Bermuda company ("Cooper"), have been prepared in accordance
with generally accepted accounting principles in the United States. Cooper is
the successor to 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 has been 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 Ohio's audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods indicated, have been
included. For further information regarding Cooper's accounting policies, refer
to the Consolidated Financial Statements and related notes for the year ended
December 31, 2001 included in Part IV of Cooper Ohio's 2001 Annual Report on
Form 10-K.
During the third quarter of 2002, Cooper's Board of Directors approved
the adoption of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"), effective January 1, 2003. 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. Cooper currently accounts for stock-based
compensation 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.
The impact on previous years net income and earnings per share if the
alternative fair value method of accounting under SFAS No. 123 was used has been
disclosed in the Notes to the Consolidated Financial Statements included in
Cooper Ohio's Annual Reports on Form 10-K. SFAS No. 123 currently provides that
the accounting provisions of the standard be applied prospectively with
compensation expense recognized for all awards granted, modified or settled
after the beginning of the fiscal year in which the provisions are first
adopted. However, in October 2002 the Financial Accounting Standards Board
issued an Exposure Draft which proposes to amend the standard and provide a
choice of adoption methods including two new alternatives. These alternatives
include: a) recognizing compensation expense from the beginning of the fiscal
year of adoption as if the fair value method had been used for all employee
awards granted, modified or settled in fiscal years beginning after December 15,
1994 and b) restatement of prior years financial statements as if the fair value
method had been used for all employee awards granted, modified or settled in
fiscal years beginning after December 15, 1994. Consequently, the method of
adopting SFAS No. 123 has not currently been determined.
-5-
NOTE 2. ADOPTION OF NEW ACCOUNTING STANDARD
On January 1, 2002, Cooper adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") and is
therefore no longer amortizing goodwill. Under SFAS No. 142, goodwill is subject
to an annual impairment test. The first step of the goodwill impairment test
compares the fair value of a reporting unit with its carrying value. Cooper has
designated eight reporting units, consisting of the seven individual businesses
of the Electrical Products reportable operating segment plus the Tools &
Hardware reportable operating segment. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test
shall be performed. The second step compares the implied fair value of reporting
unit goodwill to the carrying amount of the goodwill to measure the amount of
impairment loss. Cooper completed transitional step one of the goodwill
impairment test during the second quarter of 2002. The fair value of each
reporting unit was determined by estimating the present value of future cash
flows. The results of step one did not require the completion of step two of the
transitional test for any reporting units. The Company has designated January 1
as the date of its annual goodwill impairment test.
The following table reconciles reported net income and earnings per
share to that which would have resulted for the three and nine month periods
ended September 30, 2001 if SFAS No. 142 had been adopted effective January 1,
2001 (in millions, except per share amounts):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
------------- -------------
Net Income:
Reported net income ....................... $ 74.3 $ 198.7
Goodwill amortization, net of taxes ....... 12.7 37.7
------------- -------------
Adjusted net income ....................... $ 87.0 $ 236.4
============= =============
Income per Common Share:
Basic:
Reported net income .................. $ .79 $ 2.11
Goodwill amortization, net of taxes .. .13 .40
------------- -------------
Adjusted net income .................. $ .92 $ 2.51
============= =============
Diluted:
Reported net income .................. $ .78 $ 2.09
Goodwill amortization, net of taxes .. .13 .40
------------- -------------
Adjusted net income .................. $ .91 $ 2.49
============= =============
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, by segment, were as follows:
ELECTRICAL TOOLS &
PRODUCTS HARDWARE TOTAL
----------- ----------- -----------
(in millions)
Balance January 1, 2002............................ $ 1,655.8 $ 302.9 $ 1,958.7
Additions to Goodwill.............................. 1.1 -- 1.1
Translation adjustments............................ 28.6 (4.6) 24.0
----------- ----------- -----------
Balance September 30, 2002......................... $ 1,685.5 $ 298.3 $ 1,983.8
=========== =========== ===========
On January 1, 2002, Cooper adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Adoption of this statement did not have an effect on Cooper's
consolidated results of operations or financial position.
-6-
NOTE 3. ACQUISITIONS AND DIVESTITURES
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. During the first nine months of
2001, Cooper received purchase price adjustments of $8.4 million, net related to
previously acquired businesses.
NOTE 4. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(in millions)
Raw materials ..................................... $ 191.4 $ 223.6
Work-in-process ................................... 103.6 132.2
Finished goods .................................... 406.5 409.1
Perishable tooling and supplies ................... 21.4 21.4
Allowance for excess and obsolete inventory ....... (38.8) (35.1)
Excess of current standard costs over LIFO costs .. (76.6) (80.3)
------------- -------------
Net inventories ........................ $ 607.5 $ 670.9
============= =============
NOTE 5. LONG-TERM DEBT
During June 2002, Cooper Ohio issued $300 million senior unsecured
notes due July 1, 2007 with a 5.25% interest rate. Proceeds from the notes were
used to repay commercial paper obligations. During September 2002, Cooper Ohio
filed a Form S-4 Registration Statement to exchange the original notes for notes
with substantially identical terms, except that the exchange notes are
registered under the Securities Act of 1933 and the transfer restrictions and
registration rights applicable to the original notes will not apply to the
exchange notes. The original and exchange notes are fully and unconditionally
guaranteed by Cooper. The exchange offer was completed on November 4, 2002 with
all holders exchanging their notes. Cooper Ohio will not receive any proceeds
from the exchange offer.
During 1999, Cooper Ohio completed a shelf registration statement to
issue up to $500 million of debt securities. On October 28, 2002, Cooper Ohio
issued $275 million senior unsecured notes due November 1, 2009, with a 5.5%
interest rate. Proceeds from the notes will be used to repay maturing long-term
and short-term debt. The notes are fully and unconditionally guaranteed by
Cooper. After this issuance, $225 million of the shelf registration remains
available to be issued.
NOTE 6. SHAREHOLDERS' EQUITY
Effective May 22, 2002, Cooper became the successor to Cooper Ohio
following a reorganization. The reorganization was effected through the merger
of Cooper Mergerco, Inc. into Cooper Ohio (see Note 1). Upon consummation of the
merger, 93,099,157 issued and outstanding Cooper Ohio common shares, $5 par
value automatically became 93,099,157 Cooper Class A common shares, $.01 par
value. The decrease in the par value of the common shares of $464.5 million was
recorded as a decrease to common stock and an increase to capital in excess of
par value on the consolidated balance sheet. On May 22, 2002, 29,893,919 Cooper
Ohio treasury shares were retired due to the reorganization. The treasury stock
retirement was recorded by eliminating the $1,449.9 million treasury stock
balance and reducing common stock, $5 par value $149.6 million, capital in
excess of par $635.5 million and retained earnings $664.8 million on the
consolidated balance sheet.
-7-
As part of the reorganization, Cooper Ohio transferred the shares of
certain subsidiaries to Cooper in exchange for Cooper Class B common shares.
Cooper Ohio's investment in the Cooper Class B common shares is eliminated in
consolidation. The Cooper Class B common shares are not entitled to vote, except
as to matters for which Bermuda law specifically requires voting rights for
otherwise nonvoting shares. Cooper and Cooper Ohio entered into a voting
agreement which provides that in those limited circumstances where the Class B
common shares have the right to vote, Cooper Ohio shall vote the shares in the
same proportion as the holders of Cooper Class A common shares. If at any time a
dividend is declared or paid on the Cooper Class A common shares, a like
dividend shall be declared and paid on Cooper Class B shares in an equal amount
per share. On September 30, 2002, Cooper Ohio, owner of all of the Cooper Class
B common shares and 808,204 Cooper Class A common shares as of the September 13
dividend record date, waived its rights to receive the regular quarterly
dividend of $.35 per share (or an aggregate of $20.2 million) from its parent,
Cooper.
Cooper's authorized share capital is U.S. $4,100,000 consisting of
250,000,000 Class A common shares, par value of $.01 per share, 150,000,000
Class B common shares, par value $.01 per share and 10,000,000 preferred shares,
par value $.01 per share, which preferred shares may be designated and created
as shares of any other classes or series of shares with the respective rights
and restrictions determined by action of the Board of Directors. No preferred
shares were outstanding at September 30, 2002.
At September 30, 2002, 92,153,755 Class A common shares, $.01 par value
were issued and outstanding (excluding the 1,072,784 Class A common shares held
by Cooper Ohio discussed below) compared to 93,761,587 common shares, $5 par
value at December 31, 2001. In 2002, prior to the reorganization, Cooper Ohio
repurchased 1,000,000 shares of its common stock at a cost of $37.9 million and
issued 337,570 common shares primarily in connection with employee benefit
plans. Subsequent to the reorganization, Cooper has issued 127,382 Class A
common shares primarily in connection with employee benefit plans. During the
third quarter of 2002, Cooper Ohio purchased 1,175,950 Cooper Class A common
shares for $35.4 million. The share purchases are recorded by Cooper Ohio as an
investment in its parent company that is eliminated in consolidation. As of
September 30, 2002, 103,166 Cooper Class A common shares held by Cooper Ohio
were issued to satisfy the matching obligation under the Cooper Ohio Retirement
Savings and Stock Ownership Plan ("CO-SAV"), leaving 1,072,784 Cooper Class A
common shares held by Cooper Ohio at September 30, 2002.
During May 2002, Cooper adopted a Shareholder Rights Plan to replace
the rights attached to the common stock of Cooper Ohio. The Board of Directors
authorized the issuance of one right for each common share outstanding on May
22, 2002. Each Right entitles the holder to buy one one-hundredth of a share of
Series A Participating Preferred Stock at a purchase price of $225 per one
one-hundredth of a share or, in certain circumstances common shares having a
value of twice the purchase price. Each Right becomes exercisable only in
certain circumstances constituting a potential change of control on a basis
considered inadequate by the Board of Directors. The Rights expire August 5,
2007 and, at Cooper's option, may be redeemed prior to expiration for $.01 per
Right.
-8-
NOTE 7. SEGMENT INFORMATION
REVENUES
------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(in millions)
Electrical Products................................... $ 844.6 $ 874.5 $ 2,507.4 $ 2,664.4
Tools & Hardware...................................... 154.7 177.3 468.1 555.5
--------- --------- ---------- ----------
Total revenues..................................... $ 999.3 $ 1,051.8 $ 2,975.5 $ 3,219.9
========= ========= ========== ==========
OPERATING EARNINGS
-----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in millions)
Electrical Products................................... $ 104.8 $ 122.3 $ 304.5 $ 337.8
Tools & Hardware...................................... 7.4 16.1 16.7 54.5
--------- --------- --------- ---------
Segment operating earnings......................... 112.2 138.4 321.2 392.3
General corporate expenses........................... 9.7 7.7 23.5 22.7
--------- --------- --------- ---------
Total operating earnings........................... 102.5 130.7 297.7 369.6
Interest expense, net................................. 19.6 18.8 53.9 66.3
--------- --------- --------- ---------
Income before income taxes............................ $ 82.9 $ 111.9 $ 243.8 $ 303.3
========= ========= ========= =========
NOTE 8. INCOME TAXES
Cooper's effective tax rate was 23.8% for the nine months ended
September 30, 2002 and 34.5% for the nine months ended September 30, 2001. As a
result of the reorganization, Cooper currently expects a 2002 annualized
effective tax rate of approximately 24%. 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,
------------------------ -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
U.S. Federal statutory rate....................... 35.0% 35.0% 35.0% 35.0%
State and local income taxes...................... 2.5 1.7 2.5 1.7
Non U.S. Operations.............................. (12.1) (3.7) (12.1) (2.8)
Nondeductible goodwill............................ - 3.4 - 3.4
Foreign Sales Corporation......................... (1.3) (1.1) (1.3) (1.1)
Tax credits....................................... (0.2) (0.4) (0.2) (0.4)
Other............................................. (0.1) (1.3) (0.1) (1.3)
--------- --------- --------- ---------
Effective tax rate .......................... 23.8% 33.6% 23.8% 34.5%
========= ========= ========= =========
-9-
NOTE 9. NET INCOME PER COMMON SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in millions)
BASIC:
Net income applicable to Common stock ......... $ 63.2 $ 74.3 $ 185.9 $ 198.7
========== ========== ========== ==========
Weighted average Common shares outstanding .... 93.0 94.3 93.4 94.0
========== ========== ========== ==========
DILUTED:
Net income applicable to Common stock ......... $ 63.2 $ 74.3 $ 185.9 $ 198.7
========== ========== ========== ==========
Weighted average Common shares outstanding .... 93.0 94.3 93.4 94.0
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards ....... 0.2 1.3 0.7 0.9
---------- ---------- ---------- ----------
Weighted average Common shares
and Common share equivalents .............. 93.2 95.6 94.1 94.9
========== ========== ========== ==========
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,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in millions)
Net income ........................... $ 63.2 $ 74.3 $ 185.9 $ 198.7
Foreign currency translation losses .. (5.6) (1.5) (8.7) (13.3)
Change in fair value of derivatives .. (0.3) (0.2) 0.1 (0.5)
---------- ---------- ---------- ----------
Net income and other nonowner
changes in equity ................ $ 57.3 $ 72.6 $ 177.3 $ 184.9
========== ========== ========== ==========
-10-
NOTE 11. FINANCIAL INSTRUMENTS
During the third quarter of 2002, Cooper sold at a premium U.S.
Treasury securities due August 15, 2003. Cooper obtained these securities
pursuant to a repurchase agreement containing provisions that limit Cooper's
interest rate exposure under this agreement to a maximum cost of $7.2 million.
The repurchase agreement will be settled immediately prior to the maturity of
the securities. Settlement of this transaction will not require any financing by
Cooper and this transaction does not create an asset or liability, other than as
described above. The face amount of the securities was $750 million.
During 2001, Cooper purchased at a discount Federal Home Loan Mortgage
Corporation Notes due February 2003 and immediately transferred these notes
pursuant to a securities loan agreement. During the third quarter of 2001,
Cooper subsequently eliminated any potential cost under the securities loan
agreement and realized a gain of approximately $1.9 million. The securities loan
agreement will be settled immediately prior to the maturity of the notes.
Settlement of this transaction will not require any financing by Cooper and this
transaction does not create a liability. The face amount of the notes was $480
million.
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, 2002, a
total of 89,985 Abex Claims were filed, of which 31,475 claims have been
resolved leaving 58,510 Abex Claims pending at September 30, 2002, that are the
responsibility of Federal-Mogul. During the three months ended September 30,
2002, 2,696 claims were filed and 13,577 claims were resolved. In addition,
during the third quarter, the Company completed the transition of case
administration to a new national counsel and record keeping system, as well as
an audit of information received from Federal-Mogul. As a result of the audit,
the number of claims received was adjusted by 6,190 and the number of claims
resolved was adjusted by 116 to reflect claims and settlements that should have
been included in Federal-Mogul's pre-October 2001 records. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $812 before
insurance. A total of $34.7 million was spent on defense costs for the period
August 28, 1998 through September 30, 2002. 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 & Ballentine,
LLC, Cooper completed a thorough analysis of its potential exposure for asbestos
liabilities in the event Federal-Mogul rejects the 1998 Agreement. The analysis
included a review of the twenty-year history of Abex Claims; the average
indemnity payments for resolved claims; the jurisdictions in which claims had
been filed; Bates White & Ballentine, LLC data on the incidence of asbestos
exposure and diseases in various industries; existing insurance coverage
including the insurance recovered by Pneumo and Federal Mogul for pre-bankruptcy
claims and the contractual indemnities. Assumptions were made regarding future
claim filings and indemnity payments, and, based on advisor's data, the expected
population of persons exposed to asbestos in
-11-
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, 2002, Cooper had an $88 million accrual
for potential liabilities related to the Federal-Mogul bankruptcy.
NOTE 13. CONSOLIDATING FINANCIAL INFORMATION
Cooper fully and unconditionally guarantees the registered debt
securities of Cooper Ohio, a wholly owned 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.
CONSOLIDATING INCOME STATEMENTS
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
========== ============ ============= ========= ==========
THREE MONTHS ENDED SEPTEMBER 30, 2001
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ------------ ------------- ------------- ----------
Revenues.............................. $ -- $ 86.6 $ 971.4 $ (6.2) $ 1,051.8
Cost of sales......................... -- 48.1 688.6 (6.2) 730.5
Selling and administrative expenses... -- 21.4 153.9 -- 175.3
Goodwill amortization................. -- 0.3 15.0 -- 15.3
Interest expense, net................. -- 13.0 5.8 -- 18.8
Equity in earnings of
subsidiaries, net of tax............ -- 101.5 -- (101.5) --
Intercompany income (expense)......... -- (49.8) 49.8 -- --
---------- ------------ ------------- ---------- ----------
Income before income taxes....... -- 55.5 157.9 (101.5) 111.9
Income tax expense (benefit).......... -- (18.8) 56.4 -- 37.6
---------- ------------ ------------- ---------- ----------
Net income........................ $ -- $ 74.3 $ 101.5 $ (101.5) $ 74.3
========== ============ ============= ========== ==========
-12-
CONSOLIDATING INCOME STATEMENTS
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
============ ============ ============= =========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2001
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------- ------------- ----------
Revenues.............................. $ -- $ 236.7 $ 3,000.5 $ (17.3) $ 3,219.9
Cost of sales......................... -- 142.5 2,118.9 (17.3) 2,244.1
Selling and administrative expenses... -- 63.7 497.1 -- 560.8
Goodwill amortization................. -- 1.0 44.4 -- 45.4
Interest expense, net................. -- 50.1 16.2 -- 66.3
Equity in earnings of
subsidiaries, net of tax............ -- 279.7 -- (279.7) --
Intercompany income (expense)......... -- (115.5) 115.5 -- --
----------- ------------ ------------- ----------- ----------
Income before income taxes....... -- 143.6 439.4 (279.7) 303.3
Income tax expense (benefit).......... -- (55.1) 159.7 -- 104.6
----------- ------------ ------------- ----------- ----------
Net income........................ $ -- $ 198.7 $ 279.7 $ (279.7) $ 198.7
=========== ============ ============= =========== ==========
-13-
CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2002
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ------------- ------------- -------------- -------------
Cash and cash equivalents ............... $ 0.1 $ 22.4 $ 21.1 $ -- $ 43.6
Receivables ............................. -- 76.6 705.2 -- 781.8
Intercompany receivables ................ 463.9 -- 215.1 (679.0) --
Inventories ............................. -- 20.2 587.3 -- 607.5
Deferred income taxes and
other current assets ................. 1.4 105.7 2.5 -- 109.6
------------- ------------- ------------- ------------- -------------
Total current assets ............. 465.4 224.9 1,531.2 (679.0) 1,542.5
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, less
accumulated depreciation ............. -- 58.6 706.3 -- 764.9
Goodwill ................................ -- 41.4 1,942.4 -- 1,983.8
Investment in subsidiaries .............. 2,478.2 5,291.2 13.4 (7,782.8) --
Investment in parent .................... -- 2,362.4 -- (2,362.4) --
Intercompany notes receivable ........... -- 91.4 6,262.5 (6,353.9) --
Deferred income taxes and
other noncurrent assets .............. -- 172.8 43.4 -- 216.2
------------- ------------- ------------- ------------- -------------
Total assets ..................... $ 2,943.6 $ 8,242.7 $ 10,499.2 $ (17,178.1) $ 4,507.4
============= ============= ============= ============= =============
Short-term debt ......................... $ -- $ 20.0 $ 40.8 $ -- $ 60.8
Accounts payable ........................ 32.3 26.8 307.6 -- 366.7
Accrued liabilities ..................... 0.6 197.9 256.1 -- 454.6
Intercompany payables ................... -- 679.0 -- (679.0) --
Current maturities of long-term debt .... -- 213.1 0.4 -- 213.5
------------- ------------- ------------- ------------- -------------
Total current liabilities ........ 32.9 1,136.8 604.9 (679.0) 1,095.6
------------- ------------- ------------- ------------- -------------
Long-term debt .......................... -- 658.4 332.5 -- 990.9
Intercompany notes payable .............. 0.4 4,709.2 1,644.3 (6,353.9) --
Other long-term liabilities ............. -- 222.7 148.0 -- 370.7
------------- ------------- ------------- ------------- -------------
Total liabilities .................. 33.3 6,727.1 2,729.7 (7,032.9) 2,457.2
------------- ------------- ------------- ------------- -------------
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 .......... 2,798.6 -- 6,924.9 (9,286.4) 437.1
Retained earnings ....................... 116.2 1,652.0 933.3 (952.9) 1,748.6
Accumulated other nonowner changes
in equity ............................ (6.0) (136.4) (229.7) 235.7 (136.4)
------------- ------------- ------------- ------------- -------------
Total shareholders' equity ....... 2,910.3 1,515.6 7,769.5 (10,145.2) 2,050.2
------------- ------------- ------------- ------------- -------------
Total liabilities and
shareholders' equity ........... $ 2,943.6 $ 8,242.7 $ 10,499.2 $ (17,178.1) $ 4,507.4
============= ============= ============= ============= =============
-14-
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents ................... $ -- $ 2.8 $ 8.7 $ -- $ 11.5
Receivables ................................. -- 74.2 702.9 -- 777.1
Intercompany receivables .................... -- -- 561.9 (561.9) --
Inventories ................................. -- 27.1 643.8 -- 670.9
Deferred income taxes and
other current assets ..................... -- 133.2 58.5 -- 191.7
------------- ------------- ------------- ------------- -------------
Total current assets ................. -- 237.3 1,975.8 (561.9) 1,651.2
------------- ------------- ------------- ------------- -------------
Property, plant and equipment, less
accumulated depreciation ................. -- 65.3 761.5 -- 826.8
Goodwill .................................... -- 41.4 1,917.3 -- 1,958.7
Investment in subsidiaries .................. -- 7,464.2 -- (7,464.2) --
Intercompany notes receivable ............... -- 79.6 3,969.0 (4,048.6) --
Deferred income taxes and other
noncurrent assets ........................ -- 178.2 (3.5) -- 174.7
------------- ------------- ------------- ------------- -------------
Total assets ......................... $ -- $ 8,066.0 $ 8,620.1 $ (12,074.7) $ 4,611.4
============= ============= ============= ============= =============
Short-term debt ............................. $ -- $ 62.0 $ 70.9 $ -- $ 132.9
Accounts payable ............................ -- 118.4 283.0 -- 401.4
Accrued liabilities ......................... -- 241.9 269.0 -- 510.9
Intercompany payables ....................... -- 561.9 -- (561.9) --
Current maturities of long-term debt ........ -- 60.2 0.7 -- 60.9
------------- ------------- ------------- ------------- -------------
Total current liabilities ............ -- 1,044.4 623.6 (561.9) 1,106.1
------------- ------------- ------------- ------------- -------------
Long-term debt .............................. -- 799.6 307.4 -- 1,107.0
Intercompany notes payable .................. -- 3,969.0 79.6 (4,048.6) --
Other long-term liabilities ................. -- 229.8 145.3 -- 375.1
------------- ------------- ------------- ------------- -------------
Total liabilities ...................... -- 6,042.8 1,155.9 (4,610.5) 2,588.2
------------- ------------- ------------- ------------- -------------
Common stock, $5.00 par value ............... -- 615.0 141.0 (141.0) 615.0
Capital in excess of par value .............. -- 646.0 6,420.8 (6,420.8) 646.0
Retained earnings ........................... -- 2,325.0 1,112.3 (1,112.3) 2,325.0
Common stock held in treasury, at cost ...... -- (1,435.0) -- -- (1,435.0)
Accumulated other nonowner
changes in equity ........................ -- (127.8) (209.9) 209.9 (127.8)
------------- ------------- ------------- ------------- -------------
Total shareholders' equity ........... -- 2,023.2 7,464.2 (7,464.2) 2,023.2
------------- ------------- ------------- ------------- -------------
Total liabilities and shareholders'
equity ............................. $ -- $ 8,066.0 $ 8,620.1 $ (12,074.7) $ 4,611.4
============= ============= ============= ============= =============
-15-
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
============= ============= ============= ============= =============
-16-
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(in millions)
COOPER OTHER CONSOLIDATING
COOPER OHIO SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities ................. $ -- $ (67.2) $ 344.4 $ -- $ 277.2
Cash flows from investing activities:
Capital expenditures .................. -- (10.4) (81.1) -- (91.5)
Note repayments from affiliates ....... -- 16.5 47.3 (63.8) --
Dividends from subsidiaries ........... -- 9.8 -- (9.8) --
Other ................................. -- 17.4 11.3 (17.4) 11.3
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities ............ -- 33.3 (22.5) (91.0) (80.2)
Cash flows from financing activities:
Proceeds from issuances of debt ....... -- 130.0 6.9 -- 136.9
Repayments of debt .................... -- (229.9) (14.7) -- (244.6)
Note repayments to affiliates ......... -- (47.3) (16.5) 63.8 --
Other intercompany financing
activities ......................... -- 291.5 (291.5) -- --
Dividends ............................. -- (98.5) -- -- (98.5)
Dividends paid to parent .............. -- -- (9.8) 9.8 --
Acquisition of treasury shares ........ -- (42.0) -- -- (42.0)
Employee stock plan activity
and other ........................... -- 40.6 (17.4) 17.4 40.6
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities ............ -- 44.4 (343.0) 91.0 (207.6)
Effect of exchange rate changes on
cash and cash equivalents .......... -- -- 0.1 -- 0.1
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents ........................ -- 10.5 (21.0) -- (10.5)
Cash and cash equivalents, beginning
of period .......................... -- -- 26.4 -- 26.4
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period ............................. $ -- $ 10.5 $ 5.4 $ -- $ 15.9
============= ============= ============= ============= =============
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2001
Net income for the third quarter of 2002 was $63.2 million on revenues of $999.3
million compared with 2001 third quarter net income of $74.3 million on revenues
of $1,051.8 million. Third quarter 2002 diluted earnings per share were $.68
compared to $.78 in 2001. On January 1, 2002, Cooper adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), and no longer amortizes goodwill. See Note 2 of the Notes to
the Consolidated Financial Statements for additional information on the adoption
of SFAS No. 142. Excluding goodwill amortization, third quarter 2001 net income
would have been $87.0 million and diluted earnings per share would have been
$.91.
REVENUES:
Revenues for the third quarter of 2002 were 5% lower than the third
quarter of 2001. Foreign currency translation increased reported revenues for
the quarter by approximately 1%.
Third quarter 2002 Electrical Products segment revenues were 3% below
the third quarter of last year. A weaker U.S. dollar increased reported revenues
for the period by approximately 1%. Sales continue to be pressured by weak
demand from industrial customers and a declining commercial construction market.
This had a negative impact on the hazardous-duty, lighting and support systems
businesses. Revenues of power systems products remained weak reflecting
uncertainty in utility markets. These declines have been partly offset by
improved sales in circuit protection products and growth in the retail sector
that benefited the Company's wiring devices and lighting fixtures businesses.
Cooper's European lighting and security businesses achieved growth as a result
of positive market share shift.
Tools & Hardware segment revenues for the quarter decreased 13% from
the third quarter of 2001. Sales were impacted by weak worldwide demand for
industrial grade hand and power tools. Shipments of automotive assembly
equipment were lower than last year, reflecting continuing efforts by automotive
companies to control capital spending. A weakening U.S. dollar increased total
Tools & Hardware segment revenues during the quarter by approximately 1%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 71.1% for the third
quarter of 2002 compared to 69.5% for the comparable 2001 quarter. The increase
in the cost of sales percentage was primarily due to lower absorption of
production costs in response to lower demand and efforts to reduce inventories.
Electrical Products segment cost of sales, as a percentage of revenues,
was 70.9% for the third quarter of 2002 compared to 69.4% for the third quarter
of 2001. The increase in the cost of sales percentage was primarily a result of
market pricing pressures, lower production volumes and strategic business
investments. Tools & Hardware segment cost of sales, as a percentage of
revenues, was 74.4% for the third quarter of 2002 compared to 71.8% for the
third quarter of 2001. While costs were decreased aggressively due to the
reduced demand, the increase in the cost of sales percentage was primarily a
result of lower absorption of production costs and inefficiencies associated
with adjusting manufacturing levels in response to lower demand and efforts to
reduce inventories.
Selling and administrative expenses, as a percentage of revenues, for
the third quarter of 2002 were 18.7% compared to 16.7% for the third quarter of
2001. The factors contributing to the increased percentage were an $11.2 million
increase in actual expenditures for the 2002 third quarter, in addition to the
effect on
-18-
the percentage of lower 2002 revenues. The $11.2 million increase consisted
primarily of additional compensation-related payments including increased
medical and pension costs.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the third quarter of 2002 were 16.7% compared to
15.1% for the third quarter of 2001. The increase in the selling and
administrative expense percentage is primarily due to the previously discussed
compensation-related payment increases as well as the 2002 drop in revenues.
Tools & Hardware segment selling and administrative expenses, as a percentage of
revenues, for the third quarter of 2002 were 20.8% compared to 17.8% for the
third quarter of 2001. The increase in the selling and administrative expense
percentage is primarily due to lower revenues and increased investment in
sales-based initiatives.
Interest expense, net for the third quarter of 2002 increased $0.8
million compared to the third quarter of 2001. Interest expense, net for the
third quarter of 2001 included a $1.9 million interest rate gain on the Federal
Home Loan Mortgage Corporation Notes securities lending transaction. See Note 11
of the Notes to the Consolidated Financial Statements. Excluding this gain from
the third quarter of 2001, interest expense, net decreased $1.1 million
primarily as a result of lower average debt levels partially offset by higher
average interest rates. Average total debt levels were $1.33 billion and $1.50
billion and average interest rates were 5.84% and 5.46% during the quarters
ended September 30, 2002 and 2001, respectively.
SEGMENT OPERATING EARNINGS:
Electrical Products segment third quarter 2002 operating earnings
decreased 14% to $104.8 million from $122.3 million for the same quarter of last
year. Excluding goodwill amortization, Electrical Products segment third quarter
2001 operating earnings were $135.2 million. The Electrical Products businesses
were impacted by lower overall volumes, competitive pricing pressures and lower
absorption of production costs as a result of reduced demand and efforts to
decrease inventory. Earnings were also impacted by increased selling and
administrative expenses.
Tools & Hardware segment operating earnings were $7.4 million for the
2002 third quarter, compared to $16.1 million in the third quarter of 2001.
Excluding goodwill amortization, Tools & Hardware segment third quarter 2001
operating earnings were $18.5 million. The decline in operating earnings
primarily reflects lower revenues, production inefficiencies related to lower
manufacturing levels in response to decreased demand and efforts to reduce
inventory. Earnings were also impacted by increased selling and administrative
expenses.
INCOME TAXES:
Income taxes decreased as a result of lower taxable income and the
reorganization as discussed in Note 1 of the Notes to the Consolidated Financial
Statements. The effective tax rate was 23.8% for the three months ended
September 30, 2002 and 31.6% for the three months ended September 30, 2001,
excluding goodwill amortization. See Note 8 of the Notes to the Consolidated
Financial Statements for additional information regarding the effective tax
rate.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
Net income for the first nine months of 2002 was $185.9 million on revenues of
$2,975.5 million compared with 2001 first nine months net income of $198.7
million on revenues of $3,219.9 million. Diluted earnings per share for the 2002
nine month period were $1.98 compared to $2.09 in 2001. Excluding goodwill
amortization, net income for the first nine months of 2001 would have been
$236.4 million and diluted earnings per share would have been $2.49.
REVENUES:
Revenues for the first nine months of 2002 were 8% below the first nine
months of 2001. Foreign currency translation had a negligible impact on reported
revenues for the nine month period.
-19-
Year-to-date 2002 Electrical Products segment revenues were 6% less
than last year. Continued weakness in the North American economy affected the
markets served by the Electrical Products segment. A contraction in domestic
industrial activity and commercial construction impacted demand and increased
price pressures across all of the businesses. Despite some signs of
stabilization, the electronics and telecommunication markets remained weak. An
uncertain economic environment for utility customers reduced sales of electrical
distribution equipment.
Tools & Hardware segment revenues for the first nine months of 2002
were 16% below the first nine months of 2001. Worldwide demand was very weak for
both hand tools and power tools used in general industrial and electronics
markets. Shipments of automotive assembly equipment were lower than last year as
a result of reduced capital spending by automotive companies.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, was 71.5% for the first
nine months of 2002 compared to 69.7% for the comparable 2001 period. The
increase in the cost of sales percentage was due to lower production levels and
the resulting inefficiencies from adjusting manufacturing capacity and efforts
to reduce inventories.
Electrical Products segment cost of sales, as a percentage of revenues,
was 71.3% for the first nine months of 2002 compared to 70.0% for the comparable
2001 period. The increase in the cost of sales percentage was due to pricing
pressures and lower absorption of manufacturing costs as a result of reduced
volumes. Tools & Hardware segment cost of sales, as a percentage of revenues,
was 75.3% for the first nine months of 2002 compared to 70.2% for the comparable
2001 period. The increase in the cost of sales percentage was due to lower
absorption of production costs and inefficiencies associated with adjusting
manufacturing levels in response to lower demand.
Selling and administrative expenses, as a percentage of revenues, for
the first nine months of 2002 were 18.5% compared to 17.4% for the first nine
months of 2001. The increase in the selling and administrative expenses
percentage reflects the impact of lower revenues, partially offset by $11.3
million in reduced spending for the first nine months of 2002.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the first nine months of 2002 were 16.6% compared to
15.9% for the first nine months of 2001. Total Electrical Products segment
selling and administrative expenses were down 1.5%; however, the revenue fall
off more than offset this reduction in the overall percentage increase. Tools &
Hardware segment selling and administrative expenses, as a percentage of
revenues, for the first nine months of 2002 were 21.2% compared to 18.7% for the
first nine months of 2001. The increase in selling and administrative expenses,
as a percentage of revenues, was due to the reduction in revenues despite total
expense decreases of 4.6% during the first nine months of 2002 compared to the
comparable 2001 period.
Interest expense, net for the first nine months of 2002 decreased $12.4
million compared to the same period of last year. Interest expense, net for the
first nine months of 2001 included a $1.9 million interest rate gain on the
Federal Home Loan Mortgage Corporation Notes securities lending transaction. See
Note 11 of the Notes to the Consolidated Financial Statements. Excluding this
gain from the nine months ended September 30, 2001, interest expense, net
decreased $14.3 million primarily as a result of lower average debt balances and
average interest rates. Average debt balances were $1.39 billion and $1.59
billion and average interest rates were 5.21% and 5.75% for the nine months
ended September 30, 2002 and 2001, respectively.
-20-
SEGMENT OPERATING EARNINGS:
Year-to-date operating earnings for the Electrical Products segment
were $304.5 million compared to $337.8 million for the same period of last year.
Excluding goodwill amortization, Electrical Products segment year-to-date
operating earnings for the first nine months of 2001 were $376.2 million. The
reduction from prior year was due to lower revenues reflective of the overall
weakness of the U.S. economy, competitive market conditions, and lower
absorption of production costs as a result of reduced manufacturing levels,
partially offset by decreased selling and administrative expenses.
Tools & Hardware segment operating earnings were $16.7 million for the
first nine months of 2002, compared to $54.5 million in the same period last
year. Excluding goodwill amortization, Tools & Hardware segment operating
earnings for the first nine months of 2001 were $61.5 million. The lower
operating earnings primarily reflect the impact of reduced revenues from the
prior year, plant inefficiencies from operating at reduced levels of
manufacturing and planned inventory reductions, partially offset by decreased
selling and administrative expenses.
INCOME TAXES:
Income taxes decreased primarily as a result of lower taxable income
and the reorganization as discussed in Note 1 of the Notes to the Consolidated
Financial Statements. The effective tax rate was 23.8% for the nine months ended
September 30, 2002 and 32.2% for the nine months ended September 30, 2001,
excluding goodwill amortization. See Note 8 of the Notes to the Consolidated
Financial Statements for additional information regarding the effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) decreased $24 million during the first nine
months of 2002. This decrease was primarily related to a $63 million reduction
in inventories. Contributing to the reduction in inventories was a $4 million
increase in the allowance for excess and obsolete inventory reflecting the
Company's assessment of salability in light of recent usage data. Operating
working capital turnover for the first nine months of 2002 was 3.8 turns
compared to 3.9 turns in the same period of 2001, reflecting the impact of lower
shipments.
Cash provided from operating activities was $305 million in the first
nine months of 2002. These funds were used to fund capital expenditures of $43
million, dividends of $98 million, share purchases of $73 million, and a net
reduction in debt of $63 million. During the first nine months of 2001, cash
provided by operating activities totaled $277 million. These funds plus net cash
received of $8 million related to previous acquisitions and $41 million from
employee stock plan activity were used to fund capital expenditures of $92
million, dividends of $99 million, share repurchases of $42 million and net debt
repayments of $108 million.
Cooper is continuing to focus on initiatives to maximize cash flows.
These actions include reduced capital spending, elimination of discretionary
spending and workforce reductions. As a result, Cooper currently anticipates a
continuation of its long-term ability to annually generate approximately $200
million in cash flow available for acquisitions, debt repayment and common stock
repurchases.
In connection with acquisitions accounted for as purchases, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired businesses
into existing Cooper operations. Cash flows from operating activities are
reduced by the amounts expended against the various accruals established in
connection with each acquisition. Spending against these accruals was $5.2
million and $5.8 million during the nine months ended September 30, 2002 and
2001, respectively.
-21-
During the fourth quarter of 2001, Cooper recorded a nonrecurring
charge that results in certain future cash expenditures. Cooper recorded a $7.1
million accrual for severance and other costs associated with the consolidation
or closure of certain Electrical Products segment facilities as a result of
management's review and modification of their assessment of required production
and distribution facilities and capacity, in consideration of depressed demand
levels. A total of 77 salaried and 196 hourly positions were scheduled to be
eliminated in 2002 as a result of these planned consolidation actions. Also
during the fourth quarter of 2001, Cooper recorded a provision of $36.0 million
for financial advisory, legal and other costs associated with the Company's
review of strategic alternatives. The source of funding total cash expenditures
of $41.4 million (non-cash charges were $1.7 million) is cash provided by
operating activities.
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 ................ (269) -- -- --
Cash expenditures ................... -- (2.9) (1.8) (15.7)
------------- ------------- ------------- -------------
Balance at September 30, 2002 ....... 4 $ 0.1 $ 0.3 $ 14.3
============= ============= ============= =============
As of September 30, 2002, Cooper anticipates incurring $1.0 million
related to facility exit costs and disruptions to operations under the 2001
facility consolidation plan that could not be accrued. A majority of the $1.0
million relates to operating inefficiencies and training, personnel and
inventory relocation costs that will be required to be expensed as incurred
during 2002.
CAPITAL RESOURCES:
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-total capitalization ratio
within this range. Excess cash flows are utilized to fund acquisitions or to
purchase Cooper common shares. Cooper's debt-to-total capitalization ratio was
38.2% at September 30, 2002, 41.2% at September 30, 2001, and 39.1% at December
31, 2001.
Cooper and its subsidiaries have numerous defined benefit pension
plans. During 2002, the fair market value of the equity investments included in
the plan assets of one of the largest plans decreased as a result of the overall
downturn in the U.S. stock market. In addition, interest rates declined during
the year which may result in a decrease in the assumed discount rate used to
measure this plan's obligations. This will cause an increase in the accumulated
benefit obligation amount. The Company therefore expects the accumulated benefit
obligation of this plan will exceed the fair market value of plan assets at
year-end. This unfunded accumulated benefit obligation, plus the existing
prepaid pension asset recorded related to this plan, will result in a
significant increase in the minimum pension liability amount included in
accumulated other nonowner changes in equity on the December 31, 2002
consolidated balance sheet. The actual amount of the minimum pension liability
equity charge will be determined as of the December 31, 2002 plan measurement
date. Cooper estimates that the charge to accumulated nonowner changes in equity
will range from approximately $50 million to $100 million, net of tax. The final
amount of the charge will depend primarily on the market value of plan assets
and the assumed discount rate as of December 31, 2002. Cooper believes that the
debt-to-total capitalization ratio will remain within our targeted range after
this expected year-end charge to equity.
-22-
Cooper relies on commercial paper markets as its principal source of
short-term financing. As of September 30, 2002 and December 31, 2001, Cooper's
outstanding commercial paper balance was $20 million and $342 million,
respectively. The weighted average interest rate on these borrowings was 2.66%
and 2.54% at September 30, 2002 and December 31, 2001, respectively.
Cooper's practice is to back up its outstanding commercial paper with a
combination of cash and committed bank credit facilities. As of September 30,
2002, the balance of these committed bank credit facilities was $825 million,
$375 million of which mature on April 30, 2003 and $450 million of which mature
on November 17, 2004. 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 EBITDA to interest ratio of 3 to 1. Cooper is in compliance with all of
the covenants 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.
During June 2002, Cooper Ohio issued $300 million senior unsecured
notes due July 1, 2007 with a 5.25% interest rate. Proceeds from the notes were
used to reduce outstanding commercial paper balances. During September 2002,
Cooper Ohio filed a Form S-4 Registration Statement to exchange the original
notes for notes with substantially identical terms, except that the exchange
notes are registered under the Securities Act of 1933 and the transfer
restrictions and registration rights applicable to the original notes will not
apply to the exchange notes. The original and exchange notes are fully and
unconditionally guaranteed by Cooper. The exchange offer was completed on
November 4, 2002 with all holders exchanging their notes. Cooper Ohio will not
receive any proceeds from the exchange offer.
During 1999, Cooper Ohio completed a shelf registration to issue up to
$500 million of debt securities. On October 28, 2002, Cooper Ohio issued $275
million senior unsecured notes due November 1, 2009, with a 5.5% interest rate.
Proceeds from the notes will be used to repay maturing long-term and short-term
debt. The notes are fully and unconditionally guaranteed by Cooper. After this
issuance, $225 million of the shelf registration remains available to be issued.
During the third quarter of 2002, Cooper sold at a premium U.S.
Treasury securities due August 15, 2003. Cooper obtained these securities
pursuant to a repurchase agreement containing provisions that limit Cooper's
interest rate exposure under this agreement to a maximum cost of $7.2 million.
The repurchase agreement will be settled immediately prior to the maturity of
the securities. Settlement of this transaction will not require any financing by
Cooper and this transaction does not create an asset or liability, other than as
described above. The face amount of the securities was $750 million. Cash
provided by operating activities will be the source of funding for settlement of
interest rate exposure, if any.
During 2001, Cooper sold at a premium U.S. Treasury securities due
November 2002. Cooper obtained these securities pursuant to a repurchase
agreement containing provisions that limit Cooper's interest rate exposure under
this agreement to a maximum cost of $7.0 million. During the second quarter of
2002, Cooper realized a $6.0 million cost in connection with this transaction.
The repurchase agreement will be settled immediately prior to the maturity of
the securities. Settlement of this transaction will not require any financing by
Cooper and this transaction does not create an asset or liability, other than as
described above. The face amount of the securities was $1.0 billion.
-23-
As of September 30, 2002, there have been no other significant changes
to Cooper's contractual obligations or other commitments as described in Cooper
Ohio's Annual Report on Form 10-K for the year ended December 31, 2001.
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,
-----------------------------------
2002 2001
------------- -------------
(in millions)
Electrical Products.......................... $ 248.1 $ 252.9
Tools & Hardware............................. 96.7 75.9
------------- -------------
$ 344.8 $ 328.8
============= =============
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q includes certain forward-looking statements. The
forward-looking statements reflect Cooper's expectations, objectives and goals
with respect to future events and financial performance, and are based on
assumptions and estimates which Cooper believes are reasonable. Forward-looking
statements include, but are not limited to, statements regarding facility
consolidations and cost-reduction programs, the anticipated effective tax rate,
the anticipated debt-to-capitalization ratio, the anticipated minimum pension
liability equity charge, the potential liability exposure resulting from
Federal-Mogul Corporation's bankruptcy filing and any statements regarding
future revenues, earnings, cash flows and capital expenditures. Cooper wishes to
caution readers not to put undue reliance on these statements and that actual
results could differ materially from anticipated results. Important factors
which may affect the actual results include, but are not limited to, the net
effects of Cooper's cost reduction programs, the timing of facility
consolidations and the magnitude of any disruption from such consolidations, the
fair market value of the assets in the defined benefit pension plans at
year-end, the resolution of Federal-Mogul's bankruptcy proceedings, market and
economic conditions, changes in raw material and energy costs, industry
competition, changes in financial markets including foreign currency rate
fluctuations and changing legislation and regulations including changes in tax
laws, tax treaties or tax regulations. The statements also assume, without
limitation, no significant change in competitive conditions and such other risk
factors as are discussed from time to time in Cooper's periodic filings with the
Securities and Exchange Commission. The forward-looking statements contained in
this report are intended to qualify for the safe harbor provisions of Section
21E of the Securities Exchange Act of 1934, as amended.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report,
Cooper's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of the design and operation of Cooper's disclosure controls
and procedures. Based on that evaluation, Cooper's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
disclosure controls and procedures are effective. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
-24-
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, 2002, a
total of 89,985 Abex Claims were filed, of which 31,475 claims have been
resolved leaving 58,510 Abex Claims pending at September 30, 2002, that are the
responsibility of Federal-Mogul. During the three months ended September 30,
2002, 2,696 claims were filed and 13,577 claims were resolved. In addition,
during the third quarter, the Company completed the transition of case
administration to a new national counsel and record keeping system, as well as
an audit of information received from Federal-Mogul. As a result of the audit,
the number of claims received was adjusted by 6,190 and the number of claims
resolved was adjusted by 116 to reflect claims and settlements that should have
been included in Federal-Mogul's pre-October 2001 records. Since August 28,
1998, the average indemnity payment for resolved Abex Claims was $812 before
insurance. A total of $34.7 million was spent on defense costs for the period
August 28, 1998 through September 30, 2002. Historically, existing insurance
coverage has provided 50% to 80% of the total defense and indemnity payments for
Abex Claims. Cooper is preserving its rights as a creditor for breach of
Federal-Mogul's indemnification to Cooper and its rights against all
Federal-Mogul subsidiaries. Cooper intends to take all actions to seek a
resolution of the indemnification issues and future handling of the Abex-related
claims within the Federal-Mogul bankruptcy proceedings.
-25-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Third Supplemental Indenture dated as of October 28, 2002
among Cooper Industries, Inc., Cooper Industries, Ltd. and JP
Morgan Chase Bank, as Trustee (incorporated herein by
reference to Exhibit 4.1 of Cooper's Form 8-K dated October
28, 2002).
4.2 Form of Cooper Industries, Inc. 5.5% Senior Notes Due 2009
(incorporated herein by reference to Exhibit 4.2 of Cooper's
Form 8-K dated October 28, 2002).
4.3 Form of Cooper Industries, Inc. 5.25% Senior Notes due 2007.
10.1 Form of Management Continuity Agreement between Cooper
Industries, Ltd. and key management personnel which applies if
there is a Change of Control of Cooper.
10.2 Form of Indemnification Agreement between Cooper Industries,
Ltd. and key management personnel.
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 2001 through 1997 and the Nine Months Ended
September 30, 2002 and 2001.
23. Consent of Bates White & Ballentine, LLC.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
Cooper filed a report on Form 8-K dated July 23, 2002, which included a
copy of a press release containing Cooper's results of operations for
the second quarter of 2002 and "Sales Trends" information posted on
Cooper's website.
Cooper filed a report on Form 8-K dated August 6, 2002, which included
a copy of a press release announcing that the Board of Directors
elected a new director and approved the expensing of stock options, and
the Chief Executive Officer and Chief Financial Officer certified
Cooper's SEC filings made in 2002.
Cooper filed a report on Form 8-K dated August 19, 2002, which included
"Sales Trends" information posted on Cooper's website.
Cooper filed a report on Form 8-K dated September 20, 2002, which
included "Sales Trends" information posted on Cooper's website.
-26-
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 12, 2002 /s/ D. Bradley McWilliams
------------------------- -------------------------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
Date: November 12, 2002 /s/ Jeffrey B. Levos
------------------------- -------------------------------------------------
Jeffrey B. Levos
Vice President and Controller
and Chief Accounting Officer
-27-
Certifications
I, H. John Riley, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooper
Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ H. John Riley, Jr.
---------------------------------------- ----------------------------------
H. John Riley, Jr.
Chairman, President and
Chief Executive Officer
-28-
I, D. Bradley McWilliams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooper
Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Acts Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ D. Bradley McWilliams
----------------------------------- ---------------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
-29-
Exhibit Index
Exhibit No.
4.1 Third Supplemental Indenture dated as of October 28, 2002
among Cooper Industries, Inc., Cooper Industries, Ltd. and JP
Morgan Chase Bank, as Trustee (incorporated herein by
reference to Exhibit 4.1 of Cooper's Form 8-K dated October
28, 2002).
4.2 Form of Cooper Industries, Inc. 5.50% Senior Notes Due 2009
(incorporated herein by reference to Exhibit 4.2 of Cooper's
Form 8-K dated October 28, 2002).
4.3 Form of Cooper Industries, Inc. 5.25% Senior Notes due 2007.
10.1 Form of Management Continuity Agreement between Cooper
Industries, Ltd. and key management personnel which applies if
there is a Change of Control of Cooper.
10.2 Form of Indemnification Agreement between Cooper Industries,
Ltd. and key management personnel.
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 2001 through 1997 and the Nine Months Ended
September 30, 2002 and 2001.
23. Consent of Bates White & Ballentine, LLC.
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
-30-