e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended September 30, 2006
OR
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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)
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Bermuda
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98-0355628 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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600 Travis, Suite 5800
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Houston, Texas 77002 |
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(Address of principal executive offices)
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(Zip Code) |
(713) 209-8400
(Registrants 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 a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer 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 þ
Number of registrants common stock outstanding as of September 30, 2006 was 90,909,772 Class A
common shares that are held by the public and 12,910,501 Class A common shares and 54,810,129 Class
B common shares that are held by the issuers wholly owned subsidiaries.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(in millions, where applicable) |
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Revenues |
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$ |
1,314.6 |
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$ |
1,210.4 |
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$ |
3,843.3 |
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$ |
3,544.4 |
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Cost of sales |
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887.2 |
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828.1 |
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2,604.3 |
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2,430.4 |
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Selling and administrative expenses |
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240.8 |
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235.9 |
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722.6 |
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696.3 |
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Operating earnings |
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186.6 |
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146.4 |
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516.4 |
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417.7 |
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Interest expense, net |
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14.0 |
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16.5 |
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38.5 |
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52.0 |
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Income from continuing operations before
income taxes |
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172.6 |
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129.9 |
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477.9 |
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365.7 |
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Income taxes |
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44.4 |
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27.9 |
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122.2 |
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78.6 |
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Income from continuing operations |
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128.2 |
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102.0 |
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355.7 |
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287.1 |
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Charge related to discontinued operations,
net of income taxes |
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20.3 |
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Net income |
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$ |
128.2 |
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$ |
102.0 |
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$ |
335.4 |
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$ |
287.1 |
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Income per common share: |
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Basic: |
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Income from continuing operations |
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$ |
1.40 |
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$ |
1.11 |
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$ |
3.87 |
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$ |
3.09 |
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Charge from discontinued operations |
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.22 |
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Net income |
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$ |
1.40 |
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$ |
1.11 |
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$ |
3.65 |
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$ |
3.09 |
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Diluted: |
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Income from continuing operations |
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$ |
1.37 |
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$ |
1.08 |
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$ |
3.78 |
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$ |
3.02 |
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Charge from discontinued operations |
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.21 |
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Net income |
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$ |
1.37 |
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$ |
1.08 |
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$ |
3.57 |
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$ |
3.02 |
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Cash dividends per common share |
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$ |
.37 |
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$ |
.37 |
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$ |
1.11 |
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$ |
1.11 |
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The accompanying notes are an integral part of these statements.
-2-
COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2006 |
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2005 |
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(in millions) |
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ASSETS |
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Cash and cash equivalents |
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$ |
243.9 |
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$ |
452.8 |
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Receivables |
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960.8 |
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842.4 |
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Inventories |
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642.2 |
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538.7 |
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Deferred income taxes and other current assets |
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262.4 |
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297.2 |
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Total current assets |
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2,109.3 |
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2,131.1 |
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Property, plant and equipment, less accumulated depreciation |
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662.8 |
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673.7 |
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Goodwill |
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2,315.8 |
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2,084.0 |
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Deferred income taxes and other noncurrent assets |
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334.4 |
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326.3 |
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Total assets |
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$ |
5,422.3 |
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$ |
5,215.1 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Short-term debt |
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$ |
6.3 |
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$ |
7.6 |
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Accounts payable |
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455.3 |
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427.8 |
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Accrued liabilities |
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526.9 |
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518.0 |
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Current discontinued operations liability |
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207.5 |
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196.3 |
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Current maturities of long-term debt |
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300.5 |
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11.4 |
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Total current liabilities |
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1,496.5 |
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1,161.1 |
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Long-term debt |
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703.3 |
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1,002.9 |
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Postretirement benefits other than pensions |
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152.7 |
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163.0 |
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Long-term discontinued operations liability |
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330.0 |
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330.0 |
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Other long-term liabilities |
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392.1 |
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352.9 |
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Total liabilities |
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3,074.6 |
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3,009.9 |
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Common stock, $.01 par value |
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0.9 |
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0.9 |
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Capital in excess of par value |
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255.4 |
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383.2 |
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Retained earnings |
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2,229.8 |
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1,997.4 |
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Accumulated other nonowner changes in equity |
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(138.4 |
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(176.3 |
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Total shareholders equity |
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2,347.7 |
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2,205.2 |
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Total liabilities and shareholders equity |
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$ |
5,422.3 |
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$ |
5,215.1 |
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The accompanying notes are an integral part of these statements.
-3-
COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended |
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September 30, |
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2006 |
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2005 |
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(in millions) |
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Cash flows from operating activities: |
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Net income |
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$ |
335.4 |
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$ |
287.1 |
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Plus: charge related to discontinued operations |
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20.3 |
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Income from continuing operations |
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355.7 |
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287.1 |
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Adjustments to reconcile to net cash provided by operating activities: |
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Depreciation and amortization |
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85.0 |
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84.1 |
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Deferred income taxes |
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12.6 |
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5.0 |
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Excess tax benefits from stock options and awards |
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(21.4 |
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Restructuring charge payments |
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(0.4 |
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Changes in assets and liabilities: (1) |
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Receivables |
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(87.8 |
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(114.3 |
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Inventories |
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(81.5 |
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(54.5 |
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Accounts payable and accrued liabilities |
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(0.9 |
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8.3 |
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Other assets and liabilities, net |
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113.0 |
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85.2 |
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Net cash provided by operating activities |
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374.7 |
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300.5 |
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Cash flows from investing activities: |
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Capital expenditures |
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(58.1 |
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(71.8 |
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Cash paid for acquired businesses |
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(279.4 |
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(2.4 |
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Proceeds from sales of property, plant and equipment and other |
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18.4 |
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6.6 |
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Net cash used in investing activities |
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(319.1 |
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(67.6 |
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Cash flows from financing activities: |
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Proceeds from issuances of debt |
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1.4 |
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Repayments of debt |
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(13.3 |
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(270.1 |
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Dividends |
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(103.0 |
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(103.8 |
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Subsidiary purchase of parent shares |
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(261.7 |
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(166.2 |
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Excess tax benefits from stock options and awards |
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21.4 |
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Activity under employee stock plans and other |
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81.1 |
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54.7 |
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Net cash used in financing activities |
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(275.5 |
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(484.0 |
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Effect of exchange rate changes on cash and cash equivalents |
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11.0 |
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(25.7 |
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Decrease in cash and cash equivalents |
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(208.9 |
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(276.8 |
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Cash and cash equivalents, beginning of period |
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452.8 |
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652.8 |
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Cash and cash equivalents, end of period |
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$ |
243.9 |
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$ |
376.0 |
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(1) |
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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.
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 Coopers 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
Coopers accounting policies, refer to the Consolidated Financial Statements and related notes for
the year ended December 31, 2005 included in Part IV of Coopers 2005 Annual Report on Form 10-K.
Impact of New Accounting Standards - In June 2006, the Financial Accounting Standards Board
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the
Interpretation). This Interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
Interpretation prescribes a more-likely-than not recognition threshold that a tax position will be
sustained upon examination and a measurement attribute for the financial statement recognition of a
tax position taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The cumulative effect of applying the provisions of this Interpretation shall
be reported as an adjustment to the opening balance of retained earnings in 2007. Cooper is
currently evaluating the impact of the Interpretation on its consolidated financial statements.
In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (the Statement). This Statement requires an employer to recognize the
overfunded or underfunded status of a defined benefit pension plan as an asset or liability on its
balance sheet and recognize changes in its funded status in the year in which the change occurs
through accumulated other nonowner changes in equity. The Statement is effective as of the end of
the fiscal year ending after December 15, 2006. Cooper is currently evaluating the impact of the
Statement on its consolidated financial position, which is anticipated to not be material.
Note 2. Stock-Based Compensation
Effective January 1, 2003, Cooper adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), as amended. Cooper utilized the
prospective method of adoption. Cooper accounted 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). In accordance with APB No. 25, compensation expense
was recognized for performance-based and restricted stock awards. No compensation expense was
recognized under Coopers fixed stock option plans or Employee Stock Purchase Plan for grants prior
to January 1, 2003.
SFAS No. 123 provided an alternative fair value based method for recognizing stock-based
compensation in which compensation expense was measured at the grant date based on the value of the
award and recognized over the service period, which was usually the vesting period. The fair
value of stock options was estimated on the grant date, using the Black-Scholes-Merton option-pricing model.
The fair
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value of restricted stock and performance-based awards granted were measured at the market
price on the grant date.
The following table presents pro forma net income and earnings per share as if the fair value
recognition provisions of SFAS No. 123 had been applied to all outstanding and unvested awards in
2005. In 2005, there were essentially two remaining differences between as reported and pro-forma
net income and earnings per share. First, Cooper accounted for awards granted prior to January 1,
2003 using the intrinsic value method, whereas the pro-forma amounts reflect those award grants as
calculated under SFAS No. 123. Secondly, the pro-forma amounts reflect recognition of the tax
benefits of disqualifying dispositions of incentive stock options in accordance with SFAS No. 123.
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Three Months Ended |
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Nine Months Ended |
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September 30, 2005 |
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September 30, 2005 |
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(in millions, except per share amounts) |
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Net income, as reported |
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$102.0 |
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$287.1 |
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Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects |
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8.3 |
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18.5 |
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Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects |
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(8.0 |
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(16.1 |
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Pro-forma net income |
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$102.3 |
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$289.5 |
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Earnings per share: |
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Basic as reported |
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$1.11 |
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$3.09 |
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Basic pro-forma |
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$1.11 |
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$3.12 |
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Diluted as reported |
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$1.08 |
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$3.02 |
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Diluted pro-forma |
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$1.08 |
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$3.05 |
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In December 2004, the Financial Accounting Standards Board issued FASB Statement 123(R),
Share-Based Payment, which is a revision of SFAS No. 123. Statement 123(R) also supersedes APB No.
25, and amends FASB Statement No. 95, Statement of Cash Flows. Effective January 1, 2006, Cooper
adopted Statement 123(R) using the modified prospective method. Recognition of compensation cost
is based on the requirements of Statement 123(R) for all share-based payments granted after January
1, 2006 and based on the requirements of SFAS No. 123 for all awards granted to employees prior to
January 1, 2006 that remained unvested on that date.
Cooper adopted SFAS No. 123 using the prospective transition method, which applied only to
awards granted, modified or settled after the adoption date. Accordingly, compensation expense for
some previously granted awards that were not recognized under SFAS No. 123 is recognized under
Statement 123(R). However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share above.
Cooper uses the Black-Scholes-Merton formula to estimate the value of stock options granted to
employees, as well as the straight-line recognition method for awards subject to graded vesting.
Cooper has recorded an estimate for forfeitures of 2006 awards of stock options, performance-based
shares and restricted stock units. This estimate will be adjusted as actual forfeitures differ
from the estimate. Prior to adoption of Statement 123(R), forfeitures were accounted for as
recognized when they actually occurred. Upon adoption of Statement 123(R), the cumulative effect
of this change in accounting principle to reflect compensation expense that would not have been
recognized in periods prior to 2006, had forfeitures been estimated during these periods, was
immaterial.
-6-
Statement 123(R) also requires the benefits of tax deductions in excess of recognized
compensation expense be reported as a financing cash flow, rather than as an operating cash flow.
This requirement reduced net operating cash flows and increased net financing cash flows during the
nine months ended September 30, 2006 by $21.4 million.
Cooper has a share-based compensation plan known as the Amended and Restated Stock Incentive
Plan (the Plan). The Plan provides for the granting of stock options, performance-based share
awards and restricted stock units. Since the original Plans inception in 1996, the aggregate
number of shares authorized under the Plan is 17 million. As of September 30, 2006, 2,627,899
shares remain available for future grants under the Plan all of which are available for grants of
performance-based shares and restricted stock units. Activity for each of these stock-incentive
awards is discussed in more detail below. Total compensation expense for all share-based
compensation arrangements under the Plan was $22.8 million and $30.0 million during the nine months
ended September 30, 2006 and 2005, respectively. The total income tax benefit recognized in the
income statement for all share-based compensation arrangements under the Plan was $8.1 million and
$11.5 million during the nine months ended September 30, 2006 and 2005, respectively.
Stock Options
Stock option awards are granted with an exercise price no less than the market price of
Coopers stock at the date of grant. Stock option awards generally vest over a three-year period
with one-third vesting in each successive year so that the option is fully exercisable after three
years and generally have five-, seven- and ten-year contractual terms. Stock option awards provide
that, upon a change in control in Cooper (as defined in the Plan), all options will be cancelled
and Cooper will make a cash payment to the employee equal to the difference in the fair market
value of Cooper Class A common shares (or the highest price actually paid for the stock in
connection with the change in control, if higher) and the option price.
The fair value of each stock option award is estimated on the date of grant using the
Black-Scholes-Merton option valuation model using the assumptions noted in the following table.
Expected volatility in 2006 is based on implied volatilities from traded options on Cooper stock,
historical volatility of Cooper stock, and other factors. Cooper believes that the resulting
blended volatility represents a more accurate estimate of potential fluctuations in Cooper stock.
Cooper uses historical data to estimate employee termination experience. The expected term of
options granted is determined based on historical exercise behavior. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Expected volatility |
|
|
18.0 |
% |
|
|
27.7 |
% |
Expected dividends |
|
|
1.8 |
% |
|
|
2.1 |
% |
Expected term (in years) |
|
|
4.5 |
|
|
|
5.0 |
|
Risk-free rate |
|
|
4.6 |
% |
|
|
3.7 |
% |
-7-
A summary of option activity under the Plan as of September 30, 2006, and changes during the
nine months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
(in millions) |
|
Outstanding at January 1, 2006 |
|
|
5,428,821 |
|
|
$ |
48.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
805,600 |
|
|
$ |
82.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,759,729 |
) |
|
$ |
44.15 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(93,566 |
) |
|
$ |
67.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
4,381,126 |
|
|
$ |
56.53 |
|
|
|
4.5 |
|
|
$ |
126.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
September 30, 2006 |
|
|
4,329,550 |
|
|
$ |
56.23 |
|
|
|
4.8 |
|
|
$ |
125.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
2,560,536 |
|
|
$ |
44.83 |
|
|
|
3.7 |
|
|
$ |
103.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair values of options granted during the nine months
ended September 30, 2006 and 2005 were $16.00 and $17.37, respectively. The total intrinsic value
of options exercised during the nine months ended September 30, 2006 and 2005 was $71.8 million and
$36.8 million, respectively.
As of September 30, 2006, total unrecognized compensation expense related to nonvested stock
options was $18.4 million. This expense is expected to be recognized over a weighted-average
period of 1.7 years. The total fair value of stock options vested during the nine months ended
September 30, 2006 and 2005 was $12.6 million and $8.5 million, respectively.
Performance-Based Shares and Restricted Stock Units
Under the Plan, Cooper grants certain executives and other key employees performance-based
share awards with vesting contingent upon meeting Company-wide performance goals, typically tied to
cumulative compound growth in earnings per share over a defined multi-year performance period.
Awards under the performance-based component of the Plan are typically arranged in levels, with
increasing numbers of shares earned as higher levels of growth are achieved. In order to earn the
performance shares, participants are generally required to remain actively employed by Cooper for
the performance period. Under the Plan, Cooper also awards grants of restricted stock units to
certain executives and other key employees in order to provide financial incentive to remain in the
employ of Cooper, thereby enhancing management continuity. Cooper may also utilize restricted
stock units for new executives and other key employees to replace equity compensation forfeited
upon resignation from their former employer. Restricted stock units vest pursuant to time-based
service conditions.
The fair value of each performance-based share and restricted stock unit was calculated at the
average (simple two-point high and low) market price on the date of grant. Performance goals for
the performance-based shares are currently assumed to be achieved at the maximum level. If
goal-level assumptions are not met, compensation expense is adjusted and previously recognized
compensation expense is reversed. Upon distribution of performance-based shares, Cooper also pays
the recipient cash equal to the aggregate amount of cash dividends that the recipient would have
received had they been the owner of record from the date of grant. Dividends on restricted stock
units are payable on the dividend payment date or on the date when restrictions lapse, depending
upon the specific award. For performance-based share and restricted stock unit awards, upon a
change in control in Cooper (as defined in the Plan), all restrictions on those awards will lapse
and shares shall be issued as otherwise provided in the Plan.
-8-
A summary of the status of Coopers nonvested performance-based shares as of September 30,
2006 and changes during the nine months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
Nonvested Performance-Based Shares |
|
Shares |
|
Fair Value |
Nonvested at January 1, 2006 |
|
|
962,138 |
|
|
$ |
55.05 |
|
Granted |
|
|
288,260 |
|
|
$ |
82.83 |
|
Vested |
|
|
(288,975 |
) |
|
$ |
37.58 |
|
Forfeited |
|
|
(73,324 |
) |
|
$ |
64.64 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
888,099 |
|
|
$ |
68.98 |
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of performance-based shares granted during the
nine months ended September 30, 2006 and 2005 was $82.83 and $69.25, respectively. The total
intrinsic value of performance-based shares awarded during the nine months ended September 30, 2006
and 2005 was $24.6 million and $23.9 million, respectively.
As of September 30, 2006, total unrecognized compensation expense related to nonvested
performance-based shares was $29.3 million. This expense is expected to be recognized over a
weighted-average period of 1.3 years. The total fair value of performance-based shares vested
during the nine months ended September 30, 2006 was $10.9 million. No performance-based shares
vested during the nine months ended September 30, 2005.
A summary of the status of Coopers nonvested restricted stock units as of September 30, 2006,
and changes during the nine months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
Nonvested Restricted Stock Units |
|
Shares |
|
Fair Value |
Nonvested at January 1, 2006 |
|
|
309,400 |
|
|
$ |
49.97 |
|
Granted |
|
|
40,800 |
|
|
$ |
86.61 |
|
Vested |
|
|
(102,600 |
) |
|
$ |
41.36 |
|
Forfeited |
|
|
(23,000 |
) |
|
$ |
48.78 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
224,600 |
|
|
$ |
60.68 |
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of restricted stock units granted during the
nine months ended September 30, 2006 and 2005 was $86.61 and $68.86, respectively. The total
intrinsic value of restricted stock units awarded during the nine months ended September 30, 2006
and 2005 was $3.5 million and $8.2 million, respectively.
As of September 30, 2006, total unrecognized compensation expense related to nonvested
restricted stock unit compensation arrangements was $7.6 million. This expense is expected to be
recognized over a weighted-average period of 2.5 years. The total fair value of restricted stock
units vested during the nine months ended September 30, 2006 and 2005 was $4.2 million and $0.3
million, respectively.
Cash received from stock option exercises during the nine months ended September 30, 2006 and
2005 was $81.1 million and $54.7 million, respectively. The actual tax benefit realized for the
tax deductions from option exercises totaled $26.2 million and $11.9 million, respectively, during
the nine months ended September 30, 2006 and 2005. Cash used to settle equity instruments granted
under all share-based payment arrangements during the nine months ended September 30, 2006 and 2005
was immaterial in both periods.
Cooper has a practice of repurchasing shares on the open market to satisfy shares issued for
option exercises and share awards and expects to repurchase approximately 2.6 million shares during
2006, based on estimates of option exercises and share awards vesting for the year.
-9-
The impact of adopting Statement 123(R) on January 1, 2006, on Coopers income from continuing
operations before income taxes, net income and basic and diluted earnings per share during the nine
months ended September 30, 2006 was immaterial.
Note 3. Acquisitions and Divestitures
Cooper completed four acquisitions during the nine months ended September 30, 2006. These
acquisitions were selected because of their strategic fit with existing Cooper businesses or were
new strategic lines that were complementary to Coopers operations. All of the acquisitions were
accounted for as purchases and the results of operations are included in Coopers consolidated
financial statements since the date of acquisition. Cooper makes an initial allocation of the
purchase price as of the date of acquisition, based on its understanding of the fair value of the
assets and liabilities acquired. In the months after the closing of the transaction, Cooper
obtains additional information about the assets and liabilities acquired and finalizes allocation
of the purchase price.
In August 2006, Cooper completed the acquisition of all of the outstanding stock of Cannon
Technologies, Inc. for $190.4 million, net of cash acquired, including acquisition costs. Cannon
is a provider of automation technologies for monitoring and metering, and energy management by
electrical utilities. The Cannon acquisition resulted in the recognition of a preliminary estimate
of goodwill of $150.0 million, primarily related to the future earnings and cash flow potential
resulting from Cannons rapidly expanding customer base. Purchased research and development costs
acquired and written off of $4.2 million pre-tax were included in cost of sales.
In the first nine months of 2006, Cooper acquired three additional companies for total
consideration of $89.0 million, net of cash acquired, including acquisition costs. In general, the
acquired businesses were manufacturers and assemblers of electrical products, in markets such as
aerospace, subsea, military, industrial and fire and safety. These companies were all
complementary to existing businesses owned by Cooper and resulted in aggregate goodwill of $41.0
million.
In July 2006, Cooper divested one small business within the Electrical Products segment for
aggregate proceeds of $11.5 million. A pre-tax gain of $4.7 million was recognized on the
divestiture.
The following table summarizes the aggregate estimated preliminary fair values of the assets
acquired and the liabilities assumed at the date of acquisition for the acquisitions consummated
during the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cannon |
|
|
All Others |
|
|
Total |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Receivables |
|
$ |
6.5 |
|
|
$ |
8.7 |
|
|
$ |
15.2 |
|
Inventories |
|
|
4.6 |
|
|
|
12.6 |
|
|
|
17.2 |
|
Property, Plant and Equipment |
|
|
1.7 |
|
|
|
8.5 |
|
|
|
10.2 |
|
Goodwill |
|
|
150.0 |
|
|
|
41.0 |
|
|
|
191.0 |
|
Other intangible assets |
|
|
55.5 |
|
|
|
33.0 |
|
|
|
88.5 |
|
Accounts payable |
|
|
(3.8 |
) |
|
|
(1.9 |
) |
|
|
(5.7 |
) |
Other assets and liabilities, net |
|
|
(24.1 |
) |
|
|
(12.9 |
) |
|
|
(37.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash consideration |
|
$ |
190.4 |
|
|
$ |
89.0 |
|
|
$ |
279.4 |
|
|
|
|
|
|
|
|
|
|
|
Cooper continues to evaluate the fair value of the assets and liabilities acquired during the
nine months ended September 30, 2006 and will adjust the allocations as additional information
relative to the businesses becomes available for up to one year from the acquisition date.
Pro-forma results of operations for 2006 and 2005, assuming the acquisitions had been made at
the beginning of the year, would not be materially different from reported results.
-10-
Note 4. Inventories
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Raw materials |
|
$ |
213.0 |
|
|
$ |
206.1 |
|
Work-in-process |
|
|
171.4 |
|
|
|
137.9 |
|
Finished goods |
|
|
383.2 |
|
|
|
303.7 |
|
Perishable tooling and supplies |
|
|
14.1 |
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
781.7 |
|
|
|
662.1 |
|
Allowance for excess and obsolete inventory |
|
|
(68.5 |
) |
|
|
(58.7 |
) |
Excess of current standard costs over LIFO costs |
|
|
(71.0 |
) |
|
|
(64.7 |
) |
|
|
|
|
|
|
|
Net inventories |
|
$ |
642.2 |
|
|
$ |
538.7 |
|
|
|
|
|
|
|
|
Note 5. Shareholders Equity
At September 30, 2006, 90,909,772 Class A common shares, $.01 par value were issued and
outstanding (excluding the 12,910,501 Class A common shares held by wholly-owned subsidiaries as
discussed below) compared to 91,556,569 Class A common shares, $.01 par value (excluding the
9,850,101 Class A common shares held by wholly-owned subsidiaries) at December 31, 2005. During
the nine months ended September 30, 2006, Cooper issued 2,413,603 Class A common shares primarily
in connection with employee incentive and benefit plans and Coopers dividend reinvestment program.
During the nine months ended September 30, 2006, Coopers wholly-owned subsidiaries purchased
3,060,400 Class A common shares for $261.7 million under Coopers share repurchase plan. The share
purchases are recorded by Coopers wholly-owned subsidiaries as an investment in its parent company
that is eliminated in consolidation.
A wholly-owned subsidiary also owns all the issued and outstanding Class B common shares. The
subsidiarys 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, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Electrical Products |
|
$ |
1,127.4 |
|
|
$ |
1,027.5 |
|
|
$ |
3,291.5 |
|
|
$ |
3,006.4 |
|
Tools |
|
|
187.2 |
|
|
|
182.9 |
|
|
|
551.8 |
|
|
|
538.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,314.6 |
|
|
$ |
1,210.4 |
|
|
$ |
3,843.3 |
|
|
$ |
3,544.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Electrical Products |
|
$ |
186.4 |
|
|
$ |
158.2 |
|
|
$ |
524.0 |
|
|
$ |
441.8 |
|
Tools |
|
|
24.3 |
|
|
|
15.5 |
|
|
|
61.2 |
|
|
|
46.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings |
|
|
210.7 |
|
|
|
173.7 |
|
|
|
585.2 |
|
|
|
487.8 |
|
General Corporate expenses |
|
|
24.1 |
|
|
|
27.3 |
|
|
|
68.8 |
|
|
|
70.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating earnings |
|
|
186.6 |
|
|
|
146.4 |
|
|
|
516.4 |
|
|
|
417.7 |
|
Interest expense, net |
|
|
14.0 |
|
|
|
16.5 |
|
|
|
38.5 |
|
|
|
52.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
$ |
172.6 |
|
|
$ |
129.9 |
|
|
$ |
477.9 |
|
|
$ |
365.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Pension and Other Postretirement Benefits
During June 2006, Cooper announced that, effective January 1, 2007, future benefit accruals
will cease under the Cooper U. S. Salaried Pension Plan. Benefits earned through December 31, 2006
will remain in each participants Salaried Pension Plan account. The account balance will
continue to earn interest credits until a participant is eligible for and elects to receive the
plan benefit. Cooper recognized a curtailment loss of $4.2 million in the second quarter of 2006 as
a result of this action. Beginning in 2007, Cooper will make a cash contribution equal to 3% of
compensation to the Retirement Savings and Stock-Ownership Plan (CO-SAV). Cooper will further
increase the company-matching contribution under the CO-SAV plan to a dollar-for-dollar match up to
6% of employee contributions.
Cooper also announced the elimination of postretirement life insurance for active employees,
effective January 1, 2007. As a result, Cooper recognized a curtailment gain of $3.2 million in
the second quarter of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
4.1 |
|
|
$ |
4.2 |
|
|
$ |
12.5 |
|
|
$ |
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
10.4 |
|
|
|
9.8 |
|
|
|
31.1 |
|
|
|
30.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(12.2 |
) |
|
|
(12.0 |
) |
|
|
(36.9 |
) |
|
|
(37.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss |
|
|
2.9 |
|
|
|
2.4 |
|
|
|
10.1 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment loss |
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5.3 |
|
|
$ |
4.6 |
|
|
$ |
21.4 |
|
|
$ |
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-12-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
1.4 |
|
|
|
1.7 |
|
|
|
4.1 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(0.5 |
) |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial gain |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
(2.1 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) cost |
|
$ |
0.2 |
|
|
$ |
1.0 |
|
|
$ |
(2.6 |
) |
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Income Taxes
The effective tax rate was 25.6% for the nine months ended September 30, 2006 and 21.5% for
the nine months ended September 30, 2005. The rate increase is primarily related to increased
earnings in 2006 without a corresponding increase in tax benefits.
Cooper is under examination by the Internal Revenue Service for the 2002-2004 tax years.
Cooper is also under examination by various United States state and local taxing authorities as
well as various taxing authorities in other countries. Cooper fully cooperates with all audits,
but defends existing positions vigorously. These audits are in various stages of completion. To
provide for potential tax exposures, Cooper maintains an allowance for tax contingencies, which
management believes is adequate. The results of future audit assessments, if any, could have a
material effect on Coopers cash flows as these audits are completed. However, management does not
believe that any of these matters will have a material adverse effect on Coopers consolidated
results of operations.
In 2005, Cooper protested the Internal Revenue Service examination findings for the 2000-2001
tax years. The Internal Revenue Service has challenged Coopers treatment of gains and interest
deductions claimed on its 2000 and 2001 federal income tax returns, relating to transactions
involving government securities. If the proposed adjustments are upheld, it would require that
Cooper pay approximately $26.5 million in taxes plus accrued interest for those years. There would
be an additional payment related to those items for the 2002-2003 tax years of approximately $67.2
million in taxes plus accrued interest if the Internal Revenue Service prevails in its proposed
treatment for the 2000-2001 tax years. 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
and 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 Coopers consolidated financial condition or results of
operations.
-13-
Note 9. Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
128.2 |
|
|
$ |
102.0 |
|
|
$ |
355.7 |
|
|
$ |
287.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge from discontinued operations |
|
|
|
|
|
|
|
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
128.2 |
|
|
$ |
102.0 |
|
|
$ |
335.4 |
|
|
$ |
287.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
91.4 |
|
|
|
92.3 |
|
|
|
92.0 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
128.2 |
|
|
$ |
102.0 |
|
|
$ |
355.7 |
|
|
$ |
287.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge from discontinued operations |
|
|
|
|
|
|
|
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
128.2 |
|
|
$ |
102.0 |
|
|
$ |
335.4 |
|
|
$ |
287.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
91.4 |
|
|
|
92.3 |
|
|
|
92.0 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, performance-based stock
awards and other employee awards |
|
|
1.9 |
|
|
|
2.5 |
|
|
|
2.0 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and common share equivalents |
|
|
93.3 |
|
|
|
94.8 |
|
|
|
94.0 |
|
|
|
95.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Net income |
|
$ |
128.2 |
|
|
$ |
102.0 |
|
|
$ |
335.4 |
|
|
$ |
287.1 |
|
Foreign currency translation gains (losses) |
|
|
15.8 |
|
|
|
(6.9 |
) |
|
|
34.8 |
|
|
|
(20.4 |
) |
Change in fair value of derivatives |
|
|
3.9 |
|
|
|
1.2 |
|
|
|
3.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and other nonowner
changes in equity |
|
$ |
147.9 |
|
|
$ |
96.3 |
|
|
$ |
373.3 |
|
|
$ |
266.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 included plans for
the withdrawal
-14-
from a multiple-employer pension plan. Cooper recorded a $12.5 million obligation as an
estimate of Coopers portion of unfunded benefit obligations of the plan. In 2005, Cooper reached
a final agreement related to withdrawal from the multi-employer pension plan and recorded an
additional $4.0 million pre-tax charge. The multiple-employer pension obligation was satisfied
with a cash payment of $14.1 million in October 2006 representing full and final payment of the
withdrawal liability. The remaining $5.9 million charge primarily represented severance for
announced employment reductions at several locations. Substantially all of the severance payments
were made as of March 31, 2006.
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.
See Restructuring in Managements 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, 2006, a total of 140,813 Abex Claims were filed, of which
109,325 claims have been resolved leaving 31,488 Abex Claims pending at September 30, 2006, that
are the responsibility of Federal-Mogul. During the three months ended September 30, 2006, 1,405
claims were filed and 8,735 claims were resolved. Since August 28, 1998, the average indemnity
payment for resolved Abex Claims was $1,965 before insurance. A total of $100.7 million was spent
on defense costs for the period August 28, 1998 through September 30, 2006. Historically, existing
insurance coverage has provided 50% to 80% of the total defense and indemnity payments for Abex
Claims. However, insurance recovery is currently at a lower percentage (approximately 30%) due to
exhaustion of primary layers of coverage and litigation with certain excess insurers.
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 Coopers analysis of its contingent
liability exposure resulting from Federal-Moguls 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.
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 of Federal-Mogul, its bankruptcy committees and the future
claimants (the Representatives) regarding participation in Federal-Moguls proposed 524(g)
asbestos trust. Based on the status of the negotiations in 2004, Cooper concluded that it was
probable that Federal-Mogul would reject
-15-
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.
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 income tax benefit, in the fourth quarter
of 2003.
In December 2005, Cooper announced that the Company and other parties involved in the
resolution of the Federal-Mogul bankruptcy proceeding had reached an agreement regarding Coopers
participation in Federal Moguls proposed 524 (g) asbestos trust. By participating in this trust,
Cooper would resolve its liability for asbestos claims arising from Coopers former Abex Friction
Products business. The proposed settlement agreement was subject to court approval, approval of 75
percent of the current Abex asbestos claimants and certain other approvals. The settlement would
resolve more than 38,000 pending Abex Claims as of December 2005. Future claims would be resolved
through the bankruptcy trust, and Cooper would be protected against future claims by an injunction
to be issued by the district court upon plan confirmation.
Key terms and aspects of the proposed settlement agreement included Cooper agreeing to pay
$130 million in cash into the trust, with $115 million payable upon Federal-Moguls emergence from
bankruptcy. The remainder would be due on January 15, 2007, or upon emergence from bankruptcy, if
later. Cooper would receive a total of $37.5 million during the funding period from other parties
associated with the Federal-Mogul bankruptcy. Cooper would further provide the trust 1.4 million
shares of the Companys stock upon Federal-Moguls emergence from bankruptcy. The agreement
provided that the trust may, during the first year after issuance, sell these shares to Cooper at
market prices and, thereafter, in open market transactions.
The proposed settlement agreement also provided for further payments by Cooper subject to the
amount and timing of insurance proceeds. Cooper agreed to make 25 annual payments of up to $20
million each, reduced by certain insurance proceeds received by the trust. In years that the
insurance proceeds exceed $17 million, Cooper would be required to contribute $3 million with the
excess insurance proceeds carried over to the next year. The trust would retain 10 percent of the
insurance proceeds for indemnity claims paid by the trust until Coopers obligation is satisfied
and would retain 15 percent thereafter. The agreement also provided for Cooper to receive the
insurance proceeds related to indemnity and defense costs paid prior to the date a stay of current
claims is entered by the bankruptcy court. Cooper would also be required to forego certain claims
and objections in the Federal-Mogul bankruptcy proceedings. In addition, the parties involved had
agreed to petition the court for a stay on all current claims outstanding.
Although the payments related to the settlement could extend to 25 years and the collection of
insurance proceeds could extend beyond 25 years, the liability and insurance would be undiscounted
on Coopers balance sheet as the amount of the actual annual payments is not reasonably
predictable.
A critical term of the proposed settlement was the issuance of a preliminary injunction
staying all pending Abex asbestos claims. At a hearing on January 20, 2006, other parties to the
bankruptcy proceedings were unable to satisfy the courts requirements to grant the required
preliminary injunction. As a result, the proposed settlement agreement required renegotiation of
certain terms. The final determination of whether Cooper would participate in the Federal-Mogul
524(g) trust was unknown. However, Cooper management concluded that, at the date of the filing of
its 2005 Form 10-K, the most likely outcome in the range of potential outcomes was a revised
settlement approximating the December 2005 proposed settlement. Accordingly, Cooper recorded a
$227.2 million after-tax discontinued operations charge, net of a $127.8 million income tax
benefit, in the fourth quarter of 2005.
-16-
The fourth quarter 2005 charge to discontinued operations included payments to a 524(g) trust
over 25 years that were undiscounted, and the insurance recoveries only included recoveries where
insurance in place agreements, settlements or policy recoveries were probable. If the negotiations
with the Representatives in early 2004 had resulted in an agreement, Cooper would have paid all the
consideration when Federal-Mogul emerged from bankruptcy and the 524(g) trust was formed and would
have relinquished all rights to insurance. The lack of discounting and the limited recognition of
insurance recoveries in the fourth quarter 2005 charge to discontinued operations were a
significant component of the increase in the accrual for discontinued operations. While it is not
possible to quantify, the accrual for discontinued operations also includes a premium for resolving
the inherent uncertainty associated with resolving Abex Claims though the tort system. If Cooper
is unable to reach a settlement to participate in the Federal-Mogul 524(g) trust,
the accrual for discontinued operations potentially may have to be reduced to the estimated
liability and related insurance recoveries through the tort system. There are numerous assumptions
that are required to project the liability in the tort system and Cooper has not completed the
analysis and determined the liability that would be recorded under this scenario.
Cooper, through Pneumo-Abex LLC, has access to Abex insurance policies with remaining limits
on policies with solvent insurers in excess of $750 million. Cooper included insurance recoveries
of approximately $215 million pre-tax in the fourth quarter 2005 charge to discontinued operations
discussed above. Cooper believes that it is likely that additional insurance recoveries will be
recorded in the future as new insurance in place agreements are consummated and settlements with
insurance carriers are completed. However, extensive litigation with the insurance carriers may be
required to receive those additional recoveries.
On July 7, 2006, Cooper announced a revised agreement had been reached regarding Coopers
participation in Federal-Moguls 524(g) trust. The revised proposed settlement agreement remains
subject to court approval, to approval by 75 percent of the current Abex asbestos claimants and to
certain other approvals.
Key terms and aspects of the revised proposed settlement agreement include Cooper agreeing to
pay $256 million in cash into the trust on the date Federal-Mogul emerges from bankruptcy, which
includes elimination of the contribution of 1.4 million common shares to the trust by increasing
the cash contribution. Removing the Companys common stock as a component of the revised
settlement agreement eliminates additional charges and reversals of charges that may have occurred
to account for any changes in the market value of the Companys stock. Cooper has or will receive
$37.5 million from other parties toward its cash obligation.
As in the December 2005 agreement, Cooper has agreed to make 25 annual payments of up to $20
million each to the trust with such payments being reduced by insurance proceeds. The minimum
annual payment of $3 million in the December 2005 agreement has been eliminated. However, Cooper
has agreed to make advances, beginning in 2015 through 2021, in the event the trust is unable to
pay outstanding qualified claims at 100 percent of the value provided for in the trust agreement.
In the event that advances are made by Cooper, they will accrue interest at 5 percent per annum,
and will be repaid in years where excess funds are available in the trust or credited against the
future year annual payments. The maximum advances are $36.6 million.
Cooper will pay all defense costs through the date Federal-Mogul emerges from bankruptcy and
will be reimbursed for indemnity payments to the extent such payments are eligible for payment from
the trust. Cooper will retain the rights to receive the insurance proceeds related to indemnity
and defense costs paid prior to the date Federal-Mogul emerges from bankruptcy. For claims paid by
the trust, the trust will retain 10 percent of any reimbursed insurance proceeds for the first 25
years and thereafter will retain 15 percent.
As in the December 2005 proposed agreement, Cooper will forego certain claims and objections
in the Federal-Mogul bankruptcy proceedings. However, under the revised proposed agreement, which
is subject to court approval, in the event that Coopers participation in the Federal-Mogul 524(g)
trust is not approved for any reason, Cooper would receive a cash payment of $138 million on the
date Federal-Mogul
-17-
emerges from bankruptcy and 20 percent of any insurance policy settlements related to the former Wagner business purchased by Federal-Mogul in 1998. If Cooper participates
in the trust, it will receive 12 percent of any Wagner insurance settlements.
Accordingly, Cooper recorded a $20.3 million after-tax discontinued operations charge, net of
an $11.4 million income tax benefit, in the second quarter of 2006.
From a cash flow perspective, Cooper management continues to believe that a settlement on the
terms of the revised agreement would allow Cooper to continue to grow through acquisitions and
return cash to shareholders through dividends and stock repurchases. The settlement agreement
remains 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
$537.5 million at September 30, 2006 and $526.3 million at December 31, 2005.
Note 13. Consolidating Financial Information
Cooper and certain of its principal operating subsidiaries (the Guarantors) fully and
unconditionally guarantee, on a joint and several basis, the registered debt securities of Cooper
Industries, LLC and Cooper US, Inc. The following condensed consolidating financial information is
included so that separate financial statements of Cooper Industries, LLC, Cooper US, Inc. or the
Guarantors 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.
-18-
Consolidating Income Statements
Three Months Ended September 30, 2006
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc. |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
860.9 |
|
|
$ |
508.3 |
|
|
$ |
(54.6 |
) |
|
$ |
1,314.6 |
|
Cost of sales |
|
|
|
|
|
|
(0.2 |
) |
|
|
0.5 |
|
|
|
598.5 |
|
|
|
343.0 |
|
|
|
(54.6 |
) |
|
|
887.2 |
|
Selling and administrative expenses |
|
|
2.0 |
|
|
|
4.9 |
|
|
|
16.8 |
|
|
|
126.0 |
|
|
|
91.1 |
|
|
|
|
|
|
|
240.8 |
|
Interest expense, net |
|
|
(0.2 |
) |
|
|
11.7 |
|
|
|
3.6 |
|
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
14.0 |
|
Equity in earnings of
subsidiaries, net of tax |
|
|
159.9 |
|
|
|
(136.8 |
) |
|
|
98.4 |
|
|
|
22.3 |
|
|
|
96.2 |
|
|
|
(240.0 |
) |
|
|
|
|
Intercompany income (expense) |
|
|
(4.9 |
) |
|
|
145.0 |
|
|
|
3.0 |
|
|
|
(105.5 |
) |
|
|
(12.7 |
) |
|
|
(24.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
153.2 |
|
|
|
(8.2 |
) |
|
|
80.5 |
|
|
|
53.2 |
|
|
|
158.8 |
|
|
|
(264.9 |
) |
|
|
172.6 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
(7.7 |
) |
|
|
(15.9 |
) |
|
|
11.7 |
|
|
|
56.3 |
|
|
|
|
|
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
153.2 |
|
|
$ |
(0.5 |
) |
|
$ |
96.4 |
|
|
$ |
41.5 |
|
|
$ |
102.5 |
|
|
$ |
(264.9 |
) |
|
$ |
128.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc. |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
820.2 |
|
|
$ |
430.2 |
|
|
$ |
(40.0 |
) |
|
$ |
1,210.4 |
|
Cost of sales |
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
573.5 |
|
|
|
294.9 |
|
|
|
(40.0 |
) |
|
|
828.1 |
|
Selling and administrative expenses |
|
|
2.0 |
|
|
|
4.1 |
|
|
|
21.6 |
|
|
|
124.7 |
|
|
|
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 |
|
|
|
94.6 |
|
|
|
(90.8 |
) |
|
|
66.9 |
|
|
|
(202.4 |
) |
|
|
|
|
Intercompany income (expense) |
|
|
(1.8 |
) |
|
|
(10.3 |
) |
|
|
(32.3 |
) |
|
|
(88.4 |
) |
|
|
149.5 |
|
|
|
(16.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
118.7 |
|
|
|
(18.6 |
) |
|
|
42.0 |
|
|
|
(57.2 |
) |
|
|
264.1 |
|
|
|
(219.1 |
) |
|
|
129.9 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
(10.3 |
) |
|
|
(24.8 |
) |
|
|
10.3 |
|
|
|
52.7 |
|
|
|
|
|
|
|
27.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
118.7 |
|
|
$ |
(8.3 |
) |
|
$ |
66.8 |
|
|
$ |
(67.5 |
) |
|
$ |
211.4 |
|
|
$ |
(219.1 |
) |
|
$ |
102.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-19-
Consolidating Income Statements
Nine Months Ended September 30, 2006
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc. |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,529.1 |
|
|
$ |
1,486.5 |
|
|
$ |
(172.3 |
) |
|
$ |
3,843.3 |
|
Cost of sales |
|
|
|
|
|
|
(0.6 |
) |
|
|
0.5 |
|
|
|
1,767.3 |
|
|
|
1,009.4 |
|
|
|
(172.3 |
) |
|
|
2,604.3 |
|
Selling and administrative expenses |
|
|
7.5 |
|
|
|
12.6 |
|
|
|
48.4 |
|
|
|
385.8 |
|
|
|
268.3 |
|
|
|
|
|
|
|
722.6 |
|
Interest expense, net |
|
|
(0.5 |
) |
|
|
33.5 |
|
|
|
8.9 |
|
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
38.5 |
|
Equity in earnings of
subsidiaries, net of tax |
|
|
428.2 |
|
|
|
(118.3 |
) |
|
|
247.7 |
|
|
|
69.5 |
|
|
|
246.6 |
|
|
|
(873.7 |
) |
|
|
|
|
Intercompany income (expense) |
|
|
(12.2 |
) |
|
|
138.0 |
|
|
|
10.8 |
|
|
|
(318.3 |
) |
|
|
255.2 |
|
|
|
(73.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
409.0 |
|
|
|
(25.8 |
) |
|
|
200.7 |
|
|
|
127.2 |
|
|
|
714.0 |
|
|
|
(947.2 |
) |
|
|
477.9 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
(21.5 |
) |
|
|
(46.0 |
) |
|
|
23.6 |
|
|
|
166.1 |
|
|
|
|
|
|
|
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
409.0 |
|
|
|
(4.3 |
) |
|
|
246.7 |
|
|
|
103.6 |
|
|
|
547.9 |
|
|
|
(947.2 |
) |
|
|
355.7 |
|
Charge related to discontinued
operations, net of tax |
|
|
|
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
409.0 |
|
|
$ |
(24.6 |
) |
|
$ |
246.7 |
|
|
$ |
103.6 |
|
|
$ |
547.9 |
|
|
$ |
(947.2 |
) |
|
$ |
335.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc. |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,382.8 |
|
|
$ |
1,262.2 |
|
|
$ |
(100.6 |
) |
|
$ |
3,544.4 |
|
Cost of sales |
|
|
0.2 |
|
|
|
|
|
|
|
1.3 |
|
|
|
1,684.4 |
|
|
|
845.1 |
|
|
|
(100.6 |
) |
|
|
2,430.4 |
|
Selling and administrative expenses |
|
|
6.7 |
|
|
|
7.9 |
|
|
|
53.4 |
|
|
|
376.1 |
|
|
|
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 |
|
|
|
256.4 |
|
|
|
69.9 |
|
|
|
196.3 |
|
|
|
(942.0 |
) |
|
|
|
|
Intercompany income (expense) |
|
|
(4.3 |
) |
|
|
(37.1 |
) |
|
|
(77.7 |
) |
|
|
(209.2 |
) |
|
|
391.5 |
|
|
|
(63.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
350.2 |
|
|
|
(26.6 |
) |
|
|
126.9 |
|
|
|
183.0 |
|
|
|
737.4 |
|
|
|
(1,005.2 |
) |
|
|
365.7 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
(31.8 |
) |
|
|
(69.3 |
) |
|
|
38.7 |
|
|
|
141.0 |
|
|
|
|
|
|
|
78.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
350.2 |
|
|
$ |
5.2 |
|
|
$ |
196.2 |
|
|
$ |
144.3 |
|
|
$ |
596.4 |
|
|
$ |
(1,005.2 |
) |
|
$ |
287.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
Consolidating Balance Sheets
September 30, 2006
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc. |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
61.5 |
|
|
$ |
(2.3 |
) |
|
$ |
183.9 |
|
|
$ |
|
|
|
$ |
243.9 |
|
Receivables |
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
529.1 |
|
|
|
426.2 |
|
|
|
|
|
|
|
960.8 |
|
Inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357.9 |
|
|
|
284.3 |
|
|
|
|
|
|
|
642.2 |
|
Deferred income taxes and other current
assets |
|
|
|
|
|
|
141.2 |
|
|
|
39.6 |
|
|
|
47.5 |
|
|
|
34.1 |
|
|
|
|
|
|
|
262.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
0.8 |
|
|
|
141.2 |
|
|
|
106.6 |
|
|
|
932.2 |
|
|
|
928.5 |
|
|
|
|
|
|
|
2,109.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, less
accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
45.5 |
|
|
|
321.7 |
|
|
|
295.6 |
|
|
|
|
|
|
|
662.8 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,023.9 |
|
|
|
1,291.9 |
|
|
|
|
|
|
|
2,315.8 |
|
Investment in subsidiaries |
|
|
3,382.7 |
|
|
|
569.9 |
|
|
|
4,002.7 |
|
|
|
1,194.8 |
|
|
|
1,151.1 |
|
|
|
(10,301.2 |
) |
|
|
|
|
Investment in parent |
|
|
|
|
|
|
|
|
|
|
2,808.8 |
|
|
|
|
|
|
|
312.7 |
|
|
|
(3,121.5 |
) |
|
|
|
|
Intercompany accounts receivable |
|
|
675.5 |
|
|
|
797.8 |
|
|
|
|
|
|
|
1,075.6 |
|
|
|
631.7 |
|
|
|
(3,180.6 |
) |
|
|
|
|
Intercompany notes receivable |
|
|
83.9 |
|
|
|
24.3 |
|
|
|
741.5 |
|
|
|
8.4 |
|
|
|
3,970.1 |
|
|
|
(4,828.2 |
) |
|
|
|
|
Deferred income taxes and other
noncurrent assets |
|
|
|
|
|
|
53.5 |
|
|
|
24.5 |
|
|
|
88.3 |
|
|
|
168.1 |
|
|
|
|
|
|
|
334.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,142.9 |
|
|
$ |
1,586.7 |
|
|
$ |
7,729.6 |
|
|
$ |
4,644.9 |
|
|
$ |
8,749.7 |
|
|
$ |
(21,431.5 |
) |
|
$ |
5,422.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6.3 |
|
|
$ |
|
|
|
$ |
6.3 |
|
Accounts payable |
|
|
34.0 |
|
|
|
11.4 |
|
|
|
9.6 |
|
|
|
220.6 |
|
|
|
179.7 |
|
|
|
|
|
|
|
455.3 |
|
Accrued liabilities |
|
|
4.9 |
|
|
|
39.2 |
|
|
|
108.9 |
|
|
|
221.1 |
|
|
|
152.8 |
|
|
|
|
|
|
|
526.9 |
|
Current discontinued operations liability |
|
|
|
|
|
|
207.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207.5 |
|
Current maturities of long-term debt |
|
|
|
|
|
|
300.0 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
300.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
38.9 |
|
|
|
558.1 |
|
|
|
118.5 |
|
|
|
441.7 |
|
|
|
339.3 |
|
|
|
|
|
|
|
1,496.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
370.7 |
|
|
|
323.9 |
|
|
|
8.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
703.3 |
|
Intercompany accounts payable |
|
|
|
|
|
|
|
|
|
|
3,180.6 |
|
|
|
|
|
|
|
|
|
|
|
(3,180.6 |
) |
|
|
|
|
Intercompany notes payable |
|
|
478.2 |
|
|
|
322.3 |
|
|
|
1,870.0 |
|
|
|
1,705.8 |
|
|
|
451.9 |
|
|
|
(4,828.2 |
) |
|
|
|
|
Long-term discontinued operations
liability |
|
|
|
|
|
|
330.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330.0 |
|
Other long-term liabilities |
|
|
|
|
|
|
(13.4 |
) |
|
|
197.1 |
|
|
|
212.8 |
|
|
|
148.3 |
|
|
|
|
|
|
|
544.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
517.1 |
|
|
|
1,567.7 |
|
|
|
5,690.1 |
|
|
|
2,368.4 |
|
|
|
940.1 |
|
|
|
(8,008.8 |
) |
|
|
3,074.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
0.9 |
|
Class B common stock |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470.6 |
|
|
|
(470.6 |
) |
|
|
|
|
Capital in excess of par value |
|
|
3,366.6 |
|
|
|
|
|
|
|
50.9 |
|
|
|
1,393.5 |
|
|
|
5,168.1 |
|
|
|
(9,723.7 |
) |
|
|
255.4 |
|
Retained earnings |
|
|
263.9 |
|
|
|
129.5 |
|
|
|
2,138.0 |
|
|
|
868.6 |
|
|
|
2,281.2 |
|
|
|
(3,451.4 |
) |
|
|
2,229.8 |
|
Accumulated other non- owner changes in
equity |
|
|
(6.2 |
) |
|
|
(110.5 |
) |
|
|
(149.4 |
) |
|
|
14.4 |
|
|
|
(110.3 |
) |
|
|
223.6 |
|
|
|
(138.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,625.8 |
|
|
|
19.0 |
|
|
|
2,039.5 |
|
|
|
2,276.5 |
|
|
|
7,809.6 |
|
|
|
(13,422.7 |
) |
|
|
2,347.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
4,142.9 |
|
|
$ |
1,586.7 |
|
|
$ |
7,729.6 |
|
|
$ |
4,644.9 |
|
|
$ |
8,749.7 |
|
|
$ |
(21,431.5 |
) |
|
$ |
5,422.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-21-
Consolidating Balance Sheets
December 31, 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
64.1 |
|
|
$ |
|
|
|
$ |
144.4 |
|
|
$ |
(3.5 |
) |
|
$ |
247.8 |
|
|
$ |
|
|
|
$ |
452.8 |
|
Receivables |
|
|
0.1 |
|
|
|
|
|
|
|
8.6 |
|
|
|
469.7 |
|
|
|
364.0 |
|
|
|
|
|
|
|
842.4 |
|
Inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327.1 |
|
|
|
211.6 |
|
|
|
|
|
|
|
538.7 |
|
Deferred income taxes and other current
assets |
|
|
1.2 |
|
|
|
130.7 |
|
|
|
94.0 |
|
|
|
48.8 |
|
|
|
22.5 |
|
|
|
|
|
|
|
297.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
65.4 |
|
|
|
130.7 |
|
|
|
247.0 |
|
|
|
842.1 |
|
|
|
845.9 |
|
|
|
|
|
|
|
2,131.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, less
accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
41.0 |
|
|
|
339.5 |
|
|
|
293.2 |
|
|
|
|
|
|
|
673.7 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018.3 |
|
|
|
1,065.7 |
|
|
|
|
|
|
|
2,084.0 |
|
Investment in subsidiaries |
|
|
2,887.9 |
|
|
|
759.5 |
|
|
|
3,579.4 |
|
|
|
917.6 |
|
|
|
899.1 |
|
|
|
(9,043.5 |
) |
|
|
|
|
Investment in parent |
|
|
|
|
|
|
|
|
|
|
2,547.1 |
|
|
|
|
|
|
|
312.7 |
|
|
|
(2,859.8 |
) |
|
|
|
|
Intercompany accounts receivable |
|
|
588.4 |
|
|
|
550.5 |
|
|
|
|
|
|
|
1,367.3 |
|
|
|
589.9 |
|
|
|
(3,096.1 |
) |
|
|
|
|
Intercompany notes receivable |
|
|
43.9 |
|
|
|
23.5 |
|
|
|
651.1 |
|
|
|
0.8 |
|
|
|
3,683.4 |
|
|
|
(4,402.7 |
) |
|
|
|
|
Deferred income taxes and other
noncurrent assets |
|
|
|
|
|
|
223.5 |
|
|
|
48.7 |
|
|
|
(43.2 |
) |
|
|
97.3 |
|
|
|
|
|
|
|
326.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,585.6 |
|
|
$ |
1,687.7 |
|
|
$ |
7,114.3 |
|
|
$ |
4,442.4 |
|
|
$ |
7,787.2 |
|
|
$ |
(19,402.1 |
) |
|
$ |
5,215.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7.6 |
|
|
$ |
|
|
|
$ |
7.6 |
|
Accounts payable |
|
|
34.1 |
|
|
|
14.0 |
|
|
|
8.0 |
|
|
|
214.7 |
|
|
|
157.0 |
|
|
|
|
|
|
|
427.8 |
|
Accrued liabilities |
|
|
3.9 |
|
|
|
28.9 |
|
|
|
107.5 |
|
|
|
238.8 |
|
|
|
138.9 |
|
|
|
|
|
|
|
518.0 |
|
Current discontinued operations liability |
|
|
|
|
|
|
196.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196.3 |
|
Current maturities of long-term debt |
|
|
|
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
38.0 |
|
|
|
250.2 |
|
|
|
115.5 |
|
|
|
453.5 |
|
|
|
303.9 |
|
|
|
|
|
|
|
1,161.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
670.0 |
|
|
|
323.7 |
|
|
|
8.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
1,002.9 |
|
Intercompany accounts payable |
|
|
|
|
|
|
|
|
|
|
3,096.1 |
|
|
|
|
|
|
|
|
|
|
|
(3,096.1 |
) |
|
|
|
|
Intercompany notes payable |
|
|
326.0 |
|
|
|
258.7 |
|
|
|
1,652.8 |
|
|
|
1,708.0 |
|
|
|
457.2 |
|
|
|
(4,402.7 |
) |
|
|
|
|
Long-term discontinued operations
liability |
|
|
|
|
|
|
330.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330.0 |
|
Other long-term liabilities |
|
|
|
|
|
|
131.4 |
|
|
|
191.2 |
|
|
|
77.0 |
|
|
|
116.3 |
|
|
|
|
|
|
|
515.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
364.0 |
|
|
|
1,640.3 |
|
|
|
5,379.3 |
|
|
|
2,246.5 |
|
|
|
878.6 |
|
|
|
(7,498.8 |
) |
|
|
3,009.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
0.9 |
|
Class B common stock |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272.9 |
|
|
|
(272.9 |
) |
|
|
|
|
Capital in excess of par value |
|
|
3,232.7 |
|
|
|
|
|
|
|
29.4 |
|
|
|
1,388.6 |
|
|
|
5,082.3 |
|
|
|
(9,349.8 |
) |
|
|
383.2 |
|
Retained earnings |
|
|
31.5 |
|
|
|
162.4 |
|
|
|
1,892.3 |
|
|
|
832.5 |
|
|
|
1,733.2 |
|
|
|
(2,654.5 |
) |
|
|
1,997.4 |
|
Accumulated other non- owner changes in
equity |
|
|
(44.1 |
) |
|
|
(115.0 |
) |
|
|
(186.7 |
) |
|
|
(25.2 |
) |
|
|
(179.8 |
) |
|
|
374.5 |
|
|
|
(176.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,221.6 |
|
|
|
47.4 |
|
|
|
1,735.0 |
|
|
|
2,195.9 |
|
|
|
6,908.6 |
|
|
|
(11,903.3 |
) |
|
|
2,205.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
3,585.6 |
|
|
$ |
1,687.7 |
|
|
$ |
7,114.3 |
|
|
$ |
4,442.4 |
|
|
$ |
7,787.2 |
|
|
$ |
(19,402.1 |
) |
|
$ |
5,215.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-22-
Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2006
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Net cash provided by (used in)
operating activities |
|
$ |
(15.8 |
) |
|
$ |
(20.8 |
) |
|
$ |
45.7 |
|
|
$ |
(23.4 |
) |
|
$ |
389.0 |
|
|
$ |
|
|
|
$ |
374.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
(10.5 |
) |
|
|
(24.6 |
) |
|
|
(23.0 |
) |
|
|
|
|
|
|
(58.1 |
) |
Cash paid for acquired businesses |
|
|
|
|
|
|
|
|
|
|
(42.4 |
) |
|
|
(230.8 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
(279.4 |
) |
Investment in affiliates |
|
|
(12.3 |
) |
|
|
|
|
|
|
(36.0 |
) |
|
|
|
|
|
|
|
|
|
|
48.3 |
|
|
|
|
|
Loans to affiliates |
|
|
(102.0 |
) |
|
|
|
|
|
|
(36.9 |
) |
|
|
|
|
|
|
(384.4 |
) |
|
|
523.3 |
|
|
|
|
|
Repayments of loans from affiliates |
|
|
64.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.2 |
|
|
|
(165.2 |
) |
|
|
|
|
Dividends from affiliates |
|
|
5.0 |
|
|
|
|
|
|
|
68.6 |
|
|
|
|
|
|
|
5.9 |
|
|
|
(79.5 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
17.6 |
|
|
|
|
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(45.3 |
) |
|
|
|
|
|
|
(57.2 |
) |
|
|
(254.6 |
) |
|
|
(288.9 |
) |
|
|
326.9 |
|
|
|
(319.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt |
|
|
|
|
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
(13.3 |
) |
Borrowings from affiliates |
|
|
197.2 |
|
|
|
36.8 |
|
|
|
289.2 |
|
|
|
|
|
|
|
0.1 |
|
|
|
(523.3 |
) |
|
|
|
|
Repayments of loans to affiliates |
|
|
(47.3 |
) |
|
|
|
|
|
|
(73.6 |
) |
|
|
(2.4 |
) |
|
|
(41.9 |
) |
|
|
165.2 |
|
|
|
|
|
Other intercompany financing activities |
|
|
9.5 |
|
|
|
(5.0 |
) |
|
|
(112.9 |
) |
|
|
281.6 |
|
|
|
(173.2 |
) |
|
|
|
|
|
|
|
|
Dividends |
|
|
(103.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103.0 |
) |
Dividends paid to affiliates |
|
|
(73.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.0 |
) |
|
|
79.5 |
|
|
|
|
|
Subsidiary purchase of parent shares |
|
|
14.9 |
|
|
|
|
|
|
|
(276.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261.7 |
) |
Issuance of stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.3 |
|
|
|
(48.3 |
) |
|
|
|
|
Excess tax benefits from stock options
and awards |
|
|
|
|
|
|
|
|
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.4 |
|
Employee stock plan activity and other |
|
|
|
|
|
|
|
|
|
|
81.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
(2.2 |
) |
|
|
20.8 |
|
|
|
(71.4 |
) |
|
|
279.2 |
|
|
|
(175.0 |
) |
|
|
(326.9 |
) |
|
|
(275.5 |
) |
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.0 |
|
|
|
|
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
(63.3 |
) |
|
|
|
|
|
|
(82.9 |
) |
|
|
1.2 |
|
|
|
(63.9 |
) |
|
|
|
|
|
|
(208.9 |
) |
Cash and cash equivalents, beginning of
period |
|
|
64.1 |
|
|
|
|
|
|
|
144.4 |
|
|
|
(3.5 |
) |
|
|
247.8 |
|
|
|
|
|
|
|
452.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
61.5 |
|
|
$ |
(2.3 |
) |
|
$ |
183.9 |
|
|
$ |
|
|
|
$ |
243.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-23-
Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooper |
|
|
Cooper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industries, |
|
|
US, |
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Cooper |
|
|
LLC |
|
|
Inc |
|
|
Guarantors |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
Net cash provided by (used in)
operating activities |
|
$ |
(4.9 |
) |
|
$ |
(114.0 |
) |
|
$ |
0.5 |
|
|
$ |
20.0 |
|
|
$ |
398.9 |
|
|
$ |
|
|
|
$ |
300.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
(11.0 |
) |
|
|
(30.4 |
) |
|
|
(30.4 |
) |
|
|
|
|
|
|
(71.8 |
) |
Cash paid for acquired businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.4 |
) |
|
|
|
|
|
|
(2.4 |
) |
Investment in affiliates |
|
|
(11.1 |
) |
|
|
(9.8 |
) |
|
|
(30.3 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
54.6 |
|
|
|
|
|
Loans to affiliates |
|
|
(46.0 |
) |
|
|
(14.1 |
) |
|
|
(72.2 |
) |
|
|
(0.7 |
) |
|
|
(137.1 |
) |
|
|
270.1 |
|
|
|
|
|
Repayments of loans from affiliates |
|
|
25.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.6 |
) |
|
|
|
|
Dividends from affiliates |
|
|
|
|
|
|
0.9 |
|
|
|
67.7 |
|
|
|
31.8 |
|
|
|
3.1 |
|
|
|
(103.5 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
0.5 |
|
|
|
4.6 |
|
|
|
|
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(31.5 |
) |
|
|
(21.5 |
) |
|
|
(45.8 |
) |
|
|
(2.2 |
) |
|
|
(162.2 |
) |
|
|
195.6 |
|
|
|
(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 |
|
|
|
|
|
|
|
3.5 |
|
|
|
121.6 |
|
|
|
(270.1 |
) |
|
|
|
|
Repayments of loans to affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.6 |
) |
|
|
25.6 |
|
|
|
|
|
Other intercompany financing activities |
|
|
(16.7 |
) |
|
|
279.5 |
|
|
|
(100.5 |
) |
|
|
(19.9 |
) |
|
|
(142.4 |
) |
|
|
|
|
|
|
|
|
Dividends |
|
|
(103.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103.8 |
) |
Dividends paid to affiliates |
|
|
(46.4 |
) |
|
|
|
|
|
|
|
|
|
|
(12.8 |
) |
|
|
(44.3 |
) |
|
|
103.5 |
|
|
|
|
|
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 |
|
|
|
(123.8 |
) |
|
|
(29.2 |
) |
|
|
(252.2 |
) |
|
|
(195.6 |
) |
|
|
(484.0 |
) |
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.7 |
) |
|
|
|
|
|
|
(25.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(55.0 |
) |
|
|
(0.1 |
) |
|
|
(169.1 |
) |
|
|
(11.4 |
) |
|
|
(41.2 |
) |
|
|
|
|
|
|
(276.8 |
) |
Cash and cash equivalents, beginning of
period |
|
|
111.5 |
|
|
|
|
|
|
|
246.0 |
|
|
|
1.2 |
|
|
|
294.1 |
|
|
|
|
|
|
|
652.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
56.5 |
|
|
$ |
(0.1 |
) |
|
$ |
76.9 |
|
|
$ |
(10.2 |
) |
|
$ |
252.9 |
|
|
$ |
|
|
|
$ |
376.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-24-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three Months Ended September 30, 2006 Compared With Three Months Ended September 30, 2005
Net income for the third quarter of 2006 was $128.2 million on revenues of $1,314.6 million
compared with 2005 third quarter net income of $102.0 million on revenues of $1,210.4 million.
Third quarter diluted earnings per share increased 27% to $1.37 in 2006 from $1.08 in 2005.
Revenues:
Revenues for the third quarter of 2006 increased 9% compared to the third quarter of 2005.
Foreign currency translation increased reported revenues by approximately 1% for the quarter and
the impact of acquisitions increased reported revenues by approximately 2% for the quarter.
Electrical Products segment revenues increased 10% compared to the third quarter of 2005.
Excluding the impact of currency translation, revenues increased approximately 9% compared to the
third quarter of 2005. The impact of acquisitions increased segment revenues by approximately 2%.
Strong demand from industrial and utility markets continues to drive year-over-year core revenue
growth. Demand from non-residential construction markets improved during the quarter, while retail
sales were down, due to softening of residential markets and the ceding of product offerings in the
retail channel over prices. The businesses within the Electrical Products segment continued to
penetrate new and existing markets through successful product introductions, coordinated marketing
initiatives and execution of global growth strategies.
Tools segment revenues for the third quarter of 2006 increased 2% from the third quarter of
2005. Excluding the impact of favorable currency translation, revenues increased approximately 1%
over the third quarter of 2005. Demand within the industrial and commercial markets improved for
both Hand Tools and Power Tools. Shipments of assembly equipment declined as compared to the prior
year quarter.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 67.5% for the third quarter of 2006 compared
to 68.4% for the comparable 2005 quarter. The decline in cost of sales percentage resulted
primarily from production leverage on higher volume, improved pricing in key markets and channels,
a continued favorable shift in sales mix and benefits realized through productivity and sourcing
cost reduction initiatives. These improvements were partially offset by inflation in key
commodity, energy and transportation costs.
Electrical Products segment cost of sales, as a percentage of revenues, was 67.5% for the
third quarter of 2006 compared to 67.9% for the third quarter of 2005. The reduction in cost of
sales percentage resulted from sales volume leverage, a shift in sales mix away from the lower
margin retail channel, cost reductions through productivity improvement initiatives, and price
increases to offset inflation in commodity costs. Tools segment cost of sales, as a percentage of
revenues, was 67.3% for the third quarter of 2006 compared to 71.6% for the third quarter of 2005.
The decrease in cost of sales percentage was driven by productivity improvements, prior year
restructuring and a gain on the sale of property in the third quarter of 2006.
Selling and administrative expenses, as a percentage of revenues, for the third quarter of
2006 were 18.3% compared to 19.5% for the third quarter of 2005. The decline was due to sales
volume leverage, sales mix, and the non-recurrence of costs incurred in the third quarter of 2005
related to the retirement of a senior executive and costs relating to reorganizing certain
corporate activities, which were partially offset by continued investment in strategic growth
initiatives.
-25-
Electrical Products segment selling and administrative expenses, as a percentage of revenues,
for the third quarter of 2006 were 16.0% compared to 16.7% for the third quarter of 2005. The
decline was driven by strong leverage of fixed costs on increased sales volumes, cost reductions
achieved through prior restructuring actions and benefits from ongoing productivity improvement
initiatives more than offsetting increased investments in sales expansion initiatives.
Tools segment selling and administrative expenses, as a percentage of revenues, for the third
quarter of 2006 were 19.7% compared to 19.9% for the third quarter of 2005. The decline in selling
and administrative expenses percentage was driven by increased sales volumes providing leverage
against fixed costs and benefits realized from prior restructuring actions.
Interest expense, net for the third quarter of 2006 decreased $2.5 million from the 2005 third
quarter, primarily as a result of both lower average debt balances and average interest rates on
borrowings. Average debt balances were $1.07 billion and $1.27 billion and average interest rates
were 5.8% and 6.1% during the third quarter of 2006 and 2005, respectively. The decline in the
average interest rates was primarily the result of conversion of debt balances to lower
interest-rate debt. The debt balance during the third quarter of 2005 included 6.25%, 300 million
Euro bonds that matured in October 2005. Cooper partially funded repayment of this Euro bond debt
with $325 million, 5.25% senior unsecured notes maturing in 2012. Proceeds from the notes were
swapped to 272.6 million with cross-currency interest-rate swaps, effectively converting the
seven-year U.S. notes to seven-year Euro notes with an annual interest rate of 3.55%.
Operating Earnings:
Electrical Products segment third quarter 2006 operating earnings increased 18% to $186.4
million from $158.2 million for the same quarter of last year. The increase was a result of
leveraging fixed costs on higher volumes, successful cost reduction and productivity improvement
initiatives, and a shift in sales mix away from the lower margin retail channel, with increased
prices offsetting inflation in production material costs.
Tools segment third quarter 2006 operating earnings increased 57% to $24.3 million compared to
$15.5 million in the third quarter of 2005. The increase primarily reflects operating efficiencies
through productivity improvements, sales mix, gain on property sale and prior year restructuring
actions.
General Corporate expense decreased $3.2 million to $24.1 million for the third quarter of
2006 compared to $27.3 million during the third quarter of 2005. In the third quarter of 2005,
General Corporate expense included additional stock-based compensation expense due to the
accelerated vesting of expense related to the retirement of a senior executive, as well as costs
relating to reorganizing certain corporate activities.
Income Taxes:
The effective tax rate was 25.7% for the third quarter of 2006 and 21.5% for the third quarter
of 2005. The rate increase is primarily related to increased earnings in 2006, without a
corresponding increase in tax benefits.
Nine Months Ended September 30, 2006 Compared With Nine Months Ended September 30, 2005
Income from continuing operations for the nine months ended September 30, 2006 was $355.7
million on revenues of $3,843.3 million compared with income from continuing operations of $287.1
million on revenues of $3,544.4 million during the nine months ended September 30, 2005. Diluted
earnings per share from continuing operations increased 25% to $3.78 in 2006 from $3.02 during the
nine months ended September 30, 2005.
-26-
Revenues:
Revenues for the nine months ended September 30, 2006 increased 8% compared to the nine months
ended September 30, 2005. The impact of foreign currency translation was nominal and the impact of
acquisitions increased 2006 revenues by approximately 1%.
Electrical Products segment revenues for the nine months ended September 30, 2006 increased
approximately 9% compared to the nine months ended September 30, 2005. Foreign currency
translation had a nominal impact on 2006 revenues. The impact of acquisitions increased segment
revenues by approximately 1%. All of the Electrical Products segment businesses posted revenue
growth during 2006. Sales growth was a result of strong demand from industrial and utility
markets, improvement in non-residential construction demand and successful penetration into new and
developing geographic markets. These gains more than offset a decline in retail sales due to a
ceding of product lines in the retail channel over prices.
Tools segment revenues for the nine months ended September 30, 2006 increased approximately 3%
compared to the nine months ended September 30, 2005. Foreign currency translation increased
revenues by approximately 1%. Increases in sales of hand tools, driven by new product
introductions and strength in industrial markets, offset the loss of chain position in a major
retailer. Domestic industrial power tools strength and moderate price realization offset weakness
in the automated systems business.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 67.8% for the nine months ended September 30,
2006 compared to 68.6% for the comparable 2005 period. The decrease in the cost of sales
percentage was primarily a result of leveraging fixed costs against higher volumes, successful cost
reduction and productivity improvement initiatives, and an improved sales mix. Pricing has been
keeping pace with inflationary pressures and energy costs.
Electrical Products segment cost of sales, as a percentage of revenues, was 67.6% for the nine
months ended September 30, 2006 compared to 68.1% for the nine months ended September 30, 2005.
The decrease in the cost of sales percentage was primarily the result of a shift in sales mix away
from the lower margin retail channel, leverage on higher volumes, successful productivity
improvement initiatives and pricing offsetting inflationary pressures for production material and
energy costs.
Tools segment cost of sales, as a percentage of revenues, was 69.0% for the nine months ended
September 30, 2006 compared to 70.9% for the same period of 2005. The decrease in cost of sales
percentage reflects continuing cost productivity improvements, sales mix, and price increase
realization.
Selling and administrative expenses, as a percentage of revenues, for the nine months ended
September 30, 2006 were 18.8% compared to 19.6% for the nine months ended September 30, 2005. The
decrease is due to benefits realized from prior year restructuring actions and leverage against
higher volumes, which were partially offset by higher pension cost and continued investment in
global sales expansion.
Electrical Products segment selling and administrative expenses, as a percentage of revenues,
for the nine months ended September 30, 2006 were 16.5% compared to 17.2% for the nine months ended
September 30, 2005. The decrease in selling and administrative expenses percentage is primarily
due to leveraging higher volumes, enterprise business system benefits, and benefits realized from
prior year cost reductions. These performance improvements more than offset continued investment
in key commercial and global growth initiatives.
Tools segment selling and administrative expenses, as a percentage of revenues, for the nine
months ended September 30, 2006 were 19.9% compared to 20.5% for the comparable period of 2005.
The decrease in the selling and administrative expenses percentage is primarily due to leverage on fixed
costs and cost reduction activities.
-27-
Interest expense, net for the nine months ended September 30, 2006 decreased $13.5 million
from the nine months ended September 30, 2005 as a result of both lower average debt balances and
average interest rates. Average debt balances were $1.04 billion and $1.33 billion and average
interest rates were 5.7% and 6.0% for the nine months ended September 30, 2006 and 2005,
respectively. The decline in the average interest rates was primarily the result of conversion of
debt balances to lower interest-rate debt. The debt balance during the comparable 2005 period
included 6.25%, 300 million Euro bonds that matured in October 2005. Cooper partially funded
repayment of this Euro bond debt with $325 million, 5.25% senior unsecured notes maturing in 2012.
Proceeds from the notes were swapped to 272.6 million with cross-currency interest-rate swaps,
effectively converting the seven-year U.S. notes to seven-year Euro notes with an annual interest
rate of 3.55%.
Operating Earnings:
Electrical
Products segment operating earnings for the nine months ended September
30, 2006 increased 19% to $524.0 million from $441.8 million for the same period of last
year. The increase was primarily due to a shift in sales mix away from the lower margin retail
channel, continued productivity improvements, and favorable pricing offsetting inflation in
production material costs.
Tools segment operating earnings for the nine months ended September 30, 2006 increased 33% to
$61.2 million compared to $46.0 million during the same period of 2005. The increase reflects
leverage on fixed costs due to increased volume, sales mix, price increase realization, and
continuing improvements in operating efficiencies.
General Corporate expense for the nine months ended September 30, 2006 decreased $1.3 million
to $68.8 million compared to $70.1 million for the same period of 2005. In 2005, General Corporate
expense included additional stock-based compensation expense due to the accelerated vesting of
expense related to the retirement of a senior executive as well as costs relating to reorganizing
certain corporate activities.
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 included plans for
the withdrawal from a multiple-employer pension plan. Cooper recorded a $12.5 million obligation as
an estimate of Coopers portion of unfunded benefit obligations of the plan. In 2005, Cooper
reached a final agreement related to withdrawal from the multi-employer pension plan and recorded
an additional $4.0 million pre-tax charge. The multiple-employer pension obligation was satisfied
with a cash payment of $14.1 million in October 2006 representing full and final payment of the
withdrawal liability. The remaining $5.9 million charge primarily represented severance for
announced employment reductions at several locations. Substantially all of the severance payments
were made as of March 31, 2006.
A total of 114 salaried and 150 hourly personnel were eliminated as a result of these actions.
Cooper estimates the annual savings from the personnel reductions was approximately $6 million,
(net of additional employees added in lower-cost regions) with most of the savings beginning in the
first quarter of 2004. The majority of the eliminated costs previously were reflected as cost of
sales.
-28-
Income Taxes:
The effective tax rate was 25.6% for the nine months ended September 30, 2006 and 21.5% for
the nine months ended September 30, 2005. The rate increase is primarily related to increased
earnings in 2006 without a corresponding increase in tax benefits.
Charge Related to Discontinued Operations:
In the second quarter of 2006, Cooper recorded an additional charge of $20.3 million, net of
an $11.4 million income tax benefit (or $.21 per diluted share) related to potential asbestos
obligations regarding the Automotive Products segment which was sold in 1998. See Note 12 of the
Notes to the Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity:
Coopers operating working capital (defined as receivables and inventories less accounts
payable) increased $194.4 million during the nine months ended September 30, 2006. The increase
included a $118.4 million increase in receivables and a $103.5 million increase in inventories,
partially offset by a $27.5 million increase in accounts payable, which were all driven by
increased sales volume and actions to improve customer service. The increase in inventories was
partially offset by a $9.8 million increase in the allowance for excess and obsolete inventories.
Operating working capital turnover (defined as annualized revenues divided by average quarterly
operating working capital) for the nine months ended September 30, 2006 of 4.9 turns increased from
4.5 turns in the same period of 2005 and was primarily due to revenues growing at a higher rate
than operating working capital.
Cash provided by operating activities was $375 million during the nine months ended September
30, 2006. This cash, plus an additional $209 million of cash and cash equivalents and $81 million
of cash received from employee stock option exercise activity were primarily used to fund capital
expenditures of $58 million, acquisitions of $279 million, dividends of $103 million and share
purchases of $262 million.
Cash provided by operating activities was $301 million for the nine months ended September 30,
2005. This cash, plus $277 million of cash and cash equivalents and $55 million of cash received
from employee stock option exercise activity were primarily used to fund capital expenditures of
$72 million, dividends of $104 million, debt repayments of $270 million and share purchases of $166
million.
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 $6.3 million and $2.1
million during the nine months ended September 30, 2006 and 2005, respectively.
Cooper currently anticipates a continuation of its long-term ability to annually generate in
excess of $200 million in cash flow available for acquisitions, debt repayments and common stock
repurchases.
As discussed in Note 12 of Notes to the Consolidated Financial Statements, Cooper has reached
a revised agreement with the Representatives of Federal-Mogul, its bankruptcy committees and the
future claimants regarding settlement of Coopers contingent liabilities related to the Automotive
Products sale to Federal-Mogul. Cooper anticipates that any settlement would be funded from
operating cash flows, existing cash and commercial paper proceeds (if required).
-29-
Capital Resources:
Cooper currently targets a 30% to 40% debt-to-total capitalization ratio. Excess cash flows
are utilized to fund acquisitions or to purchase shares of Cooper common stock. Coopers
debt-to-total capitalization ratio was 30.1% at September 30, 2006, 31.7% at December 31, 2005 and
32.2% at September 30, 2005.
At September 30, 2006 and December 31, 2005, Cooper had cash and cash equivalents of $243.9
million and $452.8 million, respectively. At September 30, 2006 and December 31, 2005, Cooper had
short-term debt of $6.3 million and $7.6 million, respectively, and no commercial paper
outstanding.
Coopers practice is to back up its short-term debt balance with a combination of cash and
committed credit facilities. At September 30, 2006, Cooper had a $500 million committed credit
facility, which matures in November 2009. Short-term debt to the extent not backed up by cash,
reduces the amount of additional liquidity provided by the committed credit facility.
The credit facility agreement is not subject to termination based on a decrease in Coopers
debt ratings or a material adverse change clause. The principal financial covenants in the
agreement limit Coopers debt-to-total capitalization ratio to 60% and require Cooper to maintain a
minimum earnings before interest expense, income taxes, depreciation and amortization to interest
ratio of 3 to 1. Cooper is in compliance with all covenants set forth in the credit facility
agreement.
Coopers access to the commercial paper market could be adversely affected by a change in the
credit ratings assigned to its commercial paper. Should Coopers 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 credit facility to provide short-term funding. The
committed credit facility does not contain any provision, which makes its availability to Cooper
dependent on Coopers credit ratings.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As of September 30, 2006, there have been no material changes to Coopers off-balance sheet
arrangements and contractual obligations as described in its Annual Report on Form 10-K for the
year ended December 31, 2005.
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, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Electrical Products |
|
$ |
593.4 |
|
|
$ |
397.7 |
|
Tools |
|
|
75.5 |
|
|
|
64.0 |
|
|
|
|
|
|
|
|
|
|
$ |
668.9 |
|
|
$ |
461.7 |
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards
See Notes 1 and 2 of the Notes to the Consolidated Financial Statements.
-30-
Private Securities Litigation Reform Act Safe Harbor Statement
This Form 10-Q includes certain forward-looking statements. The forward-looking statements
reflect Coopers 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, any statements regarding future
revenues, cost and expenses, earnings, earnings per share, margins, 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 resolution of Federal-Moguls
bankruptcy proceedings, political developments, market and economic conditions, changes in raw
material, transportation, and energy costs, industry competition, the ability to execute and
realize the expected benefits from strategic initiatives including revenue growth plans and
cost-control and productivity improvement programs, the magnitude of any disruptions from
manufacturing rationalizations and the implementation of the Enterprise Business System, changes in
mix of products sold, mergers and acquisitions and their integration into Cooper, the timing and
amount of any stock repurchases, changes in financial markets including currency rate fluctuations
and changing legislation and regulations including changes in tax law, tax treaties or tax
regulations. The forward-looking statements contained in this report are intended to qualify for
the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.
Item 4. Controls and Procedures
As of the end of the period covered by this report, Coopers 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 Coopers disclosure controls and
procedures. Based on that evaluation, Coopers 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.
Cooper is executing a multi-year plan of implementing an Enterprise Business System (EBS)
globally. Implementing an EBS system on a global basis involves significant changes in business
processes. The implementation is phased, which reduces the risks associated with making these
changes. In addition, Cooper is taking the necessary steps to monitor and maintain appropriate
internal controls during the implementations.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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
-31-
provided by representatives of Federal-Mogul and recent claims experience, from August 28,
1998 through September 30, 2006, a total of 140,813 Abex Claims were filed, of which 109,325 claims
have been resolved leaving 31,488 Abex Claims pending at September 30, 2006, that are the
responsibility of Federal-Mogul. During the three months ended September 30, 2006, 1,405 claims
were filed and 8,735 claims were resolved. Since August 28, 1998, the average indemnity payment
for resolved Abex Claims was $1,965 before insurance. A total of $100.7 million was spent on
defense costs for the period August 28, 1998 through September 30, 2006. Historically, existing
insurance coverage has provided 50% to 80% of the total defense and indemnity payments for Abex
Claims. However, insurance recovery is currently at a lower percentage (approximately 30%) due to
exhaustion of primary layers of coverage and litigation with certain excess insurers.
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 Coopers analysis of its contingent
liability exposure resulting from Federal-Moguls 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.
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 of Federal-Mogul, its bankruptcy committees and the future
claimants (the Representatives) regarding participation in Federal-Moguls proposed 524(g)
asbestos trust. Based on the status of the negotiations in 2004, Cooper concluded that it was
probable that Federal-Mogul would 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.
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 income tax benefit, in the fourth quarter of 2003.
In December 2005, Cooper announced that the Company and other parties involved in the
resolution of the Federal-Mogul bankruptcy proceeding had reached an agreement regarding Coopers
participation in Federal Moguls proposed 524 (g) asbestos trust. By participating in this trust,
Cooper would resolve its liability for asbestos claims arising from Coopers former Abex Friction
Products business. The proposed settlement agreement was subject to court approval, approval of 75
percent of the current Abex asbestos claimants and certain other approvals. The settlement would
resolve more than 38,000 pending Abex Claims as of December 2005. Future claims would be resolved
through the bankruptcy trust, and Cooper would be protected against future claims by an injunction
to be issued by the district court upon plan confirmation.
Key terms and aspects of the proposed settlement agreement included Cooper agreeing to pay
$130 million in cash into the trust, with $115 million payable upon Federal-Moguls emergence from
bankruptcy. The remainder would be due on January 15, 2007, or upon emergence from bankruptcy, if
later. Cooper would receive a total of $37.5 million during the funding period from other parties
associated with the Federal-Mogul bankruptcy. Cooper would further provide the trust 1.4 million
shares of the Companys stock upon Federal-Moguls emergence from bankruptcy. The agreement
provided that the trust may, during the first year after issuance, sell these shares to Cooper at
market prices and, thereafter, in open market transactions.
The proposed settlement agreement also provided for further payments by Cooper subject to the
amount and timing of insurance proceeds. Cooper agreed to make 25 annual payments of up to $20
million
-32-
each, reduced by certain insurance proceeds received by the trust. In years that the
insurance proceeds exceed $17 million, Cooper would be required to contribute $3 million with the
excess insurance proceeds carried over to the next year. The trust would retain 10 percent of the
insurance proceeds for indemnity claims paid by the trust until Coopers obligation is satisfied
and would retain 15 percent thereafter. The agreement also provided for Cooper to receive the
insurance proceeds related to indemnity and defense costs paid prior to the date a stay of current
claims is entered by the bankruptcy court. Cooper would also be required to forego certain claims
and objections in the Federal-Mogul bankruptcy proceedings. In addition, the parties involved had
agreed to petition the court for a stay on all current claims outstanding.
Although the payments related to the settlement could extend to 25 years and the collection of
insurance proceeds could extend beyond 25 years, the liability and insurance would be undiscounted
on Coopers balance sheet as the amount of the actual annual payments is not reasonably
predictable.
A critical term of the proposed settlement was the issuance of a preliminary injunction
staying all pending Abex asbestos claims. At a hearing on January 20, 2006, other parties to the
bankruptcy proceedings were unable to satisfy the courts requirements to grant the required
preliminary injunction. As a result, the proposed settlement agreement required renegotiation of
certain terms. The final determination of whether Cooper would participate in the Federal-Mogul
524(g) trust was unknown. However, Cooper management concluded that, at the date of the filing of
its 2005 Form 10-K, the most likely outcome in the range of potential outcomes was a revised
settlement approximating the December 2005 proposed settlement. Accordingly, Cooper recorded a
$227.2 million after-tax discontinued operations charge, net of a $127.8 million income tax
benefit, in the fourth quarter of 2005.
The fourth quarter 2005 charge to discontinued operations included payments to a 524(g) trust
over 25 years that were undiscounted, and the insurance recoveries only included recoveries where
insurance in place agreements, settlements or policy recoveries were probable. If the negotiations
with the Representatives in early 2004 had resulted in an agreement, Cooper would have paid all the
consideration when Federal-Mogul emerged from bankruptcy and the 524(g) trust was formed and would
have relinquished all rights to insurance. The lack of discounting and the limited recognition of
insurance recoveries in the fourth quarter 2005 charge to discontinued operations were a
significant component of the increase in the accrual for discontinued operations. While it is not
possible to quantify, the accrual for discontinued operations also includes a premium for resolving
the inherent uncertainty associated with resolving Abex Claims though the tort system. If Cooper
is unable to reach a settlement to participate in the Federal-Mogul 524(g) trust, the accrual for
discontinued operations potentially may have to be reduced to the estimated liability and related
insurance recoveries through the tort system. There are numerous assumptions that are required to
project the liability in the tort system and Cooper has not completed the analysis and determined
the liability that would be recorded under this scenario.
Cooper, through Pneumo-Abex LLC, has access to Abex insurance policies with remaining limits
on policies with solvent insurers in excess of $750 million. Cooper included insurance recoveries
of approximately $215 million pre-tax in the fourth quarter 2005 charge to discontinued operations
discussed above. Cooper believes that it is likely that additional insurance recoveries will be
recorded in the future as new insurance in place agreements are consummated and settlements with
insurance carriers are completed. However, extensive litigation with the insurance carriers may be
required to receive those additional recoveries.
On July 7, 2006, Cooper announced a revised agreement had been reached regarding Coopers
participation in Federal-Moguls 524(g) trust. The revised proposed settlement agreement remains
subject to court approval, to approval by 75 percent of the current Abex asbestos claimants and to
certain other approvals.
Key terms and aspects of the revised proposed settlement agreement include Cooper agreeing to
pay $256 million in cash into the trust on the date Federal-Mogul emerges from bankruptcy, which
includes elimination of the contribution of 1.4 million common shares to the trust by increasing
the cash contribution. Removing the Companys common stock as a component of the revised
settlement agreement eliminates
-33-
additional charges and reversals of charges that may have occurred to account for any changes
in the market value of the Companys stock. Cooper has or will receive $37.5 million from other
parties toward its cash obligation.
As in the December 2005 agreement, Cooper has agreed to make 25 annual payments of up to $20
million each to the trust with such payments being reduced by insurance proceeds. The minimum
annual payment of $3 million in the December 2005 agreement has been eliminated. However, Cooper
has agreed to make advances, beginning in 2015 through 2021, in the event the trust is unable to
pay outstanding qualified claims at 100 percent of the value provided for in the trust agreement.
In the event that advances are made by Cooper, they will accrue interest at 5 percent per annum,
and will be repaid in years where excess funds are available in the trust or credited against the
future year annual payments. The maximum advances are $36.6 million.
Cooper will pay all defense costs through the date Federal-Mogul emerges from bankruptcy and
will be reimbursed for indemnity payments to the extent such payments are eligible for payment from
the trust. Cooper will retain the rights to receive the insurance proceeds related to indemnity
and defense costs paid prior to the date Federal-Mogul emerges from bankruptcy. For claims paid by
the trust, the trust will retain 10 percent of any reimbursed insurance proceeds for the first 25
years and thereafter will retain 15 percent.
As in the December 2005 proposed agreement, Cooper will forego certain claims and objections
in the Federal-Mogul bankruptcy proceedings. However, under the revised proposed agreement, which
is subject to court approval, in the event that Coopers participation in the Federal-Mogul 524(g)
trust is not approved for any reason, Cooper would receive a cash payment of $138 million on the
date Federal-Mogul emerges from bankruptcy and 20 percent of any insurance policy settlements
related to the former Wagner business purchased by Federal-Mogul in 1998. If Cooper participates
in the trust, it will receive 12 percent of any Wagner insurance settlements.
Accordingly, Cooper recorded a $20.3 million after-tax discontinued operations charge, net of
an $11.4 million income tax benefit, in the second quarter of 2006.
From a cash flow perspective, Cooper management continues to believe that a settlement on the
terms of the revised agreement would allow Cooper to continue to grow through acquisitions and
return cash to shareholders through dividends and stock repurchases. The settlement agreement
remains 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
$537.5 million at September 30, 2006 and $526.3 million at December 31, 2005.
Item 1A. Risk Factors
There have been no material changes in the risk factors previously disclosed in Coopers
Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table reflects activity related to equity securities purchased by Coopers
wholly-owned subsidiaries during the three months ended September 30, 2006:
-34-
Purchases of Equity Securities
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Total Number of Shares |
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Maximum Number of |
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Total Number of |
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Average Price |
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Purchased as Part of |
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Shares that May Yet Be |
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Shares |
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Paid per |
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Publicly Announced Plans |
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Purchased Under the |
Period |
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Purchased |
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Share |
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or Programs (1) |
|
Plans or Programs (1) |
As of 6/30/06 |
|
|
|
|
|
|
|
4,524,450 |
7/01/06 7/31/06 |
|
371,200 |
|
$88.35 |
|
371,200 |
|
4,153,250 |
8/01/06 8/31/06 |
|
196,300 |
|
$85.37 |
|
196,300 |
|
3,956,950 |
9/01/06 9/30/06 |
|
325,700 |
|
$82.05 |
|
325,700 |
|
3,631,250 |
|
|
|
|
|
|
|
Total |
|
893,200 |
|
$85.40 |
|
893,200 |
|
|
|
|
|
(1) |
|
On November 2, 2004, Coopers Board of Directors authorized the repurchase of
up to five million shares of Coopers Class A common stock. Cooper has also announced that
the Board authorized the repurchase of shares issued from time to time under its equity
compensation plans, matched savings plan and dividend reinvestment plan in order to offset the
dilution that results from issuing shares under these plans. For 2006, Coopers current
estimate is that 2.6 million shares will be issued under equity compensation plans, which is
reflected in the above table. |
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 6. Exhibits
10.1 |
|
Current Compensation Arrangements for Named Executive Officers. |
|
10.2 |
|
Separation and Transition Agreement dated September 1, 2006 between Cooper Industries, Ltd.
and David R. Sheil. |
|
10.3 |
|
Term Sheet Pneumo Abex Settlement Plan A and Plan B dated as of July 6, 2006 among Cooper
Industries, Ltd.; Cooper Industries, LLC; Federal-Mogul Corporation; Federal-Mogul Products,
Inc.; the Future Claimants Representative for Federal-Mogul Corporation and Federal-Mogul
Products, Inc.; the Official Committee of Asbestos Claimants for Federal-Mogul Corporation and
Federal-Mogul Products, Inc.; Pneumo Abex LLC; and PCT International Holdings, Inc.
(incorporated by reference to Coopers Current Reports on Form 8-K filed July 7, 2006 and July
21, 2006). |
|
12. |
|
Computation of Ratios of Earnings to Fixed Charges for the Calendar Years 2001 through 2005
and the Nine Months Ended September 30, 2006 and 2005. |
|
23. |
|
Consent of Bates White, LLC. |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
-35-
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 7, 2006 |
|
/s/ Terry A. Klebe
|
|
|
|
Terry A. Klebe |
|
|
|
Senior Vice President and
Chief Financial Officer |
|
|
|
|
|
Date: November 7, 2006 |
|
/s/ Jeffrey B. Levos
|
|
|
|
Jeffrey B. Levos |
|
|
|
Vice President, Finance and
Chief Accounting Officer |
|
|
-36-
Exhibit Index
Exhibit No.
|
|
|
10.1
|
|
Current Compensation Arrangements for Named Executive Officers. |
|
|
|
10.2
|
|
Separation and Transition Agreement dated September 1, 2006 between Cooper Industries, Ltd.
and David R. Sheil. |
|
|
|
10.3
|
|
Term Sheet Pneumo Abex Settlement Plan A and Plan B dated as of July 6, 2006 among Cooper
Industries, Ltd.; Cooper Industries, LLC; Federal-Mogul Corporation; Federal-Mogul Products,
Inc.; the Future Claimants Representative for Federal-Mogul Corporation and Federal-Mogul
Products, Inc.; the Official Committee of Asbestos Claimants for Federal-Mogul Corporation and
Federal-Mogul Products, Inc.; Pneumo Abex LLC; and PCT International Holdings, Inc.
(incorporated by reference to Coopers Current Reports on Form 8-K filed July 7, 2006 and July
21, 2006). |
|
|
|
12.
|
|
Computation of Ratios of Earnings to Fixed Charges for the Calendar Years 2001 through 2005
and the Nine Months Ended September 30, 2006 and 2005. |
|
|
|
23.
|
|
Consent of Bates White, LLC. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |