10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

         (Mark One)

	þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2005

	o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 1-31330

Cooper Industries, Ltd.

(Exact name of registrant as specified in its charter)

Bermuda		98-0355628
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

600 Travis, Suite 5800		Houston, Texas 77002
(Address of principal executive offices)		(Zip Code)

(713) 209-8400

(Registrant’s telephone number, including area code)

(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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o

Number of registrant’s common stock outstanding as of September 30, 2005 was 91,623,592 Class A common shares that are held by the public and 9,519,414 Class A common shares and 54,810,129 Class B common shares that are held by the issuer’s wholly-owned subsidiaries.

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(in millions, where applicable)
Revenues		$	1,210.4			$	1,140.2			$	3,544.4			$	3,314.1
Cost of sales			828.1				798.4				2,430.4				2,315.6
Selling and administrative expenses			235.9				211.6				696.3				632.0
Operating earnings			146.4				130.2				417.7				366.5
Interest expense, net			16.5				17.0				52.0				51.3
Income before income taxes			129.9				113.2				365.7				315.2
Income taxes			27.9				23.9				78.6				64.3
Net income		$	102.0			$	89.3			$	287.1			$	250.9
Income per common share:
Basic		$	1.11			$	.97			$	3.09			$	2.71
Diluted		$	1.08			$	.95			$	3.02			$	2.65
Cash dividends per common share		$	.37			$	.35			$	1.11			$	1.05

The accompanying notes are an integral part of these statements.

COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2005				2004
		(in millions)
ASSETS
Cash and cash equivalents		$	376.0			$	652.8
Receivables			919.2				820.9
Inventories			576.1				523.0
Deferred income taxes and other current assets			174.5				221.9
Total current assets			2,045.8				2,218.6
Property, plant and equipment, less accumulated depreciation			679.7				696.4
Goodwill			2,090.0				2,142.3
Deferred income taxes and other noncurrent assets			273.9				283.5
Total assets		$	5,089.4			$	5,340.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt		$	7.9			$	97.6
Accounts payable			385.1				350.7
Accrued liabilities			490.6				488.8
Accrual for discontinued operations			171.4				225.1
Current maturities of long-term debt			449.3				665.4
Total current liabilities			1,504.3				1,827.6
Long-term debt			680.5				698.6
Postretirement benefits other than pensions			165.9				173.3
Other long-term liabilities			345.3				354.8
Total liabilities			2,696.0				3,054.3
Common stock, $.01 par value			0.9				0.9
Capital in excess of par value			390.1				446.2
Retained earnings			2,154.9				1,971.6
Accumulated other nonowner changes in equity			(152.5	)			(132.2	)
Total shareholders’ equity			2,393.4				2,286.5
Total liabilities and shareholders’ equity		$	5,089.4			$	5,340.8

The accompanying notes are an integral part of these statements.

COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2005				2004
		(in millions)
Cash flows from operating activities:
Net income		$	287.1			$	250.9
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization			84.1				88.8
Deferred income taxes			5.0				29.0
Restructuring charge payments			(0.4	)			(3.8	)
Changes in assets and liabilities: (1)
Receivables			(114.3	)			(97.2	)
Inventories			(54.5	)			10.7
Accounts payable and accrued liabilities			8.3				(4.1	)
Other assets and liabilities, net			85.2				86.2
Net cash provided by operating activities			300.5				360.5
Cash flows from investing activities:
Capital expenditures			(71.8	)			(64.1	)
Cash paid for acquired businesses			(2.4	)			(10.1	)
Proceeds from sales of property, plant and equipment and other			6.6				8.5
Net cash used in investing activities			(67.6	)			(65.7	)
Cash flows from financing activities:
Proceeds from issuances of debt			1.4				2.2
Repayments of debt			(270.1	)			(1.7	)
Dividends			(103.8	)			(97.9	)
Subsidiary purchase of parent shares			(166.2	)			(202.9	)
Activity under employee stock plans and other			54.7				37.2
Net cash used in financing activities			(484.0	)			(263.1	)
Effect of exchange rate changes on cash and cash equivalents			(25.7	)			0.2
Increase/(decrease) in cash and cash equivalents			(276.8	)			31.9
Cash and cash equivalents, beginning of period			652.8				463.7
Cash and cash equivalents, end of period		$	376.0			$	495.6

The accompanying notes are an integral part of these statements.

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.

     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, 2004 included in Part IV of Cooper’s 2004 Annual Report on Form 10-K.

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement 123(R), Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). For Cooper, the revised statement is effective January 1, 2006. Statement 123(R) must be applied to new awards and previously granted awards that are not fully vested on the effective date. Cooper adopted SFAS No. 123 on January 1, 2003 using the prospective transition method which applied only to awards granted, modified or settled after the adoption date. Accordingly, compensation cost for some previously granted unvested awards that were not recognized under SFAS No. 123 will be recognized under Statement 123(R). Had we adopted Statement 123(R) in prior periods the impact of that standard would approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 of the Notes to the Consolidated Financial Statements.

Note 2. Stock-Based Compensation

     Under Cooper stock option plans, officers, directors and key employees may be granted options to purchase Cooper’s common stock at no less than 100% of the market price on the date the option is granted. Options generally become exercisable ratably over a three-year period commencing one year from the grant date and have a maximum term of ten years. The plans also provide for the granting of performance-based stock awards and restricted stock awards to certain key executives that generally vest over periods ranging from three to five years.

     Effective January 1, 2003, Cooper adopted SFAS No. 123, as amended. Cooper utilized the prospective method of adoption. Cooper accounts for stock-based compensation awards granted, modified or settled prior to January 1, 2003 using the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations (“APB No. 25”). SFAS No. 123 provides an alternative fair value based method for recognizing stock-based compensation in which compensation expense is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The fair value of stock options granted was estimated using the Black-Scholes option-pricing model. The fair value of restricted stock and performance-based awards granted was measured at the market price on the grant date. Stock-based compensation expense was $30.0 million and $16.1 million during the nine months ended September 30, 2005 and 2004, respectively.

     The following table presents pro forma income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period. There are essentially two remaining differences between as reported and pro-forma amounts on both a net income, as well as earnings per share basis. First, Cooper accounts for award grants prior to January 1, 2003 using the intrinsic value method, whereas the pro-forma amounts reflect those award grants as calculated under SFAS 123. Secondly, the pro-forma amounts reflect recognition of the tax benefits of disqualifying dispositions of stock acquired pursuant to incentive stock options in accordance with SFAS 123.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
						(in millions)
Net income, as reported		$	102.0			$	89.3			$	287.1			$	250.9
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			8.3				2.7				18.5				9.6
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(8.0	)			(2.3	)			(16.1	)			(11.3	)
Pro forma net income		$	102.3			$	89.7			$	289.5			$	249.2
Earnings per share:
Basic – as reported		$	1.11			$	.97			$	3.09			$	2.71
Basic – pro forma		$	1.11			$	.98			$	3.12			$	2.69
Diluted – as reported		$	1.08			$	.95			$	3.02			$	2.65
Diluted – pro forma		$	1.08			$	.95			$	3.05			$	2.63

Note 3. Acquisitions

     In March 2004, Cooper acquired a manufacturer of specification and commercial grade lighting fixtures for $10.1 million. In November 2004, Cooper acquired a U.K. based manufacturer of visual and audible alarms and public address speakers for $38.5 million.

Note 4. Inventories

		September 30,				December 31,
		2005				2004
		(in millions)
Raw materials		$	201.0			$	185.2
Work-in-process			147.9				118.6
Finished goods			337.2				320.2
Perishable tooling and supplies			14.3				13.2
			700.4				637.2
Allowance for excess and obsolete inventory			(58.9	)			(58.9	)
Excess of current standard costs over LIFO costs			(65.4	)			(55.3	)
Net inventories		$	576.1			$	523.0

Note 5. Shareholders’ Equity

     At September 30, 2005, 91,623,592 Class A common shares, $.01 par value were issued and outstanding (excluding the 9,519,414 Class A common shares held by wholly-owned subsidiaries as discussed below) compared to 92,543,660 Class A common shares, $.01 par value (excluding the 3,700,200 Class A common shares held by wholly-owned subsidiaries) at December 31, 2004. During the first nine months of 2005, Cooper issued 1,589,332 Class A common shares primarily in connection with employee incentive and benefit plans and Cooper’s dividend reinvestment program. During the first nine months of 2005, Cooper’s wholly-owned subsidiaries purchased 2,509,400 Class A common shares for $166.2 million under Cooper’s share repurchase plan and a wholly-owned subsidiary purchased 3,669,037 previously unissued Class A common shares at fair market value. The share purchases are recorded by Cooper’s wholly-owned subsidiaries as an investment in its parent company that is eliminated in consolidation. During the first nine months of 2005, 359,223 Class A common shares held by wholly-owned subsidiaries were issued in connection with employee incentive plans, leaving 9,519,414 Class A common shares held by wholly-owned subsidiaries at September 30, 2005.

     A wholly-owned subsidiary also owns all the issued and outstanding Class B common shares. The subsidiary’s investment in the Class B common shares is eliminated in consolidation. If at any time a dividend is declared and paid on the Class A common shares, a like dividend shall be declared and paid on the Class B common shares in an equal amount per share.

Note 6. Segment Information

		Revenues
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
						(in millions)
Electrical Products		$	1,027.5			$	952.2			$	3,006.4			$	2,771.8
Tools & Hardware			182.9				188.0				538.0				542.3
Total revenues		$	1,210.4			$	1,140.2			$	3,544.4			$	3,314.1

		Operating Earnings
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
						(in millions)
Electrical Products		$	158.2			$	131.2			$	441.8			$	381.4
Tools & Hardware			15.5				18.3				46.0				42.7
Segment operating earnings			173.7				149.5				487.8				424.1
General Corporate expenses			27.3				19.3				70.1				57.6
Total operating earnings			146.4				130.2				417.7				366.5
Interest expense, net			16.5				17.0				52.0				51.3
Income before income taxes		$	129.9			$	113.2			$	365.7			$	315.2

Note 7. Pension and Other Postretirement Benefits

		Pension Benefits
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
						(in millions)
Components of net periodic benefit cost:
Service cost		$	4.2			$	4.1			$	12.9			$	12.2
Interest cost			9.8				10.4				30.2				31.1
Expected return on plan assets			(12.0	)			(11.7	)			(37.4	)			(35.1	)
Amortization of prior service cost			0.2				0.2				0.5				0.5
Recognized actuarial loss			2.4				1.8				7.2				5.4
Net periodic benefit cost		$	4.6			$	4.8			$	13.4			$	14.1

		Other Postretirement Benefits
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
						(in millions)
Components of net periodic benefit cost:
Service cost		$	0.1			$	—			$	0.2			$	0.1
Interest cost			1.7				2.1				5.2				6.2
Recognized actuarial gain			(0.8	)			(0.7	)			(2.3	)			(2.1	)
Net periodic benefit cost		$	1.0			$	1.4			$	3.1			$	4.2

Note 8. Income Taxes

     The effective tax rate was 21.5% for the nine months ended September 30, 2005 and 20.4% for the nine months ended September 30, 2004. The rate increase is primarily related to increased projected taxable earnings in 2005 without a corresponding increase in projected tax benefits.

     In April 2005, Cooper received an Examination Report from the Internal Revenue Service, which included a challenge to the treatment of gains and interest deductions claimed on Cooper’s 2000 and 2001 federal income tax returns, relating to transactions involving government securities. If the proposed adjustment is upheld, it would require that Cooper pay approximately $26.5 million in taxes plus accrued interest. Interest will continue to accrue until the matter is resolved. Cooper believes these transactions were properly reported on its federal income tax returns in accordance with applicable tax laws and regulations in effect during the period involved. Cooper is challenging these adjustments vigorously. While the outcome of proceedings of this type cannot be predicted with certainty, management believes that the ultimate outcome of this matter will not have a material impact on Cooper’s consolidated financial position, results of operations, or cash flows.

Note 9. Net Income Per Common Share

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
			(in millions)
Basic:
Net income applicable to common stock		$	102.0			$	89.3			$	287.1			$	250.9
Weighted average common shares outstanding			92.3				91.8				92.8				92.5
Diluted:
Net income applicable to common stock		$	102.0			$	89.3			$	287.1			$	250.9
Weighted average common shares outstanding			92.3				91.8				92.8				92.5
Incremental shares from assumed conversions:
Options, performance-based stock awards and other employee awards			2.5				2.2				2.4				2.2
Weighted average common shares and common share equivalents			94.8				94.0				95.2				94.7

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,
		2005				2004				2005				2004
						(in millions)
Net income		$	102.0			$	89.3			$	287.1			$	250.9
Foreign currency translation gains (losses)			(6.9	)			3.1				(20.4	)			4.9
Change in fair value of derivatives			1.2				(0.1	)			0.1				1.2
Net income and other nonowner changes in equity		$	96.3			$	92.3			$	266.8			$	257.0

Note 11. Restructuring

     During the fourth quarter of 2003, Cooper recorded net restructuring charges of $16.9 million, or $13.6 million after taxes ($.14 per diluted common share). This represented costs associated with restructuring projects undertaken in 2003 of $18.4 million, partially offset by a $1.5 million adjustment of estimates for restructuring projects initiated in 2002.

     The most significant action included in the charges was an announcement of the closing of Cooper Wiring Devices’ manufacturing operations in New York City. This action will include the withdrawal from a multiple-employer pension plan. Cooper recorded a $12.5 million obligation as an estimate of Cooper’s portion of unfunded benefit obligations of the plan. The remaining $5.9 million charge primarily represents severance for announced employment reductions at several locations. The 2003 net impact of the charges was $16.4 million on the Electrical Products segment, $(0.4) million on the Tools & Hardware segment and $0.9 million related to General Corporate. As of September 30, 2005, Cooper had paid a total of $5.3 million for these actions, all of which was for severance costs.

     A total of 114 salaried and 150 hourly personnel were eliminated as a result of these actions, and all personnel were terminated as of December 31, 2004. The majority of the severance obligation was paid by the first half of 2004. The multiple-employer pension obligation is expected to be paid over 15 years, beginning in 2005.

     During the fourth quarter of 2002, Cooper committed to (1) the closure of ten manufacturing facilities, (2) further employment reductions to appropriately size Cooper’s workforce to market conditions, and (3) the write-off of assets related to production rationalization activities. These actions were taken as a part of Cooper management’s ongoing assessment of required production capacity in consideration of current demand levels. In connection with these commitments, certain production capacity and related assets were sold, outsourced, discontinued or moved to a lower cost environment. Cooper recorded a provision for these announced actions of $39.1 million ($15.0 million of which was non-cash), or $29.8 million after taxes ($.32 per diluted common share). Of this amount, $24.0 million ($11.0 million of which was non-cash) was associated with the Electrical Products segment, $12.7 million ($3.4 million of which was non-cash) was associated with the Tools & Hardware segment and the remainder was related to General Corporate.

     The following table reflects activity related to the fourth quarter 2002 restructuring charge.

										Facilities
		Number of				Accrued				Closure and
		Employees				Severance				Rationalization
						($ in millions)
Balance at December 31, 2002			1,022			$	16.2			$	5.8
Employees terminated			(982	)			—				—
Cash expenditures			—				(14.9	)			(2.9	)
Reversal of excess accruals			(9	)			(0.9	)			(0.6	)
Balance at December 31, 2003			31				0.4				2.3
Employees terminated			(31	)			—				—
Cash expenditures			—				(0.4	)			(1.7	)
Balance at December 31, 2004			—				—				0.6
Cash expenditures			—				—				—
Balance at September 30, 2005			—			$	—			$	0.6

     A total of 435 salaried and 771 hourly positions were eliminated as a result of the planned closure and rationalization actions. Of those planned position eliminations, approximately 600 positions were replaced ultimately as a result of Cooper’s ongoing efforts to relocate production capacity to lower cost locations.

     See “Restructuring” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

Note 12. Charge Related to Discontinued Operations

     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 rejected 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, 2005, a total of 137,170 Abex Claims were filed, of which 98,444 claims have been resolved leaving 38,726 Abex Claims pending at September 30, 2005, that are the responsibility of Federal-Mogul. During the three months ended September 30, 2005, 1,199 claims were filed and 4,152 claims were resolved. Since August 28, 1998, the average indemnity payment for resolved Abex Claims was $2,062 before insurance. A total of $77 million was spent on defense costs for the period August 28, 1998 through September 30, 2005. Historically, existing insurance coverage has provided 50% to 80% of the total defense and indemnity payments for Abex Claims.

     With the assistance of independent advisors, Bates White, LLC, in the fourth quarter of 2001 Cooper completed a thorough analysis of its potential exposure for asbestos liabilities in the event Federal-Mogul rejects the 1998 Agreement. Based on Cooper’s analysis of its contingent liability exposure resulting from Federal-Mogul’s bankruptcy, Cooper concluded that an additional fourth-quarter 2001 discontinued operations provision of $30 million after-tax, or $.32 per share, was appropriate to reflect the potential net

impact of this issue. The analysis included a review of the twenty-year history of Abex Claims; the average indemnity payments for resolved claims; the jurisdictions in which claims had been filed; Bates White, LLC data on the incidence of asbestos exposure and diseases in various industries; existing insurance coverage including the insurance recovered by Pneumo and Federal-Mogul for pre-bankruptcy claims and the contractual indemnities. Assumptions were made regarding future claim filings and indemnity payments, and, based on the advisor’s data, the expected population of persons exposed to asbestos in particular industries. All of this data was used to determine a reasonable expectation of future claims, indemnity payments and insurance coverage. 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.

     Cooper’s fourth-quarter 2001 analysis of the contingent liability exposure assumed that the liabilities would be settled within the Federal-Mogul bankruptcy proceedings. This analysis assumed that representatives of Federal-Mogul, its bankruptcy committees and the future claimants (the “Representatives”) would reach similar conclusions regarding the potential future liabilities and insurance recoveries as Cooper did based on the Bates White, LLC analysis. Throughout 2003, Cooper worked towards resolution of the indemnification issues and future handling of the Abex-related claims within the Federal-Mogul bankruptcy proceedings. This included negotiations with the Representatives regarding participation in Federal-Mogul’s proposed 524(g) asbestos trust. Based on the status of negotiations in 2004, Cooper concluded that it was probable that Federal-Mogul will reject the 1998 Agreement. Cooper also concluded that the Representatives would require any negotiated settlement through the Federal-Mogul bankruptcy to be at the high end of the Bates White, LLC liability analysis and with substantially lower insurance recovery assumptions and higher administrative costs.

     While Cooper believes that the insurance has significant additional value, extensive litigation with the insurance carriers and other parties that have access to the insurance may be required to receive recoveries and there is risk that court decisions could reduce the value of the recoveries. Additionally, the assumptions on liability payments could prove inaccurate over time. If Cooper is unable to reach a settlement with the Representatives and the 1998 Agreement is rejected, Cooper would be required to reflect an accrual for the asbestos liability and a related receivable for the probable insurance recoveries.

     During late February and early March 2004, Cooper reassessed the accrual required based on the then current status of the negotiations with the Representatives and the liability and insurance receivable that would be required to be recorded if this matter is not settled within the Federal-Mogul bankruptcy. Cooper concluded that resolution within the Federal-Mogul proposed 524(g) asbestos trust would likely be within the range of the liabilities, net of insurance recoveries, that Cooper would accrue if this matter were not settled within the Federal-Mogul bankruptcy. Accordingly, Cooper recorded a $126.0 million after-tax discontinued operations charge, net of a $70.9 million income tax benefit, in the fourth quarter of 2003.

     Recently, Federal-Mogul and its constituents in the Chapter 11 proceedings announced that they have reached an agreement with UK administrators of Federal-Mogul’s local affiliates, which Cooper believes brings Federal-Mogul closer to emerging from bankruptcy. Cooper is in active negotiations with representatives of Federal-Mogul, its bankruptcy committees and the future claimants to resolve its liability exposure for Abex Claims within the Federal-Mogul proposed 524(g) trust. While no agreement has been finalized, it is possible that in the foreseeable future Cooper could sign an agreement that would lead to a resolution of all of its Abex Claims through the 524(g) trust. If an agreement is reached, it will likely include an upfront payment of cash, shares of Cooper common stock, and an obligation for additional annual cash payments that could extend over 25 years. The amount of the annual ongoing obligation would likely be reduced by insurance proceeds received directly by the 524(g) trust during this period. If Cooper reaches a settlement on these terms, it would likely result in an additional earnings charge to discontinued operations. This charge would reflect 25 years of undiscounted cash outflows, and insurance recovery assumptions. There are numerous scenarios on insurance recoveries over an extended time, and Cooper is actively working to determine an appropriate insurance recovery scenario in the event that a settlement is signed. Bates White, LLC continues to assist Cooper in evaluating analyses prepared by the Representatives and their advisors and

advise Cooper on accounting and reporting practices. From a cash flow perspective, Cooper management believes that a settlement on terms being discussed would allow Cooper to continue to grow through acquisitions and return cash to shareholders through dividends and stock repurchases. There is significant uncertainty as to whether any settlement agreement will be finalized. In addition, any settlement is subject to bankruptcy court approval, approval by the current claimants and other matters. At this time, the exact manner in which this issue will be resolved is not known. The accrual for potential liabilities related to the Automotive Products sale and the Federal-Mogul bankruptcy was $171.4 million at September 30, 2005 and $225.1 million at December 31, 2004. Insurance recoveries are recorded as an increase in the accrual when cash is received, which may be an extended period from the date when a claim or defense costs are paid.

Note 13. Consolidating Financial Information

     Prior to January 1, 2005, Cooper fully and unconditionally guaranteed the registered debt securities of Cooper Industries, Inc. (“Cooper Ohio”), a wholly-owned indirect subsidiary. Effective January 1, 2005, Cooper Industries, LLC, a wholly-owned indirect subsidiary, became the successor issuer of Cooper Ohio’s registered debt securities as a result of a merger of Cooper Ohio into Cooper Industries, LLC. Cooper and certain principal operating subsidiaries fully and unconditionally guarantee, on a joint and several basis, the registered debt securities of Cooper Industries, LLC. The following condensed consolidating financial information is included so that separate financial statements of Cooper Industries, LLC, Cooper Ohio or the guaranteeing subsidiaries 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, 2005
(in millions)

						Cooper				Guaranteeing				Other				Consolidating
		Cooper				Industries, LLC				Subsidiaries				Subsidiaries				Adjustments				Total
Revenues		$	—			$	—			$	820.2			$	430.2			$	(40.0	)		$	1,210.4
Cost of sales			—				(0.2	)			573.4				294.9				(40.0	)			828.1
Selling and administrative expenses			2.0				4.1				146.3				83.5				—				235.9
Interest expense, net			(0.1	)			13.7				(1.2	)			4.1				—				16.5
Equity in earnings of subsidiaries, net of tax.			122.4				9.3				71.5				66.9				(270.1	)			—
Intercompany income (expense)			(1.8	)			(10.3	)			(120.7	)			149.5				(16.7	)			—
Income (loss) before income taxes			118.7				(18.6	)			52.5				264.1				(286.8	)			129.9
Income tax expense (benefit)			—				(10.3	)			(14.5	)			52.7				—				27.9
Net income (loss)		$	118.7			$	(8.3	)		$	67.0			$	211.4			$	(286.8	)		$	102.0

Consolidating Income Statements
Three Months Ended September 30, 2004
(in millions)

						Cooper				Other				Consolidating
		Cooper				Ohio				Subsidiaries				Adjustments				Total
Revenues		$	—			$	45.2			$	1,098.2			$	(3.2	)		$	1,140.2
Cost of sales			—				31.0				770.6				(3.2	)			798.4
Selling and administrative expenses			2.0				23.6				186.0				—				211.6
Interest expense, net			(0.2	)			12.2				5.0				—				17.0
Equity in earnings of subsidiaries, net of tax			91.8				104.4				42.1				(238.3	)			—
Intercompany income (expense)			(0.7	)			(76.6	)			77.3				—				—
Income before income taxes			89.3				6.2				256.0				(238.3	)			113.2
Income tax expense (benefit)			—				(35.9	)			59.8				—				23.9
Net income		$	89.3			$	42.1			$	196.2			$	(238.3	)		$	89.3

Nine Months Ended September 30, 2005
(in millions)

						Cooper				Guaranteeing				Other				Consolidating
		Cooper				Industries, LLC				Subsidiaries				Subsidiaries				Adjustments				Total
Revenues		$	—			$	—			$	2,382.8			$	1,262.2			$	(100.6	)		$	3,544.4
Cost of sales			0.2				—				1,685.7				845.1				(100.6	)			2,430.4
Selling and administrative expenses			6.7				7.9				429.5				252.2				—				696.3
Interest expense, net			(1.0	)			40.6				(2.9	)			15.3				—				52.0
Equity in earnings of subsidiaries, net of tax			360.4				59.0				182.1				196.3				(797.8	)			—
Intercompany income (expense)			(4.3	)			(37.1	)			(286.9	)			391.5				(63.2	)			—
Income (loss) before income taxes			350.2				(26.6	)			165.7				737.4				(861.0	)			365.7
Income tax expense (benefit)			—				(31.8	)			(30.6	)			141.0				—				78.6
Net income		$	350.2			$	5.2			$	196.3			$	596.4			$	(861.0	)		$	287.1

Nine Months Ended September 30, 2004
(in millions)

						Cooper				Other				Consolidating
		Cooper				Ohio				Subsidiaries				Adjustments				Total
Revenues		$	—			$	185.5			$	3,141.9			$	(13.3	)		$	3,314.1
Cost of sales			0.6				123.3				2,205.0				(13.3	)			2,315.6
Selling and administrative expenses			6.7				76.3				549.0				—				632.0
Interest expense, net			(0.7	)			36.1				15.9				—				51.3
Equity in earnings of subsidiaries, net of tax			260.9				330.9				117.8				(709.6	)			—
Intercompany income (expense)			(3.4	)			(280.5	)			283.9				—				—
Income before income taxes			250.9				0.2				773.7				(709.6	)			315.2
Income tax expense (benefit)			—				(117.6	)			181.9				—				64.3
Net income		$	250.9			$	117.8			$	591.8			$	(709.6	)		$	250.9

Consolidating Balance Sheets
September 30, 2005
(in millions)

						Cooper				Guaranteeing				Other				Consolidating
		Cooper				Industries, LLC				Subsidiaries				Subsidiaries				Adjustments				Total
Cash and cash equivalents		$	56.5			$	(0.1	)		$	66.7			$	252.9			$	—			$	376.0
Receivables			—				—				553.3				365.9				—				919.2
Inventories			—				—				341.8				234.3				—				576.1
Deferred income taxes and other current assets			0.1				97.3				65.7				11.4				—				174.5
Total current assets			56.6				97.2				1,027.5				864.5				—				2,045.8
Property, plant and equipment, less accumulated depreciation.			—				—				385.0				294.7				—				679.7
Goodwill			—				—				1,018.1				1,071.9				—				2,090.0
Investment in subsidiaries			4,899.0				1,027.9				4,802.5				2,772.7				(13,502.1	)			—
Investment in parent			—				—				2,522.3				312.7				(2,835.0	)			—
Intercompany accounts receivables			576.9				596.7				1,369.9				2,570.2				(5,113.7	)			—
Intercompany notes receivable			46.1				14.1				73.4				5,971.2				(6,104.8	)			—
Deferred income taxes and other noncurrent assets			—				121.6				39.7				112.6				—				273.9
Total assets		$	5,578.6			$	1,857.5			$	11,238.4			$	13,970.5			$	(27,555.6	)		$	5,089.4
Short-term debt		$	—			$	—			$	—			$	7.9			$	—			$	7.9
Accounts payable			34.2				11.9				190.5				148.5				—				385.1
Accrued liabilities			3.7				29.6				325.6				131.7				—				490.6
Accrual for discontinued operations			—				171.4				—				—				—				171.4
Current maturities of long-term debt			—				88.0				—				361.3				—				449.3
Total current liabilities.			37.9				300.9				516.1				649.4				—				1,504.3
Long-term debt			—				671.1				8.0				1.4				—				680.5
Intercompany accounts payables			—				—				2,819.8				2,293.9				(5,113.7	)			—
Intercompany notes payable			272.8				470.7				5,235.6				125.7				(6,104.8	)			—
Other long-term liabilities			—				126.6				271.9				112.7				—				511.2
Total liabilities			310.7				1,569.3				8,851.4				3,183.1				(11,218.5	)			2,696.0
Class A common stock			0.9				—				—				—				—				0.9
Class B common stock			0.5				—				—				—				(0.5	)			—
Subsidiary common stock			—				—				—				258.6				(258.6	)			—
Capital in excess of par value			3,197.7				—				501.1				6,735.8				(10,044.5	)			390.1
Retained earnings			2,231.0				401.6				2,048.8				4,133.3				(6,659.8	)			2,154.9
Accumulated other nonowner changes in equity			(162.2	)			(113.4	)			(162.9	)			(340.3	)			626.3				(152.5	)
Total shareholders’ equity			5,267.9				288.2				2,387.0				10,787.4				(16,337.1	)			2,393.4
Total liabilities and shareholders’ equity		$	5,578.6			$	1,857.5			$	11,238.4			$	13,970.5			$	(27,555.6	)		$	5,089.4

Consolidating Balance Sheets
December 31, 2004
(in millions)

						Cooper				Other				Consolidating
		Cooper				Ohio				Subsidiaries				Adjustments				Total
Cash and cash equivalents		$	111.5			$	246.1			$	295.2			$	—			$	652.8
Receivables			—				15.0				805.9				—				820.9
Inventories			—				—				523.0				—				523.0
Deferred income taxes and other current assets			1.3				215.0				5.6				—				221.9
Total current assets			112.8				476.1				1,629.7				—				2,218.6
Property, plant and equipment, less accumulated depreciation			—				34.5				661.9				—				696.4
Goodwill			—				—				2,142.3				—				2,142.3
Investment in subsidiaries			2,785.8				4,796.1				193.5				(7,775.4	)			—
Investment in parent			—				2,245.5				202.2				(2,447.7	)			—
Intercompany accounts receivable			514.0				—				681.9				(1,195.9	)			—
Intercompany notes receivable			25.6				21.3				3,899.6				(3,946.5	)			—
Deferred income taxes and other noncurrent assets			—				112.6				170.9				—				283.5
Total assets		$	3,438.2			$	7,686.1			$	9,582.0			$	(15,365.5	)		$	5,340.8
Short-term debt		$	—			$	—			$	97.6			$	—			$	97.6
Accounts payable			32.5				21.1				297.1				—				350.7
Accrued liabilities			2.9				130.6				355.3				—				488.8
Accrual for discontinued operations			—				225.1				—				—				225.1
Current maturities of long-term debt			—				229.0				436.4				—				665.4
Total current liabilities.			35.4				605.8				1,186.4				—				1,827.6
Long-term debt			—				688.3				10.3				—				698.6
Intercompany accounts payable			—				1,195.9				—				(1,195.9	)			—
Intercompany notes payable			135.7				3,763.9				46.9				(3,946.5	)			—
Other long-term liabilities			—				253.2				274.9				—				528.1
Total liabilities			171.1				6,507.1				1,518.5				(5,142.4	)			3,054.3
Class A common stock			0.9				—				—				—				0.9
Class B common stock			0.5				—				—				(0.5	)			—
Subsidiary common stock			—				—				137.0				(137.0	)			—
Capital in excess of par value			2,882.2				12.1				7,252.0				(9,700.1	)			446.2
Retained earnings			350.0				1,263.8				773.1				(415.3	)			1,971.6
Accumulated other nonowner changes in equity			33.5				(96.9	)			(98.6	)			29.8				(132.2	)
Total shareholders’ equity			3,267.1				1,179.0				8,063.5				(10,223.1	)			2,286.5
Total liabilities and shareholders’ equity		$	3,438.2			$	7,686.1			$	9,582.0			$	(15,365.5	)		$	5,340.8

Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2005
(in millions)

						Cooper				Guaranteeing				Other				Consolidating
		Cooper				Industries, LLC				Subsidiaries				Subsidiaries				Adjustments				Total
Net cash provided by (used in) operating activities		$	(4.9	)		$	(114.0	)		$	20.4			$	399.0			$	—			$	300.5
Cash flows from investing activities:
Capital expenditures			—				—				(41.4	)			(30.4	)			—				(71.8	)
Cash paid for acquired businesses			—				—				—				(2.4	)			—				(2.4	)
Investment in affiliates			(11.1	)			(9.8	)			(33.7	)			—				54.6				—
Loans to affiliates			(46.0	)			(14.1	)			(69.4	)			(137.1	)			266.6				—
Repayments of loans from affiliates			25.6				—				—				—				(25.6	)			—
Dividends from affiliates			—				0.9				86.7				3.1				(90.7	)			—
Other			—				1.5				0.5				4.6				—				6.6
Net cash used in investing activities			(31.5	)			(21.5	)			(57.3	)			(162.2	)			204.9				(67.6	)
Cash flows from financing activities:
Proceeds from issuances of debt			—				—				—				1.4				—				1.4
Repayments of debt			—				(152.0	)			—				(118.1	)			—				(270.1	)
Borrowings from affiliates			137.1				7.9				—				121.6				(266.6	)			—
Repayments of loans to affiliates			—				—				—				(25.6	)			25.6				—
Other intercompany financing activities			(16.7	)			279.5				(120.4	)			(142.4	)			—				—
Dividends			(103.8	)			—				—				—				—				(103.8	)
Dividends paid to affiliates			(46.4	)			—				—				(44.3	)			90.7				—
Subsidiary purchase of parent shares			11.2				—				(78.0	)			(99.4	)			—				(166.2	)
Issuance of stock			—				—				—				54.6				(54.6	)			—
Employee stock plan activity and other			—				—				54.7				—				—				54.7
Net cash provided by (used in) financing activities.			(18.6	)			135.4				(143.7	)			(252.2	)			(204.9	)			(484.0	)
Effect of exchange rate changes on cash and cash equivalents.			—				—				—				(25.7	)			—				(25.7	)
Increase (decrease) in cash and cash equivalents			(55.0	)			(0.1	)			(180.5	)			(41.2	)			—				(276.8	)
Cash and cash equivalents, beginning of period			111.5				—				247.2				294.1				—				652.8
Cash and cash equivalents, end of period		$	56.5			$	(0.1	)		$	66.7			$	252.9			$	—			$	376.0