10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

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

For the quarter ended March 31, 2007

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

For the transition period from                      to                     

Cooper Industries, Ltd.

(Exact name of registrant as specified in its charter)

Bermuda		98-0355628
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
600 Travis, Suite 5800		Houston, Texas 77002
(Address of principal executive offices)		(Zip Code)

(713) 209-8400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

Indicate by check mark whether the registrant is 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 registrant’s common stock outstanding as of March 31, 2007 was 183,044,209 Class A common shares that are held by the public and 26,737,202 Class A common shares and 109,620,258 Class B common shares that are held by the issuer’s wholly-owned subsidiaries.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COOPER INDUSTRIES, LTD.
CONSOLIDATED INCOME STATEMENTS

		Three Months Ended
		March 31,
		2007				2006
		(in millions, where applicable)
Revenues		$	1,394.0			$	1,240.9
Cost of sales			944.9				846.8
Selling and administrative expenses			255.4				237.5
Operating earnings			193.7				156.6
Interest expense, net			12.9				12.1
Income before income taxes			180.8				144.5
Income taxes			48.9				36.8
Net income		$	131.9			$	107.7
Income per common share:
Basic		$	.72			$	.59
Diluted		$	.71			$	.57
Cash dividends per common share		$	.21			$	.185

The accompanying notes are an integral part of these statements.

COOPER INDUSTRIES, LTD.
CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2007				2006
		(in millions)
ASSETS
Cash and cash equivalents		$	304.8			$	423.5
Receivables			1,007.4				896.0
Inventories			672.4				607.6
Deferred income taxes and other current assets			235.8				266.6
Total current assets			2,220.4				2,193.7
Property, plant and equipment, less accumulated depreciation			670.2				665.4
Goodwill			2,387.8				2,336.9
Other noncurrent assets			208.2				178.8
Total assets		$	5,486.6			$	5,374.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt		$	4.3			$	5.0
Accounts payable			512.6				471.7
Accrued liabilities			473.0				522.3
Current discontinued operations liability			229.5				199.6
Current maturities of long-term debt			300.6				300.7
Total current liabilities			1,520.0				1,499.3
Long-term debt			706.4				702.8
Postretirement benefits other than pensions			82.4				83.2
Long-term discontinued operations liability			330.0				330.0
Other long-term liabilities			302.9				284.2
Total liabilities			2,941.7				2,899.5
Common stock, $.01 par value			1.8				0.9
Capital in excess of par value			277.1				278.4
Retained earnings			2,390.2				2,324.4
Accumulated other nonowner changes in equity			(124.2	)			(128.4	)
Total shareholders’ equity			2,544.9				2,475.3
Total liabilities and shareholders’ equity		$	5,486.6			$	5,374.8

The accompanying notes are an integral part of these statements.

COOPER INDUSTRIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2007				2006
		(in millions)
Cash flows from operating activities:
Net income		$	131.9			$	107.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization			28.9				27.0
Deferred income taxes			(4.1	)			8.5
Excess tax benefits from stock options and awards			(10.4	)			(13.9	)
Changes in assets and liabilities: (1)
Receivables			(93.2	)			(77.2	)
Inventories			(41.6	)			(58.2	)
Accounts payable and accrued liabilities			3.2				(20.8	)
Other assets and liabilities, net			59.0				52.5
Net cash provided by operating activities			73.7				25.6
Cash flows from investing activities:
Capital expenditures			(22.1	)			(16.7	)
Cash paid for acquired businesses			(124.3	)			(83.2	)
Proceeds from sales of property, plant and equipment and other			—				0.2
Net cash used in investing activities			(146.4	)			(99.7	)
Cash flows from financing activities:
Repayments of debt			(1.0	)			(2.0	)
Dividends			(38.9	)			(34.6	)
Subsidiary purchase of parent shares			(39.3	)			(69.3	)
Excess tax benefits from stock options and awards			10.4				13.9
Activity under employee stock plans and other			21.5				53.2
Net cash used in financing activities			(47.3	)			(38.8	)
Effect of exchange rate changes on cash and cash equivalents			1.3				3.7
Decrease in cash and cash equivalents			(118.7	)			(109.2	)
Cash and cash equivalents, beginning of period			423.5				452.8
Cash and cash equivalents, end of period		$	304.8			$	343.6

The accompanying notes are an integral part of these statements.

COOPER INDUSTRIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Accounting Policies

     Basis of Presentation - The consolidated financial statements of Cooper Industries, Ltd., a Bermuda company (“Cooper”), have been prepared in accordance with generally accepted accounting principles in the United States.

     The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. Financial information as of December 31 has been derived from Cooper’s audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included. For further information regarding Cooper’s accounting policies, refer to the Consolidated Financial Statements and related notes for the year ended December 31, 2006 included in Part IV of Cooper’s 2006 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”). The 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. For Cooper, the Interpretation was effective January 1, 2007. See Note 8 of the Notes to the Consolidated Financial Statements.

     In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the assets or liabilities and establishes a hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Cooper is currently evaluating the impact of this Statement on its consolidated financial statements.

     In February 2007, the Financial Accounting Standards Board issued FASB Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure many eligible recognized financial assets and financial liabilities, financial instruments and certain other eligible items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Cooper is currently evaluating the impact of this Statement on its consolidated financial statements.

Note 2. Stock-Based Compensation

     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 Plan’s inception in 1996, the aggregate number of shares authorized under the Plan is 34 million. As of March 31, 2007, 3,197,591 shares remain available for future grants under the Plan all of which are available for grants of stock options, performance-based shares and restricted stock units. Total compensation expense for all share-based compensation arrangements under the Plan was

$8.8 million and $6.9 million for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for all share-based compensation arrangements under the Plan was $3.2 million and $2.5 million for the three months ended March 31, 2007 and 2006, respectively. During the three months ended March 31, 2007, Cooper granted 1,673,400 stock option awards, 540,080 performance-based shares and 236,600 restricted stock units.

Note 3. Acquisitions

     Cooper completed three acquisitions during the three months ended March 31, 2007. These acquisitions were selected because of their strategic fit with existing Cooper businesses or were new strategic lines that were complementary to Cooper’s operations.

     In January 2007, Cooper acquired WPI and Cybectec. WPI provides highly customized specification-grade connector technologies for use in harsh, heavy-duty and hazardous locations in military, industrial and commercial applications. Cybectec provides products and software systems that meet utilities’ most demanding real-time and reliability requirements in a number of areas, including electrical power substation automation, integration, communication and instrumentation. In March 2007, Cooper acquired Polaron, which provides intelligent lighting control solutions for use in office, hospitality, educational and urban outdoors settings that allow customers to realize energy savings, creative ambiance, or enhanced productivity, safety and security.

     Total consideration was $124.3 million for the three acquisitions, net of cash acquired, including acquisition costs. The acquisitions resulted in the recognition of preliminary estimated aggregate goodwill of $51.5 million.

     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. The following table summarizes the aggregate estimated preliminary fair values of the assets acquired and the liabilities assumed at the acquisition date for the acquisitions completed during the three months ended March 31, 2007:

		Total
		(in millions)
Accounts receivable		$	15.3
Inventory			21.0
Property, plant and equipment			10.5
Goodwill			51.5
Other intangible assets			37.7
Accounts payable			(7.0	)
Other assets and liabilities, net			(4.7	)
Net cash consideration		$	124.3

     Cooper continues to evaluate the fair value of the assets and liabilities acquired during the three months ended March 31, 2007 and will adjust the allocations as additional information relative to the businesses becomes available for up to one year from the acquisition date.

     In January 2006, Cooper acquired G&H Technology, Inc., a designer and manufacturer of advanced, high-reliability connectors and interconnect devices used in aerospace, subsea, and military and industrial applications for total consideration of $41.8 million. In February 2006, Cooper acquired Wheelock, Inc., a designer and manufacturer of fire safety and emergency incident communication systems and devices for total consideration of $44.2 million.

     The results of operations are included in Cooper’s consolidated financial statements since the date of acquisition. Pro-forma net income and earnings per share for the three months ended March 31, 2007 and

2006, assuming the acquisitions had been made at the beginning of the year, would not have been materially different from reported results.

Note 4. Inventories

		March 31,				December 31,
		2007				2006
		(in millions)
Raw materials		$	240.6			$	204.2
Work-in-process			178.5				160.7
Finished goods			384.7				366.3
Perishable tooling and supplies			15.3				14.6
			819.1				745.8
Allowance for excess and obsolete inventory			(73.0	)			(65.6	)
Excess of current standard costs over LIFO costs			(73.7	)			(72.6	)
Net inventories		$	672.4			$	607.6

Note 5. Shareholders’ Equity

     On February 14, 2007, Cooper announced that the Board of Directors approved a two-for-one stock split of Cooper common stock. The record date for the stock split was February 28, 2007 and the distribution date was March 15, 2007. All share and per share information presented in this Form 10-Q has been retroactively restated to reflect the effect of the stock split.

     At March 31, 2007, 183,044,209 Class A common shares, $.01 par value were issued and outstanding (excluding 26,737,202 Class A common shares held by wholly-owned subsidiaries) compared to 182,282,042 Class A common shares, $.01 par value (excluding 25,876,802 Class A common shares held by wholly-owned subsidiaries) at December 31, 2006. During the first quarter of 2007, Cooper issued 1,622,567 Class A common shares primarily in connection with employee incentive and benefit plans and Cooper’s dividend reinvestment program. During the first quarter of 2007, Cooper’s wholly-owned subsidiaries purchased 860,400 Class A common shares for $39.3 million under the Company’s share repurchase plan. The share purchases are recorded by Cooper’s 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 subsidiary’s investment in the Class B common shares is eliminated in consolidation. If at any time a dividend is declared and paid on the Class A common shares, a like dividend shall be declared and paid on the Class B common shares in an equal amount per share. During the first quarter of 2007, Cooper’s wholly-owned subsidiaries received the regular quarterly dividend of $.21 per share (or an aggregate of $28.5 million) on all Class A and Class B common shares held.

     On February 14, 2007, Cooper’s Board of Directors increased the annual dividend rate of Cooper’s common stock by $.10 per share to $.84.

Note 6. Segment Information

		Revenues								Operating Earnings
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
		(in millions)
Electrical Products		$	1,210.6			$	1,060.6			$	193.5			$	160.1
Tools			183.4				180.3				21.8				17.3
Total segments		$	1,394.0			$	1,240.9				215.3				177.4
General Corporate expense											21.6				20.8
Interest expense, net											12.9				12.1
Income before income taxes										$	180.8			$	144.5

Note 7. Pension and Other Postretirement Benefits

     During June 2006, Cooper announced that, effective January 1, 2007, future benefit accruals would cease under the Cooper U. S. Salaried Pension Plan. Benefits earned through December 31, 2006 remain in each participant’s 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 contributes cash equal to 3% of compensation to the Retirement Savings and Stock-Ownership Plan (“CO-SAV”). Cooper further increased 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.

										Other Postretirement
		Pension Benefits								Benefits
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
		(in millions)
Components of net periodic benefit cost:
Service cost		$	1.0			$	4.9			$	—			$	—
Interest cost			10.2				10.3				1.3				1.4
Expected return on plan assets			(12.8	)			(12.6	)			—				—
Amortization of prior service cost			(0.5	)			0.2				(0.5	)			(0.5	)
Recognized actuarial (gain) loss			2.6				3.8				(0.6	)			(0.7	)
Net periodic benefit cost		$	0.5			$	6.6			$	0.2			$	0.2

Note 8. Income Taxes

     The effective tax rate was 27.1% for the three months ended March 31, 2007 and 25.5% for the three months ended March 31, 2006. The increase is primarily related to increased taxable earnings in 2007 without a corresponding increase in projected tax benefits.

     In 2005, Cooper protested the United States Internal Revenue Service (“IRS”) examination findings for the 2000-2001 tax years. The IRS challenged Cooper’s 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 were upheld, it would require Cooper to pay approximately $26.5 million in taxes plus accrued interest. 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 IRS prevailed in its proposed treatment for the 2000-2001 tax years. Interest continues 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 periods involved and challenged these adjustments vigorously. During 2007, Cooper and the IRS conducted negotiations regarding these transactions. On April 27, 2007, the IRS and Cooper finalized a settlement regarding these transactions for the 2000 and 2001 tax years. A similar settlement of these transactions for the 2002 and 2003 tax years may also be reached.

     On February 1, 2007, the IRS issued its examination report for the 2002-2004 tax years. In addition to the finding related to transactions involving government securities discussed above, the IRS challenged Cooper’s treatment of certain interest payments made during these years to a subsidiary. If the proposed adjustments were upheld, it would require Cooper to pay approximately $140 million of federal withholding tax plus accrued interest. Cooper believes that these interest payments were not subject to this tax, and that the interest payments were properly reflected on its federal income tax returns in accordance with applicable tax laws and regulations in effect during the period involved. Cooper filed a protest related to these proposed adjustments and challenged the proposed adjustments vigorously. On May 2, 2007, the IRS issued a letter to Cooper accepting Cooper’s position regarding treatment of these interest payments for the 2002 through 2004 tax years.

     As a result of the settlements discussed above, Cooper will recognize $10.9 million of tax benefits in the 2007 second quarter. Should Cooper and the IRS finalize a settlement regarding the government securities transactions discussed above for the 2002 and 2003 tax years in a similar manner, approximately $40 million — $50 million of tax benefits will be recognized at that time.

     While the outcome of the above remaining proceedings cannot be predicted with certainty, management believes that the ultimate outcome of these matters will not have a material adverse impact on Cooper’s consolidated financial position or results of operations.

     In addition to the items discussed above, Cooper believes it is reasonably possible that additional tax benefits could be recognized within the next 12 months as various tax audits are concluded. However, an estimate of the range of these benefits cannot be made.

     In addition to the above, Cooper is under examination by various United States State and Local taxing authorities as well as various taxing authorities in other countries. With few exceptions, Cooper is no longer subject to U.S. Federal, State and Local, or non-U.S. income tax examinations by tax authorities for years before 1999. 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 a liability for unrecognized tax benefits, which management believes is adequate. The results of future audit assessments, if any, could have a material effect on Cooper’s cash flows as these audits are completed.

     Cooper adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized a $27.2 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction of the January 1, 2007 beginning retained earnings balance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		(in millions)
Balance at January 1, 2007		$	122.8
Additions for tax positions of the current year			1.0
Additions for tax positions of prior years			1.0
Balance at March 31, 2007		$	124.8

     The $124.8 million of unrecognized tax benefits, if recognized, would favorably impact the effective tax rate.

     Cooper recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes expense. During the three months ended March 31, 2007 and 2006, Cooper recognized $1.0 million and $1.2 million in interest and penalties, respectively. Cooper had $22.2 million and $13.2 million in interest and penalties accrued at March 31, 2007 and 2006, respectively.

Note 9. Net Income Per Common Share

     On February 14, 2007, Cooper announced that the Board of Directors approved a two-for-one stock split of Cooper common stock. The record date for the stock split was February 28, 2007 and the distribution date was March 15, 2007. All share and per share information presented in this Form 10-Q has been retroactively restated to reflect the effect of the stock split.

		Basic								Diluted
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
		(in millions)
Net income applicable to common stock		$	131.9			$	107.7			$	131.9			$	107.7
Weighted average common shares outstanding			183.0				184.4				183.0				184.4
Incremental shares from assumed conversions:
Options, performance-based stock awards and other employee awards											3.5				4.4
Weighted average common shares and common share equivalents											186.5				188.8

     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
		March 31,
		2007				2006
		(in millions)
Net income		$	131.9			$	107.7
Foreign currency translation gains (losses)			(1.1	)			4.6
Change in fair value of derivatives			4.7				3.4
Net income and other nonowner changes in equity		$	135.5			$	115.7

Note 11. 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 March 31, 2007, a total of 142,247 Abex Claims were filed, of which 110,640 claims have been resolved leaving 31,607 Abex Claims pending at March 31, 2007, that are the responsibility of Federal-Mogul. During the three months ended March 31, 2007, 718 claims were filed and 411 claims were resolved. Since August 28, 1998, the average indemnity payment for resolved Abex Claims was $1,990 before insurance. A total of $112.2 million was spent on defense costs for the period August 28, 1998 through March 31, 2007. 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 Cooper’s analysis of its contingent liability exposure resulting from Federal-Mogul’s bankruptcy, Cooper concluded that an additional fourth-quarter 2001 discontinued operations provision of $30 million after-tax 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-Mogul’s 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 Cooper’s participation in Federal Mogul’s proposed 524 (g) asbestos trust. By participating in this trust, Cooper would resolve its liability for asbestos claims arising from Cooper’s 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 31, 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-Mogul’s 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 Cooper common stock upon Federal-Mogul’s 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 Cooper’s 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 Cooper’s 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 court’s 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 will 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 through 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 Cooper’s participation in Federal-Mogul’s 524(g) trust. The revised proposed settlement agreement remains subject to court approval 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 Cooper 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 Cooper 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 Cooper’s 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.

     The revised proposed settlement agreement has been incorporated into Federal-Mogul’s Fourth Amended Joint Plan of Reorganization, which was filed on November 21, 2006.

     On February 2, 2007, the U.S. Bankruptcy Court for the District of Delaware approved the adequacy of Federal-Mogul’s Supplemental Disclosure Statement describing the Fourth Amended Joint Plan of Reorganization. The Court also approved the Voting Procedures and ordered that the voting period would expire on April 6, 2007. At a hearing on April 13, Federal-Mogul announced that the Abex settlement had received a favorable vote of approximately 94%, well in excess of the required vote. In addition, any objections to the Fourth Amended Plan must have been filed with the Court by April 24, 2007 and the hearing on confirmation of the Plan was scheduled by the Court to begin on June 18, 2007. If the Plan is confirmed, Federal-Mogul could emerge from bankruptcy in mid-year 2007.

     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 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 $559.5 million at March 31, 2007 and $529.6 million at December 31, 2006.

Note 12. 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.

Consolidating Income Statements
Three Months Ended March 31, 2007
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc.				Guarantors				Subsidiaries				Adjustments				Total
Revenues		$	—			$	—			$	—			$	918.5			$	536.4			$	(60.9	)		$	1,394.0
Cost of sales			—				0.1				0.3				645.1				360.3				(60.9	)			944.9
Selling and administrative expenses			2.4				3.5				15.7				133.3				100.5				—				255.4
Interest expense, net			(0.6	)			11.2				3.7				—				(1.4	)			—				12.9
Equity in earnings of subsidiaries, net of tax			169.2				10.8				95.7				20.2				102.9				(398.8	)			—
Intercompany income (expense)			(6.9	)			(4.3	)			15.1				(39.4	)			64.0				(28.5	)			—
Income (loss) before income taxes			160.5				(8.3	)			91.1				120.9				243.9				(427.3	)			180.8
Income tax expense (benefit)			—				(7.3	)			(11.7	)			38.8				29.1				—				48.9
Net income (loss)		$	160.5			$	(1.0	)		$	102.8			$	82.1			$	214.8			$	(427.3	)		$	131.9

Consolidating Income Statements
Three Months Ended March 31, 2006
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc.				Guarantors				Subsidiaries				Adjustments				Total
Revenues		$	—			$	—			$	—			$	823.1			$	478.4			$	(60.6	)		$	1,240.9
Cost of sales			—				(0.2	)			0.2				580.8				326.6				(60.6	)			846.8
Selling and administrative expenses			2.3				2.2				16.1				130.1				86.8				—				237.5
Interest expense, net			(0.1	)			10.9				2.6				—				(1.3	)			—				12.1
Equity in earnings of subsidiaries, net of tax			137.1				9.3				80.5				21.6				80.1				(328.6	)			—
Intercompany income (expense)			(3.2	)			(3.3	)			5.0				(94.4	)			120.0				(24.1	)			—
Income (loss) before income taxes			131.7				(6.9	)			66.6				39.4				266.4				(352.7	)			144.5
Income tax expense (benefit)			—				(6.1	)			(13.5	)			7.8				48.6				—				36.8
Net income (loss)		$	131.7			$	(0.8	)		$	80.1			$	31.6			$	217.8			$	(352.7	)		$	107.7

Consolidating Balance Sheets
March 31, 2007
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc				Guarantors				Subsidiaries				Adjustments				Total
Cash and cash equivalents		$	28.1			$	—			$	42.8			$	(0.6	)		$	234.5			$	—			$	304.8
Receivables			0.2				—				—				564.7				442.5				—				1,007.4
Inventories			—				—				—				384.0				288.4				—				672.4
Deferred income taxes and other current assets			0.7				126.0				31.4				39.3				38.4				—				235.8
Total current assets			29.0				126.0				74.2				987.4				1,003.8				—				2,220.4
Property, plant and equipment, less accumulated depreciation			—				—				50.0				324.9				295.3				—				670.2
Goodwill			—				—				—				1,256.1				1,131.7				—				2,387.8
Investment in subsidiaries			3,878.9				579.6				4,189.1				1,242.7				1,432.1				(11,322.4	)			—
Investment in parent			—				—				2,850.6				—				312.7				(3,163.3	)			—
Intercompany accounts receivable			702.3				820.8				—				1,002.5				666.9				(3,192.5	)			—
Intercompany notes receivable			60.0				24.9				714.5				0.8				4,145.4				(4,945.6	)			—
Other noncurrent assets			—				13.4				6.4				37.1				151.3				—				208.2
Total assets		$	4,670.2			$	1,564.7			$	7,884.8			$	4,851.5			$	9,139.2			$	(22,623.8	)		$	5,486.6
Short-term debt		$	—			$	—			$	—			$	—			$	4.3			$	—			$	4.3
Accounts payable			38.4				12.9				9.7				246.4				205.2				—				512.6
Accrued liabilities			5.3				39.6				55.5				216.6				156.0				—				473.0
Current discontinued operations liability			—				229.5				—				—				—				—				229.5
Current maturities of long-term debt			—				300.0				—				—				0.6				—				300.6
Total current liabilities			43.7				582.0				65.2				463.0				366.1				—				1,520.0
Long-term debt			—				374.2				323.9				8.0				0.3				—				706.4
Intercompany accounts payable			—				—				3,192.6				—				—				(3,192.6	)			—
Intercompany notes payable			593.8				344.7				1,874.1				1,741.2				391.7				(4,945.5	)			—
Long-term discontinued operations liability			—				330.0				—				—				—				—				330.0
Other long-term liabilities			—				(93.5	)			179.6				166.9				132.3				—				385.3
Total liabilities			637.5				1,537.4				5,635.4				2,379.1				890.4				(8,138.1	)			2,941.7
Class A common stock			2.1				—				—				—				—				(0.3	)			1.8
Class B common stock			1.1				—				—				—				—				(1.1	)			—
Subsidiary common stock			—				—				—				—				500.3				(500.3	)			—
Capital in excess of par value			3,429.4				—				66.6				1,445.4				5,161.5				(9,825.8	)			277.1
Retained earnings			592.1				122.4				2,318.5				1,030.4				2,678.0				(4,351.2	)			2,390.2
Accumulated other non- owner changes in equity			8.0				(95.1	)			(135.7	)			(3.4	)			(91.0	)			193.0				(124.2	)
Total shareholders’ equity			4,032.7				27.3				2,249.4				2,472.4				8,248.8				(14,485.7	)			2,544.9
Total liabilities and shareholders’ equity		$	4,670.2			$	1,564.7			$	7,884.8			$	4,851.5			$	9,139.2			$	(22,623.8	)		$	5,486.6

Consolidating Balance Sheets
December 31, 2006
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc.				Guarantors				Subsidiaries				Adjustments				Total
Cash and cash equivalents		$	11.5			$	—			$	204.9			$	(2.8	)		$	209.9			$	—			$	423.5
Receivables			0.2				—				0.4				469.3				426.1				—				896.0
Inventories			—				—				—				348.6				259.0				—				607.6
Deferred income taxes and other current assets			1.1				141.4				51.9				25.6				46.6				—				266.6
Total current assets			12.8				141.4				257.2				840.7				941.6				—				2,193.7
Property, plant and equipment, less accumulated depreciation			—				—				49.8				320.0				295.6				—				665.4
Goodwill			—				—				—				1,025.0				1,311.9				—				2,336.9
Investment in subsidiaries			3,554.6				570.0				4,081.8				1,219.2				1,346.2				(10,771.8	)			—
Investment in parent			—				—				2,811.2				—				312.8				(3,124.0	)			—
Intercompany accounts receivable			686.3				806.5				—				1,289.0				598.6				(3,380.4	)			—
Intercompany notes receivable			91.8				24.9				758.5				0.7				4,067.3				(4,943.2	)			—
Other noncurrent assets			—				20.0				2.0				23.0				133.8				—				178.8
Total assets		$	4,345.5			$	1,562.8			$	7,960.5			$	4,717.6			$	9,007.8			$	(22,219.4	)		$	5,374.8
Short-term debt		$	—			$	—			$	—			$	—			$	5.0			$	—			$	5.0
Accounts payable			32.1				17.2				4.5				225.9				192.0				—				471.7
Accrued liabilities			5.2				43.4				84.5				230.0				159.2				—				522.3
Current discontinued operations liability			—				199.6				—				—				—				—				199.6
Current maturities of long-term debt			—				300.0				—				—				0.7				—				300.7
Total current liabilities			37.3				560.2				89.0				455.9				356.9				—				1,499.3
Long-term debt			—				370.5				323.9				8.0				0.4				—				702.8
Intercompany accounts payable			—				—				3,380.4				—				—				(3,380.4	)			—
Intercompany notes payable			552.3				329.9				1,901.4				1,707.3				452.3				(4,943.2	)			—
Long-term discontinued operations liability			—				330.0				—				—				—				—				330.0
Other long-term liabilities			—				(57.7	)			119.2				172.9				133.0				—				367.4
Total liabilities			589.6				1,532.9				5,813.9				2,344.1				942.6				(8,323.6	)			2,899.5
Class A common stock			1.0				—				—				—				—				(0.1	)			0.9
Class B common stock			0.5				—				—				—				—				(0.5	)			—
Subsidiary common stock			—				—				—				—				500.3				(500.3	)			—
Capital in excess of par value			3,392.0				—				56.2				1,431.5				5,174.7				(9,776.0	)			278.4
Retained earnings			358.4				128.3				2,230.1				943.3				2,485.6				(3,821.3	)			2,324.4
Accumulated other non-owner changes in equity			4.0				(98.4	)			(139.7	)			(1.3	)			(95.4	)			202.4				(128.4	)
Total shareholders’ equity			3,755.9				29.9				2,146.6				2,373.5				8,065.2				(13,895.8	)			2,475.3
Total liabilities and shareholders’ equity		$	4,345.5			$	1,562.8			$	7,960.5			$	4,717.6			$	9,007.8			$	(22,219.4	)		$	5,374.8

Consolidating Statements of Cash Flows
Three Months Ended March 31, 2007
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc				Guarantors				Subsidiaries				Adjustments				Total
Net cash provided by (used in) operating activities		$	(1.3	)		$	(0.5	)		$	31.2			$	(36.2	)		$	80.5			$	—			$	73.7
Cash flows from investing activities:
Capital expenditures			—				—				(2.8	)			(12.3	)			(7.0	)			—				(22.1	)
Cash paid for acquired businesses			—				—				—				(74.3	)			(50.0	)			—				(124.3	)
Investment in affiliates			—				—				(0.7	)			—				—				0.7				—
Loans to affiliates			(60.0	)			—				(14.8	)			—				(309.0	)			383.8				—
Repayments of loans from affiliates			91.8				—				—				—				263.6				(355.4	)			—
Dividends from affiliates			—				—				26.3				—				2.2				(28.5	)			—
Net cash provided by (used in) investing activities			31.8				—				8.0				(86.6	)			(100.2	)			0.6				(146.4	)
Cash flows from financing activities:
Repayments of debt			—				—				—				—				(1.0	)			—				(1.0	)
Borrowings from affiliates			241.1				14.8				127.9				—				—				(383.8	)			—
Repayments of loans to affiliates			(199.6	)			—				(154.1	)			—				(1.7	)			355.4				—
Other intercompany financing activities			5.0				(14.3	)			(160.7	)			125.0				45.0				—				—
Dividends			(38.9	)			—				—				—				—				—				(38.9	)
Dividends paid to affiliates			(28.5	)			—				—				—				—				28.5				—
Subsidiary purchase of parent shares			7.0				—				(46.3	)			—				—				—				(39.3	)
Excess tax benefits from stock options and awards			—				—				10.4				—				—				—				10.4
Issuance of stock			—				—				—				—				0.7				(0.7	)			—
Employee stock plan activity and other			—				—				21.5				—				—				—				21.5
Net cash provided by (used in) financing activities			(13.9	)			0.5				(201.3	)			125.0				43.0				(0.6	)			(47.3	)
Effect of exchange rate changes on cash and cash equivalents			—				—				—				—				1.3				—				1.3
Increase (decrease) in cash and cash equivalents			16.6				—				(162.1	)			2.2				24.6				—				(118.7	)
Cash and cash equivalents, beginning of period			11.5				—				204.9				(2.8	)			209.9				—				423.5
Cash and cash equivalents, end of period		$	28.1			$	—			$	42.8			$	(0.6	)		$	234.5			$	—			$	304.8

Consolidating Statements of Cash Flows
Three Months Ended March 31, 2006
(in millions)

						Cooper				Cooper
						Industries,				US,								Other				Consolidating
		Cooper				LLC				Inc				Guarantors				Subsidiaries				Adjustments				Total
Net cash provided by (used in) operating activities		$	(4.5	)		$	1.3			$	(17.1	)		$	(71.4	)		$	117.3			$	—			$	25.6
Cash flows from investing activities:
Capital expenditures			—				—				(2.3	)			(7.0	)			(7.4	)			—				(16.7	)
Cash paid for acquired businesses			—				—				(42.4	)			(40.8	)			—				—				(83.2	)
Investment in affiliates			(4.2	)			—				(35.9	)			—				—				40.1				—
Loans to affiliates			(22.1	)			—				(12.3	)			—				(145.5	)			179.9				—
Repayments of loans from affiliates			37.9				—				—				—				2.4				(40.3	)			—
Dividends from affiliates			—				—				22.1				—				2.0				(24.1	)			—
Other			—				—				—				0.2				—				—				0.2
Net cash provided by (used in) investing activities			11.6				—				(70.8	)			(47.6	)			(148.5	)			155.6				(99.7	)
Cash flows from financing activities:
Repayments of debt			—				—				—				—				(2.0	)			—				(2.0	)
Borrowings from affiliates			59.1				12.2				108.5				—				0.1				(179.9	)			—
Repayments of loans to affiliates			—				—				—				(2.4	)			(37.9	)			40.3				—
Other intercompany financing activities			0.6				(13.5	)			(72.9	)			122.2				(36.4	)			—				—
Dividends			(34.6	)			—				—				—				—				—				(34.6	)
Dividends paid to affiliates			(24.1	)			—				—				—				—				24.1				—
Subsidiary purchase of parent shares			5.3				—				(74.6	)			—				—				—				(69.3	)
Issuance of stock			—				—				—				—				40.1				(40.1	)			—
Excess tax benefits from stock options and awards			—				—				13.9				—				—				—				13.9
Employee stock plan activity and other			—				—				53.2				—				—				—				53.2
Net cash provided by (used in) financing activities			6.3				(1.3	)			28.1				119.8				(36.1	)			(155.6	)			(38.8	)
Effect of exchange rate changes on cash and cash equivalents			—				—				—				—				3.7				—				3.7
Increase (decrease) in cash and cash equivalents			13.4				—				(59.8	)			0.8				(63.6	)			—				(109.2	)
Cash and cash equivalents, beginning of period			64.1				—				144.4				(3.5	)			247.8				—				452.8
Cash and cash equivalents, end of period		$	77.5			$	—			$	84.6			$	(2.7	)		$	184.2			$	—			$	343.6