<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 23, 1994
------------------------------
COOPER INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Ohio
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-1175 31-4156620
- --------------------------------- --------------------------------------
(Commission File Number) (IRS Employer Identification No.)
1001 Fannin, Suite 4000, Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
713/739-5400
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5 Other Events
The information set forth in the attached Exhibits reflects a
restatement of selected financial information originally filed under Form 10-K
for the year ended December 31, 1993. This restatement, which reflects the
separation of "continuing" and "discontinued" operations, has been prepared in
connection with the Company's decision to establish its petroleum and
industrial equipment business as an independent, publicly-traded company
through an exchange offer with the holders of Cooper Industries, Inc. ("Cooper"
or "Company") Common Stock. (See Note 1 of the Notes to the Company's
Consolidated Financial Statements for further information regarding the
Exchange Offer.) The Company is filing a double dated report of independent
auditors, restated consolidated financial statements and restated management's
discussion and financial review as Exhibits 99.1, 99.2 and 99.3, respectively.
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 hereunto duly authorized.
COOPER INDUSTRIES, INC.
(Registrant)
Date: November 23, 1994 /s/ D. Bradley McWilliams
D. Bradley McWilliams
Vice President, Finance
and authorized to sign on behalf
of the Registrant
/s/ Joseph D. Chamberlain
Joseph D. Chamberlain
Controller, Accounting and
Chief Accounting Officer
-2-
<PAGE> 3
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
99.1 Report of Independent Auditors
99.2 Financial Statements
99.3 Management's Discussion and Financial Review
</TABLE>
-3-
<PAGE> 1
Exhibit No. 99.1
Report of Independent Auditors
The Board of Directors and Shareholders
Cooper Industries, Inc.
We have audited the accompanying consolidated balance sheet of Cooper
Industries, Inc. as of December 31, 1993 and 1992, and the related statements
of consolidated results of operations, changes in shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cooper
Industries, Inc. at December 31, 1993 and 1992, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 4 of the Notes to Consolidated Financial Statements, in
1992 the Company changed its methods of accounting for postretirement benefits
other than pensions, income taxes and postemployment benefits.
/s/ Ernst & Young
Houston, Texas
January 24, 1994,
except for Note 1, as to which
the date is September 30, 1994
1
<PAGE> 1
Exhibit No. 99.2
CONSOLIDATED RESULTS OF OPERATIONS
(in millions except per-share data)
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1993 1992
----------- -----------
<S> <C> <C>
REVENUES $ 4,776.4 $ 4,468.4
- -------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 3,163.0 2,969.4
Depreciation and amortization 215.9 211.8
Selling and administrative expenses 810.6 759.1
Interest expense 80.9 92.5
Nonoperating gain on 1993 IPO of
Belden Inc. and other (273.8) (6.6)
Nonrecurring expense 273.8 50.1
- -------------------------------------------------------------------------------------------------------------
4,270.4 4,076.3
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of changes in accounting principles 506.0 392.1
Income taxes 207.0 152.5
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of changes in accounting principles 299.0 239.6
Income from discontinued operations, net of taxes 68.1 121.7
- -------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 367.1 361.3
Cumulative effect on prior years of changes in
accounting principles - (590.0)
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 367.1 $ (228.7)
=============================================================================================================
INCOME (LOSS) PER COMMON SHARE
Primary-
Income from continuing operations before cumulative
effect of changes in accounting principles $ 2.15 $ 1.64
Income from discontinued operations .60 1.07
Cumulative effect on prior years of changes in
accounting principles - (5.19)
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2.75 $ (2.48)
=============================================================================================================
Fully diluted-
Income from continuing operations before cumulative
effect of changes in accounting principles $ 2.15 $ 1.64
Income from discontinued operations .60 1.07
Cumulative effect on prior years of changes in
accounting principles - (5.19)
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2.75 $ (2.48)
=============================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 1.32 $ 1.24
=============================================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements. Amounts for both 1993 and 1992 have been restated to reflect
discontinued operations.
1
<PAGE> 2
CONSOLIDATED BALANCE SHEET
(in millions except share data)
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13.0 $ 17.8
Receivables 801.3 1,086.1
Inventories 904.2 1,481.8
Other 198.2 251.4
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 1,916.7 2,837.1
- -------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations 1,061.8 -
Net assets of Cameron Forged Products 74.9 -
Plant and equipment, at cost less accumulated depreciation 1,115.9 1,685.6
Intangibles, less accumulated amortization 1,946.4 2,810.4
Deferred income taxes, investments and other assets 239.7 242.5
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,355.4 $ 7,575.6
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 99.7 $ 200.2
Accounts payable and accrued liabilities 1,036.2 1,347.4
Accrued income taxes 107.1 45.4
Current maturities of long-term debt 157.8 56.9
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,400.8 1,649.9
- -------------------------------------------------------------------------------------------------------------
Long-term debt 883.4 1,815.7
Postretirement benefits other than pensions 634.5 875.3
Other long-term liabilities 433.4 367.8
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 3,352.1 4,708.7
- -------------------------------------------------------------------------------------------------------------
$1.60 Convertible Exchangeable Preferred stock, $1.00 par value;
33,376,420 shares authorized (liquidating value at
December 31, 1993 - $753.2 million) 33.2 33.1
Common stock, $5.00 par value; 250,000,000 shares authorized 571.3 567.0
Capital in excess of par value 1,122.1 1,086.2
Retained earnings 1,526.5 1,359.1
Unearned employee stock ownership plan compensation (125.2) (149.7)
Minimum pension liability (73.6) (7.7)
Translation component (47.1) (21.1)
Common stock held in treasury, at cost (3.9) -
- -------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,003.3 2,866.9
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,355.4 $ 7,575.6
=============================================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements. Amounts for 1993 have been reclassified to reflect discontinued
operations.
2
<PAGE> 3
CONSOLIDATED CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1993 1992
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 367.1 $ (228.7)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 202.0 196.2
Amortization 100.8 92.9
Deferred income taxes (7.7) 109.4
Postretirement benefits other than pensions (8.0) 29.2
Nonoperating gain on 1993 IPO of Belden Inc.
and other, net of tax (164.3) (37.0)
Nonrecurring expense, net of tax 164.3 37.0
Cumulative effect of changes in accounting principles - 590.0
Changes in assets and liabilities: (1)
Receivables (114.2) 79.9
Inventories 68.5 114.5
Accounts payable and accrued liabilities 43.1 (222.9)
Accrued income taxes (50.9) 21.4
Other assets and liabilities, net (23.2) (129.3)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 577.5 652.6
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired businesses (100.9) (637.7)
Capital expenditures (275.1) (273.5)
Proceeds from sales of plant and equipment 25.5 31.6
Proceeds from disposition of businesses 412.5 38.9
Other (.9) 1.5
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 61.1 (839.2)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt 257.7 749.2
Reductions of debt (710.7) (415.2)
Dividends (203.4) (193.3)
Activity under stock option and other plans 12.3 44.7
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (644.1) 185.4
- -------------------------------------------------------------------------------------------------------------
EFFECT OF TRANSLATION ON CASH AND CASH EQUIVALENTS .7 (.4)
- -------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (4.8) (1.6)
Cash and cash equivalents, beginning of year 17.8 19.4
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13.0 $ 17.8
=============================================================================================================
</TABLE>
(1) Net of the effects of acquisitions, divestitures, translation,
nonrecurring items and the cumulative effect of changes in accounting
principles.
The Notes to Consolidated Financial Statements are an integral part of these
statements. This statement has not been restated. See Note 18 for information
on noncash investing and financing activities.
3
<PAGE> 4
CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in millions) Unearned
$1.60 Employee
Convertible Stock Common
Exchangeable Capital In Ownership Minimum Stock
Preferred Common Excess of Retained Plan Pension Translation Held in
Stock Stock Par Value Earnings Compensation Liability Component Treasury
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1991 $ 32.9 $ 561.0 $1,035.1 $1,777.5 $ (149.2) $ - $ 137.6 $ -
Net loss (228.7)
Cash dividends:
Preferred stock - $1.60 (52.8)
Common stock (140.5)
Dividend reinvestment
program .3 2.4
Shares issued for:
Conversions of debentures .2 3.7
Exercise of stock options 2.3 9.3
Executive restricted
stock incentive
plan .9 6.2
Employee stock ownership
plan:
Principal payments by
ESOP 26.1
Excess of cash
contributions
over expense (.4)
Sale of additional shares 2.3 23.9 (26.2)
Tax effect of:
Disqualifying stock
dispositions 3.4
Dividends paid to the
ESOP 3.6
Translation loss (158.7)
Adjustment for minimum
pension liability (7.7)
Other .2 2.2
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992 33.1 567.0 1,086.2 1,359.1 (149.7) (7.7) (21.1) -
Net income 367.1
Cash dividends:
Preferred stock - $1.60 (53.1)
Common stock (150.3)
Dividend reinvestment
program .3 2.2
Acquisition of treasury
stock, at cost (4.5)
Shares issued for:
Conversions of debentures .1 2.8
Exercise of stock options 1.6 7.1 .6
Employee stock purchase
plan 2.4 21.2
Employee stock ownership
plan:
Principal payments by
ESOP 27.2
Excess of cash
contributions
over expense (2.7)
Tax effect of:
Disqualifying stock
dispositions 2.3
Dividends paid to the
ESOP 3.7
Translation loss (26.0)
Adjustment for minimum
pension liability (65.9)
Other .3
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993 $ 33.2 $ 571.3 $1,122.1 $1,526.5 $ (125.2) $ (73.6) $ (47.1) $ (3.9)
=================================================================================================================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements. Applicable amounts for 1993 have been restated to reflect
discontinued operations.
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUBSEQUENT EVENT - PETROLEUM & INDUSTRIAL EQUIPMENT SEGMENT SEPARATED
AS DISCONTINUED OPERATION
Following a special Board of Directors meeting in mid-September 1994, the
Company announced its decision to establish its petroleum and industrial
equipment business as an independent, publicly-traded company through an
exchange offer with Cooper's Common shareholders. Based on an exchange ratio
that will be determined prior to the commencement of the exchange offer,
Cooper's Common shareholders will be offered an opportunity to exchange some or
all of their Cooper Common stock for common stock of the newly-formed company,
which will be called Cooper Cameron Corporation (Cooper Cameron). The exchange
is expected to be on a tax-free basis.
Because the transaction is being structured as an exchange of shares,
accounting rules required Cooper to charge its earnings for the difference
between the estimated fair market value of Cooper Cameron's assets and the
historical cost of the net assets of Cooper Cameron as reflected on Cooper's
consolidated financial statements. This charge, which amounted to $313
million, net of $7.9 million of taxes ($2.74 per share), was recorded against
Cooper's third quarter 1994 reported earnings. The charge, as required by the
rules pertaining to a "discontinued segment of a business", was computed as of
the September 30, 1994 "measurement date" and included the estimated loss
(including $14.5 million of allocated interest expense) from the operations of
the business during the period from the measurement date until the middle of
the second quarter of 1995, as well as the estimated costs associated with
separating Cooper Cameron from Cooper. The Company currently estimates that
the exchange offer will be completed during the second quarter of 1995.
The operations that will comprise Cooper Cameron include Cooper Energy
Services, headquartered in Mount Vernon, Ohio; Cooper Oil Tool, headquartered
in Houston, Texas; Cooper Turbocompressor, headquartered in Buffalo, New York
and Wheeling Machine Products, located in Pine Bluff, Arkansas. These
businesses along with Gardner Denver Machinery Inc., Cameron Forged Products,
Gardner Denver Mining & Construction, Martin Decker and Funk Manufacturing,
constituted all the significant operations that were at one-time or another
included in the Petroleum & Industrial Equipment segment. Starting in 1989
with the sale of Funk and ending in the spring of 1994 with the spin-off of
Gardner Denver Machinery Inc. and the sale of Cameron Forged Products to
Wyman-Gordon Company, all of the operations other than those that will comprise
Cooper Cameron have been divested.
As a consequence of treating this segment as "discontinued", the Company's
results of operations and related footnote data for all periods presented
herein and when presented elsewhere in the future will exclude the results of
the Petroleum & Industrial Equipment segment from revenues and other components
of income from continuing operations. The discontinued segment results prior to
the "measurement date" will be presented separately in a single, net of tax
caption "Income (loss) from discontinued operations." Results under the
caption "Net Income (Loss)" remain unchanged.
In order to facilitate an understanding of Cooper's continuing operations, the
Company has elected to restate the Consolidated Balance Sheet as of December
31, 1993 and the related footnote data as of that date to segregate the net
assets of the discontinued operations into the caption "Net assets of
discontinued operations." Consolidated balance sheets and related footnote
data prior to December 31, 1993 have not been restated.
As part of the restatement, the indebtedness allocated to discontinued
operations (the $70 million of indebtedness that was allocated to Gardner
Denver Machinery Inc. in connection with the spin-off and the $375 million of
debt which Cooper expects to include with Cooper Cameron at the time of the
exchange offer) has been considered to be fixed and to relate historically to
the discontinued operations. As a result, the income from discontinued
operations reflects interest expense on $445 million of debt at the relevant
Cooper interest rate during each period presented ($18.2 million in 1993 and
$23.1 million in 1992.) The interest rates utilized
5
<PAGE> 6
are the actual rates for borrowings specifically identifiable with the
respective businesses, with Cooper's average cost of commercial paper borrowing
applied to the residual. Actual cash provided by or utilized in the
discontinued operations, including the payment by Cooper of all U.S. Federal,
foreign and state and local income taxes related to the discontinued
operations, was provided by or used in Cooper's continuing operations such that
the indebtedness of the discontinued operations remains constant from year to
year.
The information which follows reflects the Company's results of operations for
the years 1991 and 1990 restated to separate continued and discontinued
operations.
<TABLE>
<CAPTION>
(in millions except per share data) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1991 1990
----------- ---------------
<S> <C> <C>
REVENUES $ 4,307.6 $ 4,570.8
- -----------------------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of sales 2,862.2 3,031.5
Depreciation and amortization 186.6 165.3
Selling and administrative expenses 726.7 745.5
Interest expense(1) 125.4 170.9
- -----------------------------------------------------------------------------------------------------------------
3,900.9 4,113.2
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operation before income taxes 406.7 457.6
Income taxes 175.5 192.3
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations 231.2 265.3
Income from discontinued operations, net of tax 162.0 96.1
- -----------------------------------------------------------------------------------------------------------------
NET INCOME 393.2 361.4
=================================================================================================================
INCOME PER COMMON SHARE
Primary-
Income from continuing operations $ 1.60 $ 1.94
Income from discontinued operations 1.44 .87
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 3.04 $ 2.81
=================================================================================================================
Fully diluted-
Income from continuing operations $ 1.78 $ 1.94
Income from discontinued operations 1.23 .87
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 3.01 $ 2.81
=================================================================================================================
</TABLE>
(1) Excludes $35.8 and $43.3, respectively, of interest allocated to
discontinued operations.
NOTE 2: SUMMARY OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries, except for certain
insignificant subsidiaries, the investments in which are recorded under the
cost method because of restrictions upon the transfer of earnings and other
economic uncertainties. Investments of 50% or less in affiliated companies are
accounted for on the equity method, unless significant economic or political
considerations indicate that the cost method is appropriate.
INVENTORIES Inventories are carried at cost or, if lower, net realizable
value. On the basis of current costs, 73% of continuing operations' inventories
in 1993 and 72% of total operations' inventories in 1992 are carried on the
last-in, first-out (LIFO) method. The remaining inventories are carried on the
first-in, first-out (FIFO) method.
6
<PAGE> 7
PLANT AND EQUIPMENT Depreciation is provided over the estimated useful lives
of the related assets using primarily the straight-line method. This method is
applied to group asset accounts which in general have the following lives:
buildings--10 to 40 years; machinery and equipment--3 to 18 years; and tooling,
dies, patterns, etc.--5 to 10 years. Prior to the fourth quarter of 1992, no
provision was made for depreciation of tooling, dies, patterns and similar
assets related to general operations, as replacement of these items was charged
to expense. The depreciable life for the majority of the Company's machinery
and equipment was changed from 10 to 12 years effective July 1, 1993.
INTANGIBLES Intangibles consist primarily of goodwill related to purchase
acquisitions. With minor exceptions, the goodwill is being amortized over 40
years from respective acquisition dates. The carrying value of the Company's
goodwill is reviewed at least annually or whenever there are indications that
the goodwill may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on undiscounted cash flows over the
remaining amortization periods, the carrying value of the goodwill will be
reduced by the estimated shortfall in cash flows.
INCOME TAXES Beginning with the year 1992, the Company determined tax expense
and other deferred tax information in compliance with Statement of Financial
Accounting Standards (SFAS) No. 109 (Accounting for Income Taxes). Income tax
expense includes U.S. and foreign income taxes, including U.S. Federal taxes on
undistributed earnings of foreign subsidiaries to the extent such earnings are
planned to be remitted.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Beginning with the year 1992, the
Company determined the accounting effect of postretirement benefits other than
pensions (primarily retiree medical costs) in accordance with the provisions of
SFAS No. 106 (Employers' Accounting for Postretirement Benefits Other Than
Pensions).
POSTEMPLOYMENT BENEFITS Beginning with the year 1992, the Company accounted
for the benefits payable to employees when they leave the Company other than by
reason of retirement in accordance with the provisions of SFAS No. 112
(Employers' Accounting for Postemployment Benefits).
ENVIRONMENTAL REMEDIATION AND COMPLIANCE Environmental remediation costs are
accrued, except to the extent costs can be capitalized, based on estimates of
known environmental remediation exposures. Environmental compliance costs
include maintenance and operating costs with respect to pollution control
facilities, cost of ongoing monitoring programs and similar costs. Such costs
are expensed as incurred. Capitalized environmental costs are depreciated
generally utilizing a 15-year life.
INTEREST RATE SWAP AGREEMENTS The Company uses interest rate swaps to manage
its interest rate risk. The interest rate differential to be received or paid
is recognized over the lives of the interest rate swaps as an adjustment to
interest expense.
OTHER For purposes of the statement of Consolidated Cash Flows, the Company
considers all investments purchased with original maturities of three months or
less to be cash equivalents.
NOTE 3: NONRECURRING ITEMS
On October 6, 1993, the Company closed an initial public offering of 90.4% of
the stock of Belden Inc., formerly the Company's Belden Division. This sale,
which was recorded in the third quarter, generated net-of-tax cash proceeds of
approximately $267 million and a $273.8-million pretax ($164.3 million net of
tax) gain or $1.44 per fully diluted share. In addition, depending upon the
future profitability of Belden and other factors, the Company will receive over
a 15-year period additional benefits from a tax sharing agreement between the
Company and Belden Inc. The proceeds from the tax sharing agreement will be
recorded in income when they are earned. The Company's remaining 9.6% interest
in Belden Inc., the sale of which is prohibited during the first six months and
restricted (other than when registered as permitted by agreements with Belden)
during the first two years following the public offering, has been accounted
for as a marketable equity security with an initial investment
7
<PAGE> 8
value of $12.4 million and a December 31, 1993 market value of $46.6 million.
Belden, which was included in the Electrical Products segment, had revenues of
$281 million and pretax profits of approximately $41 million through the date
of the sale.
The gain from the Belden sale was fully offset by the final loss recorded with
respect to the sale of the Cameron Forged Products Division and by the effects
of a series of management actions designed to enhance the Company's future
profitability. These actions, as restated and realigned in connection with the
separation of continuing and discontinued operations, included $126 million of
accruals with respect to a series of productivity improvement and consolidation
programs; a $65-million reduction in the depreciable value of the machinery and
equipment and certain other plant and equipment related to the production of
transformers, a large product line within the Company's Electrical Products
segment; and an $18-million reduction in the carrying value of the continuing
operations' internally developed capitalized software. In addition, the
Company increased the depreciable life on all existing and future additions of
machinery and equipment from 10 to 12 years effective July 1, 1993.
On January 10, 1994, the Company entered into a definitive agreement for the
sale of its Cameron Forged Products Division to Wyman-Gordon Company in
exchange for approximately 16.5 million newly issued shares of Wyman-Gordon
Company's common stock and $5 million in cash and notes. In anticipation of
this sale, which had been agreed to in principle in mid-September, the Company
reclassified the net assets of Cameron Forged Products Division to a long-term
asset under the caption "Net assets of Cameron Forged Products" and charged
pretax earnings approximately $65 million, as finally determined, for a
write-down of the carrying value of those assets. Although Cooper will own
approximately 48% of Wyman-Gordon Company, this investment is not intended to
be maintained for a long period. Consequently, while the sale of the
Wyman-Gordon Company shares is restricted, Cooper will have certain
registration rights with respect to the stock in addition to its rights
pursuant to Rule 144 of the Securities Act. In addition, Cooper will have only
limited representation on Wyman-Gordon Company's Board of Directors and will be
required, except in certain circumstances, to vote its shares in accordance
with the position recommended by Wyman-Gordon Company's Board of Directors or
proportionately with the vote of the other shareholders. As a result, the
Wyman-Gordon Company stock will be accounted for as a marketable equity
security. At December 31, 1993, the market value of the common stock that
Cooper will receive was $76.3 million, based on the year-end closing price of
the Wyman-Gordon Company common stock. For the nine months ended September 30,
1993, Cameron Forged Products Division had revenues of $114 million and a small
pretax loss. The results for the fourth quarter, which were consistent with
those for the nine-month period, have not been included in the Company's
consolidated results. In connection with the restatement to reflect
discontinued operations, the historical revenues and earnings of Cameron Forged
Products originally included in the Petroleum & Industrial Equipment segment
have been reclassified to Corporate for all periods presented reflecting the
fact that the Company's investment in this business continues albeit in a new
form.
In mid-October 1993, the Company announced its intention to spin off to the
Company's Common shareholders its Gardner-Denver Industrial Machinery Division
headquartered in Quincy, Illinois. The Company formed a new corporation called
Gardner Denver Machinery Inc. and then transferred the assets and liabilities
of the division into this entity. The stock of the newly formed corporation
will be distributed on the basis of one share of common stock, par value $.01
per share, for every 25 shares of Cooper Common stock owned as of the
determined record date. Pursuant to the income tax and accounting rules
pertaining to this transaction, the Company will not have a gain or loss with
respect to the transaction and the stock received by the Company's shareholders
will not be taxable until sold. As restated at December 31, 1993, the net
assets of the business, including approximately $70 million of allocated and $5
million of other indebtedness, amounted to approximately $150 million, which
amount has been included in the long-term asset caption titled "Net assets of
discontinued operations" pending completion of the distribution. For the year
ended December 31, 1993, the Gardner-Denver Industrial Machinery Division,
after deducting allocated interest expense, had a small pretax profit on
revenues of $156 million. The Company anticipates that the distribution will
be made during the first quarter of 1994.
8
<PAGE> 9
Because the Gardner-Denver Industrial Machinery Division was historically a
part of the Petroleum & Industrial Equipment segment, its results for 1993 and
prior years have been reflected as part of discontinued operations.
The Company's net results from continuing operations for 1992 as restated
included approximately $4 million, net of tax, of nonrecurring corporate
income, as well as a one-time, $11-million income tax expense reduction. In
anticipation of a continuing slow-growth global economy, the Company
accelerated consideration of a number of productivity improvement,
consolidation and asset disposition programs. The Company decided to implement
several such programs that were contemplated for later in the 1990s, resulting
in a provision of $33 million, net of tax, which offset the favorable effects
of these gains.
The 1992 nonrecurring income resulted from the receipt of an interest refund
from the U.S. government with respect to the settlement of a pending income tax
matter. The one-time income tax expense reduction resulted from a reassessment
of the amount of tax accruals that need to be retained in order to fully
provide for the additional U.S. tax that would be payable when the earnings of
the Company's foreign subsidiaries are remitted.
NOTE 4: CHANGES IN ACCOUNTING PRINCIPLES
During the fourth quarter of 1992, the Company elected to adopt effective for
all of 1992 and future years the accounting provisions of SFAS No. 106
(Employers' Accounting for Postretirement Benefits Other Than Pensions), SFAS
No. 109 (Accounting for Income Taxes) and SFAS No. 112 (Employers' Accounting
for Postemployment Benefits). Net income for 1992 included the cumulative
effect ($590 million, net of tax, or $5.19 per fully diluted share) as of
January 1, 1992, necessary to adjust the Company's net assets for compliance
with the new standards. The results of continuing and discontinued operations
for 1993 have also been determined in accordance with the new standards. Each
of these changes is discussed in greater detail below.
SFAS NO. 106-EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS This standard, which was required to be adopted by the Company no
later than January 1, 1993, provides that the Company follow an accrual method
of accounting for the benefits other than pensions (primarily medical costs)
provided to employees after retirement. Net income for 1992 included a charge
of $669.1 million pretax ($408.2 million, net of tax, or $3.59 per fully
diluted share) for the immediate recognition of the net transition obligation
with respect to benefits earned by active and retired employees prior to
January 1, 1992. Additionally, postretirement costs were recorded based on an
actuarially determined accrual method as opposed to the Company's previous
pay-as-you-go method of accounting for such costs. The effect was to decrease
1992's full-year continuing operations' net earnings by $14.8 million, or $.13
per fully diluted share. The remaining disclosure information required by SFAS
No. 106 is set forth in Note 14.
SFAS NO. 109-ACCOUNTING FOR INCOME TAXES This standard, which also was
required to be adopted by the Company no later than January 1, 1993, requires a
liability, as opposed to a deferred, method of accounting for income taxes.
Net income for 1992 included a net tax charge of $166.2 million ($1.47 per
fully diluted share) in order to provide a net deferred tax credit with respect
to the aggregate of the differences between the book and tax basis of the
Company's assets and liabilities. The direction and magnitude of this
adjustment resulted from the large, fair market value adjustments recorded for
book purposes, but not for tax purposes, with respect to certain acquisitions,
including Gardner-Denver, McGraw-Edison and, more recently, Champion Spark Plug
and Cameron Iron Works. Additionally, income tax expense and certain other
adjustments for 1992 were determined in accordance with the provisions of the
new standard. The effect was to decrease 1992 continuing operations' pretax
income by $3.6 million while increasing continuing operations' tax expense by
$.1 million, for a combined reduction of $.03 per fully diluted share. The
remaining disclosure information required by SFAS No. 109 is set forth in Note
10.
SFAS NO. 112-EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS This standard,
which was not required to be adopted by the Company until January 1, 1994,
provides that the Company follow an accrual method of accounting for the
benefits payable to employees when they leave the Company other than by reason
of
9
<PAGE> 10
retirement. Because most of these benefits were already accounted for by the
Company on an accrual method, this new standard had a relatively small
cumulative effect--$25.6 million ($15.6 million, net of tax, or $.13 per fully
diluted share)--and a negligible effect on 1992's continuing operations'
earnings.
NOTE 5: ACQUISITIONS AND DIVESTITURES
In addition to the transactions described in Note 3, the Company's continuing
operations completed five small product-line acquisitions and two divestitures
in 1993. The acquisitions, which had an aggregate cost of $110.2 million
including $6.7 million of assumed indebtedness, have been accounted for as
purchases, with the resulting revenues and earnings included in the Company's
continuing results of operations since the respective acquisition dates. A
total of $53.6 million of goodwill was recorded on a preliminary basis with
respect to the five acquisitions. Two of the acquisitions were in the
Electrical Products segment, two were in the Tools & Hardware segment and one
was in the Automotive Products segment.
During 1993, the Company sold two businesses that were being carried as
businesses held for sale. Including $19 million of notes and other amounts
receivable in the future, proceeds from the two divestitures of businesses held
for sale totaled $26 million and resulted in the recognition of a $5.5 million
after-tax gain.
During 1992, the Company completed one large acquisition, four small
product-line acquisitions and two divestitures. Effective October 1, 1992, the
Company acquired Moog Automotive Group, Inc. from IFINT S.A. The total cost of
the acquisition, including $233.8 million of indebtedness that was largely
repaid at the acquisition date, was $612.4 million. Moog Automotive is a
leading manufacturer of steering, suspension, driveline and temperature control
parts for the automotive and light truck aftermarket. The Moog acquisition,
along with the four smaller acquisitions, which had an aggregate cost of $42.0
million, have been accounted for as purchases and the results of the
acquisitions are included in the Company's Consolidated Results of Operations
since the respective acquisition dates. The four smaller acquisitions were all
in the Tools & Hardware segment. A total of $414.8 million of goodwill,
including 1993 revisions, has been recorded with respect to the five
acquisitions. During 1992, the Company sold its Distribution Equipment
Division and one other small operation, the results of which were previously
reported in the Electrical Products segment. Proceeds from these divestitures
totaled $38.9 million and resulted in the recognition of a $5.8 million
after-tax gain.
NOTE 6: COMMON AND PREFERRED STOCK
COMMON STOCK At December 31, 1993, 250,000,000 shares of Common stock were
authorized. Of this total, 114,254,133 shares were issued and 114,179,700 were
outstanding at December 31, 1993 (113,400,841 were issued and outstanding at
December 31, 1992). During the year ended December 31, 1993, a total of 86,500
shares were purchased as treasury stock at an average price of $52.82 per
share. In addition, 35,363,582 shares were reserved for the Dividend
Reinvestment Plan, conversions of Preferred stock, grants and exercises of
stock options, subscriptions under the Employee Stock Purchase Plan and other
plans, and shares to be issued in connection with future acquisitions.
Under a Shareholder Rights Plan adopted by the Board of Directors in 1987,
share purchase Rights were declared as a dividend at the rate of one Right for
each share of Common stock. Each Right has an exercise price of $87.50,
entitles the holder to buy securities, including in certain circumstances
Common stock, having a value of twice the exercise price, and becomes
exercisable only in certain circumstances constituting a potential change of
control on a basis considered inadequate by the Board of Directors. The Rights
expire February 27, 1997, and, at the Company's option, may be redeemed prior
to expiration for $.005 per Right.
Under the terms of a Dividend Reinvestment Plan that became effective in 1991,
any holder of Common stock or $1.60 Convertible Exchangeable Preferred stock
may elect to have cash dividends and/or up to $24,000 per year in cash payments
invested in Common stock without incurring any brokerage commissions or service
charges.
10
<PAGE> 11
PREFERRED STOCK The Company is authorized to issue 1,340,750 shares of
Preferred stock with no par value (No Par Preferred), 10,000,000 shares of
$2.00 par value Preferred stock and 36,197,499 shares of $1.00 par value
Preferred stock. At December 31, 1993, no shares of the No Par Preferred or
$2.00 par value Preferred stock were issued or outstanding.
At December 31, 1993, 33,376,420 shares of $1.00 par value Preferred stock have
been designated as Convertible Exchangeable Preferred having a $1.60 dividend
rate. Of this total, 33,182,654 shares were outstanding at December 31, 1993
(33,054,184 at December 31, 1992). Each share of Convertible Exchangeable
Preferred is convertible into .55 share of Common stock and has a liquidating
preference of $22.70. Each Convertible Exchangeable Preferred share may be
redeemed at the option of the Company at any time after January 1, 1995, at
prices declining from $23.50 in 1995 to $22.70 in 2000 and thereafter. The
Preferred stock may be exchanged, at the option of the Company, on any
quarterly dividend payment date after January 1, 1995, for $22.70 principal
amount of 7.05% convertible debentures maturing on January 1, 2015. The
holders of the $1.60 Preferred stock are entitled to a one-tenth vote per share
upon all matters presented to the shareholders and generally vote as a single
class along with the Common shareholders, except in matters affecting control
of the Company or the rights of the Convertible Exchangeable Preferred
shareholders, where they vote as a separate class.
Under a Shareholder Rights Plan adopted by the Board of Directors in 1989, the
same share purchase Rights referred to above were declared as a dividend at the
rate of .55 Rights for each share of $1.60 Preferred stock.
At December 31, 1993, 189,360 shares of $1.60 Convertible Exchangeable
Preferred were reserved for the conversions of the 7% convertible subordinated
debentures and for issuance of fractional shares from exchange of Cameron Iron
Works common stock.
NOTE 7: INVENTORIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992
--------- ----------
<S> <C> <C>
Raw materials $ 264.7 $ 364.5
Work-in-process 200.6 431.6
Finished goods 488.1 889.9
Perishable tooling and supplies 53.1 66.9
- --------------------------------------------------------------------------------------------------------------
1,006.5 1,752.9
Excess of current standard costs over LIFO costs (89.5) (235.5)
Progress payments - (23.7)
Allowance for obsolete and slow-moving inventory (10.4) (11.9)
Other (2.4) -
- --------------------------------------------------------------------------------------------------------------
Net inventories $ 904.2 $1,481.8
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
During each year, reductions in inventory quantities resulted in liquidations
of LIFO inventory layers carried at lower costs prevailing in prior years as
compared with the cost of that year's purchases. The effect was to increase
income from continuing operations before the cumulative effect of changes in
accounting principles by $3.9 million ($.03 per share) in 1993 and $2.7 million
($.02 per share) in 1992.
11
<PAGE> 12
NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992
--------- ----------
<S> <C> <C>
Trade accounts and accruals $ 517.5 $ 718.0
Salaries, wages and related fringe benefits 104.4 178.0
Product and environmental liability accruals 103.4 111.8
Contributions payable under employee benefit plans 58.5 63.7
Estimated costs of facility relocation, restructuring and other nonrecurring
items 144.9 138.6
Other (individual items less than 5% of total current liabilities) 107.5 137.3
- --------------------------------------------------------------------------------------------------------------
$1,036.2 $1,347.4
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
At December 31, 1993, Cooper had continuing operations' accruals of $27.6
million ($39.4 million for total operations at December 31, 1992) with respect
to potential product liability claims and continuing operations' accruals of
$75.8 million ($72.4 million for total operations at December 31, 1992) with
respect to potential environmental liabilities based on the Company's current
estimate of the most likely amount of losses that it believes will be incurred.
Of the $27.6 million of product liability accruals, $12.4 million relate to
known claims with respect to ongoing operations, $9.1 million relate to known
claims for previously divested operations that are no longer a part of Cooper
and $6.1 million relate to a minimum estimate of claims that have been incurred
but not yet reported. While Cooper is generally self-insured with respect to
product liability claims, the Company had insurance coverage for individual
1993 claims beyond $3 million, except where products are utilized in oilfield
applications where the coverage is $1 million. Insurance levels have varied
from year to year as the Company has grown. The recorded product liability
accruals are net of amounts covered under insurance policies.
Of the continuing operations' $75.8 million of environmental liability
accruals, $32.0 million relate to sites owned by Cooper and $43.8 million
relate to sites either previously owned by Cooper but where Cooper has retained
the environmental liability, or third-party sites where Cooper was a
contributor. Third-party sites usually involve multiple contributors where
Cooper's liability will be determined based on an estimate of Cooper's
proportionate responsibility for the total cleanup. The amount actually accrued
for such sites is based on these estimates as well as an assessment of the
financial capacity of the other potentially responsible parties. Environmental
liabilities are not generally subject to insurance recovery and, therefore, the
amount by which the accrual has been reduced for insurance coverage is small.
In addition, the Company has capitalized a total of $21.0 million with respect
to continuing operations' environmental matters with an undepreciated net book
value of $18.5 million at December 31, 1993 ($18.0 million for total operations
at December 31, 1992).
It has been the Company's consistent practice to include the entire accrual for
these liabilities as a current liability although only approximately 10-20% of
the balance will be spent on an annual basis. The annual effect on earnings for
product liability is essentially equal to the amounts disbursed. In the case of
environmental liability, the annual expense is considerably smaller than the
disbursements, since the vast majority of the Company's environmental liability
has been recorded in connection with acquired companies. The change in the
accrual balance from year to year reflects not only this normal expensing and
funding but also the effect of acquisitions and divestitures.
In establishing its accruals for both product liability and environmental
liability, the Company has not utilized any form of discounting. While both
product liability and environmental liability accruals involve estimates that
can have wide ranges of potential liability, Cooper has taken a proactive
approach and has managed the costs in both of these areas over the years such
that the actual liabilities, absent law changes, have generally been lower than
the estimates. Cooper does not believe that the nature of its products, its
production processes, or
12
<PAGE> 13
the materials or other factors involved in the manufacturing process, subject
the Company to unusual risks or exposures for product or environmental
liability. Cooper's greatest exposure to inaccuracy in its estimates is with
respect to the constantly changing definitions of what constitutes an
environmental liability or an acceptable level of cleanup.
See "Environmental Remediation and Compliance" under Note 2 for additional
information.
NOTE 9: PLANT AND EQUIPMENT AND INTANGIBLES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992
---------- -----------
<S> <C> <C>
Plant and equipment:
Land and land improvements $ 83.5 $ 127.3
Buildings 539.6 737.4
Machinery and equipment 1,017.8 1,518.8
Tooling, dies, patterns, etc. 95.5 135.2
All other 182.2 285.7
Construction in progress 71.9 97.3
- --------------------------------------------------------------------------------------------------------------
1,990.5 2,901.7
Accumulated depreciation (874.6) (1,216.1)
- --------------------------------------------------------------------------------------------------------------
$ 1,115.9 $ 1,685.6
==============================================================================================================
Intangibles:
Goodwill $ 2,193.8 $ 3,102.2
Assets related to pension plans 6.8 6.9
Other 85.3 140.9
- --------------------------------------------------------------------------------------------------------------
2,285.9 3,250.0
Accumulated amortization (339.5) (439.6)
- --------------------------------------------------------------------------------------------------------------
$ 1,946.4 $ 2,810.4
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
13
<PAGE> 14
NOTE 10: INCOME TAXES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992(1)
--------- -----------
<S> <C> <C>
Continuing operations income before income taxes:
U.S. operations $ 457.8 $ 318.4
Foreign operations 48.2 73.7
- --------------------------------------------------------------------------------------------------------------
$ 506.0 $ 392.1
==============================================================================================================
Discontinued operations income before income taxes $ 119.4 $ 188.0
==============================================================================================================
Continuing operations income tax expense:
U.S. Federal $ 157.2 $ 99.8
U.S. state and local 31.8 26.7
Foreign 18.0 26.0
- --------------------------------------------------------------------------------------------------------------
207.0 152.5
- --------------------------------------------------------------------------------------------------------------
Discontinued operations income tax expense:
U.S. Federal 28.4 28.9
U.S. state and local 8.7 8.4
Foreign 14.2 29.0
- --------------------------------------------------------------------------------------------------------------
51.3 66.3
- --------------------------------------------------------------------------------------------------------------
Income tax expense $ 258.3 $ 218.8
==============================================================================================================
Income taxes for continuing and discontinued operations:
Currently payable:
U.S. Federal $ 191.6 $ 60.9
U.S. state and local 45.1 19.9
Foreign 23.2 36.6
- --------------------------------------------------------------------------------------------------------------
259.9(2) 117.4
- --------------------------------------------------------------------------------------------------------------
Deferred:
U.S. Federal (11.3) 76.5
U.S. state and local (5.6) 14.5
Foreign 9.2 18.4
- --------------------------------------------------------------------------------------------------------------
(7.7) 109.4
- --------------------------------------------------------------------------------------------------------------
Other:
Tax benefit of foreign exchange transaction losses credited
to translation component of equity 6.2 -
Effect of change in U.S. Federal tax rate on recorded deferred
tax balances (4.7) -
U.S. Federal adjustment of foreign unremitted earnings accrual - (15.0)
ESOP dividends and disqualifying stock dispositions:
U.S. Federal 3.6 6.3
U.S. state and local 1.0 .7
- --------------------------------------------------------------------------------------------------------------
6.1 (8.0)
- --------------------------------------------------------------------------------------------------------------
Income tax expense $ 258.3 $ 218.8
==============================================================================================================
Items giving rise to deferred income taxes:
Employee medical program funding $ (2.8) $ 13.5
Employee stock ownership plan 1.0 3.5
Excess of tax over book depreciation 9.9 5.0
Postretirement benefits other than pensions 4.0 (7.7)
Reserves and accruals (35.5) 74.3
Utilization of net operating loss carryforwards 7.4 10.4
Other 8.3 10.4
- --------------------------------------------------------------------------------------------------------------
Deferred income taxes $ (7.7) $ 109.4
==============================================================================================================
</TABLE>
(1) Restated to reflect discontinued operations.
(2) Includes $122 million with respect to the sale of Belden. See Note 3 for
further information.
14
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions except for percentages) 1993 1992
--------- -----------
<S> <C> <C>
Effective tax rate reconciliation(1)
U.S. Federal statutory rate 35.0 % 34.0 %
State and local income taxes 3.6 3.6
Foreign statutory rate differential (.6) (.4)
Nondeductible goodwill 4.3 4.8
Effect of change in U.S. tax rate on recorded deferred tax balances (.8) -
Unremitted earnings accrual adjustment - (2.7)
All other (individually less than 5% of the expected tax provision) (.6) (.4)
- --------------------------------------------------------------------------------------------------------------
Indicated effective tax rate continuing operations 40.9 % 38.9 %
==============================================================================================================
Total income taxes paid for continuing and discontinued operations $ 157.3 $ 112.4
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993 (1) 1992
----------- ----------
<S> <C> <C>
Components of deferred tax balances:
Deferred tax liabilities:
Plant and equipment and intangibles $ (150.2) $ (239.7)
Inventory (58.6) (134.7)
Employee medical program funding (22.3) (23.4)
Employee stock ownership plan (24.6) (23.0)
Other (72.4) (93.6)
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (328.1) (514.4)
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits other than pensions 253.8 341.4
Reserves and accruals 219.9 250.4
Net operating loss carryforwards 16.1 25.0
Other 70.6 67.9
- --------------------------------------------------------------------------------------------------------------
Total deferred tax assets 560.4 684.7
- --------------------------------------------------------------------------------------------------------------
Valuation allowances (16.3) (17.3)
- --------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 216.0 $ 153.0
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
Income tax expense and the information shown above for 1993 and 1992 have been
determined in accordance with the provisions of SFAS No. 109 (Accounting for
Income Taxes) which basically provides for a "liability" approach to taxes.
Net of valuation allowances, the Company has recorded $3.3 million of domestic
net operating loss carryforwards at December 31, 1993, with the earliest
expiration date being 2000.
The U.S. Federal portion of the above provision includes U.S. tax expected to
be payable on the foreign portion of the Company's income before income taxes
when such earnings are remitted. During the third quarter of 1992, the Company
completed its assessment of the effects of various legal entity restructurings,
capital investment alterations and other actions that have been taken over the
last three to five years as part of efforts to optimize the Company's foreign
tax structure. The effect of the Company's assessment was a $15-million
reduction in the Company's income tax accrual ($11 million related to
continuing operations and $4 million related to discontinued operations) with
respect to the unremitted earnings of its foreign subsidiaries. The Company's
remaining accruals for continuing operations at December 31, 1993 and total
operations at December 31, 1992 are sufficient to cover the additional U.S. tax
estimated to be payable on the earnings that the Company anticipates will be
remitted. Through December 31, 1993, this amounted to essentially all
unremitted earnings of the Company's foreign subsidiaries.
15
<PAGE> 16
NOTE 11: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992
---------- -----------
<S> <C> <C>
3.43%* commercial paper and bank loans maturing at various dates
through February 9, 1994 $ 820.0 $ 1,200.0
5.99% Pounds Sterling bank loans maturing at various dates through
February 18, 1994 70.7 -
7.84%-7.98% first series medium-term notes, due through 1995 41.9 65.9
7.70%-7.99% second series medium-term notes, due through 1998 197.9 197.9
3.44% floating-rate loan, due 1996 50.0 50.0
7.875% notes, due 1997** 100.0 100.0
10.7% notes payable, due through 1998 16.9 20.8
3.14%* floating-rate ESOP notes, due through 1999 90.7 117.6
7% convertible subordinated debentures, due 2012 4.2 7.2
Capitalized lease obligations 31.3 41.3
Other 67.6 71.9
- --------------------------------------------------------------------------------------------------------------
1,491.2 1,872.6
Amounts allocated to discontinued operations (450.0) -
Current maturities** (157.8) (56.9)
- --------------------------------------------------------------------------------------------------------------
Long-term portion $ 883.4 $ 1,815.7
==============================================================================================================
</TABLE>
*Weighted average interest rates at December 31, 1993. (In 1992, 3.73% for
commercial paper and bank loans and 3.49% for the ESOP notes).
**The Company issued a call notice for this borrowing and subsequently
refinanced it with commercial paper in January 1994. Accordingly, the
principal balance of $100 million is included in current maturities at
December 31, 1993.
(1) Restated to exclude discontinued operations.
The Company has U.S. committed credit facilities totaling $1.25 billion that
expire in 1997, U.S. committed credit facilities totaling $510 million that
expire in 1994, Pounds Sterling credit facilities totaling 25 million Pounds
Sterling that expire in 1996 and 30-million Pounds Sterling credit facilities
expiring in 1994. At December 31, 1993, the Company had an effective "shelf"
registration statement, which may be used to issue up to $302 million of
indebtedness from time to time.
At December 31, 1993, $1.04 billion of the total $1.76-billion U.S. committed
credit facilities was available after considering commercial paper backup, and
7.2 million Pounds Sterling of the 55-million Pounds Sterling credit facilities
was available. At December 31, 1992, Cooper had $648 million of its
$1.91-billion credit facilities available, after considering commercial paper
backup, and 1.0 million of its 40-million Pounds Sterling credit facilities was
available. The agreements for the credit facilities require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization.
Interest rates on the Company's commercial paper and bank loans were generally
at 2.7% below the U.S. prime rate during 1993 (2.6% during 1992). Total
interest paid during 1993 and 1992 was $104 million and $128 million,
respectively.
16
<PAGE> 17
At December 31, 1993, $821 million of commercial paper and bank loans ($1.2
billion in 1992) was reclassified to long-term debt, reflecting the Company's
intention to refinance this amount during the twelve-month period following the
balance sheet date through either continued short-term borrowing or utilization
of available credit facilities. In addition, $445 million of allocated
indebtedness and $5 million of other debt was classified in discontinued
operations at December 31, 1993. Of the $445 million, $380 million was
allocated from commercial paper and the balance from obligations directly
related to the discontinued operations.
The 7% convertible subordinated debentures were assumed by Cooper in 1989 in
connection with the Cameron acquisition. The debentures are convertible into
Cooper $1.60 Convertible Exchangeable Preferred stock at the rate of one share
of Preferred stock for every $23.00 face amount of debentures. The
floating-rate ESOP notes are indebtedness of Cooper's ESOP. Because payment of
the ESOP notes is guaranteed by Cooper, the ESOP notes are reported with
Cooper's indebtedness. (See Note 12 for further information regarding the
ESOP.)
The Company entered into interest rate swaps, which became effective in early
1993 and mature at various dates through February 22, 1994, that converted $500
million of its floating-rate borrowings into fixed-rate borrowings for a
one-year period. Under the terms of these swaps, the Company's effective
borrowing rate for this $500 million during the one-year period will be
approximately 3.73%.
Based on the most restrictive provision contained in the Company's loan
agreements, retained earnings of approximately $791 million were unrestricted
as to the payment of dividends at December 31, 1993.
Maturities of long-term debt (exclusive of commercial paper and bank loans and
amounts allocated to discontinued operations) for the five years subsequent to
December 31, 1993, are $157.8 million, $17.5 million, $149.2 million, $96.9
million and $76.7 million, respectively. The future net minimum lease payments
under capital leases and obligations under operating leases are not
significant.
NOTE 12: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS
All full-time domestic employees, except for certain bargaining unit employees,
are eligible to participate in the Cooper Savings Plan. Under the terms of the
Plan, employee savings deferrals are partially matched with Company
contributions of Common stock consisting of either an allocation of shares in
the Company's employee stock ownership plan (ESOP) or new shares issued to the
ESOP.
At December 31, 1993, the ESOP had 2.9 million shares available for future
matching contributions, including 460,000 shares sold to the ESOP in 1992 for
$26.2 million in cash. The 1992 sales were funded by loans between the ESOP and
Cooper, which for accounting purposes are treated as eliminated intercompany
loans.
At December 31, 1993, the Company had $90.7 million ($117.6 million at December
31, 1992) of ESOP third-party indebtedness and $36.2 million ($36.5 million at
December 31, 1992) of ESOP intercompany indebtedness. An offsetting debit of
$125.2 million ($149.7 million at December 31, 1992), considering a cumulative
$1.7-million ($4.4-million at December 31, 1992) difference between the expense
recognized and the cash contributed to the ESOP, is recorded in shareholders'
equity under the caption "Unearned Employee Stock Ownership Plan Compensation."
During 1993, expense for continuing operations under the Cooper Savings Plan
amounted to $16.3 million ($16.9 million in 1992), which was funded through the
ESOP. During 1993, expense for discontinued operations under the Cooper Savings
Plan amounted to $5.2 million ($5.1 million in 1992), which was funded through
the ESOP.
Expense with respect to the ESOP includes the recognition of interest expense
based on the interest payable by the ESOP. With respect to continuing
operations, aggregate matching expense of the ESOP for 1993 amounted to $14.0
million ($14.1 million in 1992), interest expense amounted to $2.3 million
($2.8 million in 1992), and dividends paid and accrued with respect to the ESOP
shares amounted to $7.1 million ($7.1 million in 1992).
17
<PAGE> 18
With respect to discontinued operations, aggregate matching expense of the ESOP
for 1993 amounted to $4.5 million ($4.3 million in 1992), interest expense
amounted to $.7 million ($.8 million in 1992), and dividends paid and accrued
with respect to the ESOP shares amounted to $2.3 million ($2.0 million in
1992.)
NOTE 13: PENSION PLANS
The Company and its subsidiaries have numerous pension plans covering
substantially all domestic employees and pension and similar arrangements in
accordance with local custom covering employees at foreign locations. Aggregate
pension expense for continuing operations amounted to $44.3 million in 1993 and
$37.5 million in 1992. The amount of expense with respect to the Company's
various defined benefit pension plans of continuing operations is set forth in
the table below. For the years ended December 31, 1993 and 1992, expense with
respect to domestic and foreign defined contribution plans (primarily related
to various groups of hourly employees) of continuing operations amounted to
$23.2 million and $19.4 million. Also included in pension expense are gains and
losses on curtailments and settlements and other matters. The increases in
pension expense resulted from incremental expense related to acquired
companies, lower amounts of pension income with respect to overfunded plans and
changes in plan assumptions.
<TABLE>
<CAPTION>
Components of Defined
Benefit Plan Pension Expense
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------
(millions) 1993(1) 1992(1)
----------- ---------
<S> <C> <C>
Service cost-benefits earned during the year $ 26.2 $ 27.7
Interest cost on projected benefit obligation 66.0 69.7
Actual return on assets (54.4) (53.8)
Net amortization and deferral (17.2) (28.0)
- --------------------------------------------------------------------------------------------------------------
Net pension cost $ 20.6 $ 15.6
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Funded Status of Defined Benefit Plans
- --------------------------------------------------------------------------------------------------------------
Plans With Assets in Plans With Accumulated
Excess of Benefits in Excess of
Accumulated Benefits Assets
- --------------------------------------------------------------------------------------------------------------
December 31, December 31,
--------------------------------------------------
(millions) 1993(1) 1992 1993(1) 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actual present value of:
Vested benefit obligation $ (484.4) $ (694.0) $ (379.7) $ (293.4)
==============================================================================================================
Accumulated benefit obligation $ (502.5) $ (724.8) $ (413.1) $ (327.8)
==============================================================================================================
Projected benefit obligation $ (525.8) $ (781.3) $ (424.6) $ (340.0)
Plan assets at fair value 553.5 882.9 306.1 272.0
- --------------------------------------------------------------------------------------------------------------
Projected benefit obligation (in excess of) less
than plan assets 27.7 101.6 (118.5) (68.0)
Unrecognized net (gain) loss 17.7 (11.1) 69.3 9.9
Unrecognized net (asset) obligation
from adoption date (15.3) (20.5) 7.4 9.0
Unrecognized prior service cost .2 (7.8) 1.9 1.7
Adjustment required to recognize minimum liability - - (74.1) (14.6)
- --------------------------------------------------------------------------------------------------------------
Pension asset (liability) at end of year $ 30.3 $ 62.2 $ (114.0) $ (62.0)
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
18
<PAGE> 19
<TABLE>
<CAPTION>
Computational Assumptions
- --------------------------------------------------------------------------------------------------------------
Projected Benefit
Net Pension Cost Obligation
- --------------------------------------------------------------------------------------------------------------
1993 1992 1993 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Discount rate:
Domestic 8 1/2% 9% 7% 8 1/2-9%
International 7 1/2-9 7 1/2-9 6-7 3/4 7 1/2-9
Rate of increase in compensation levels:
Domestic 5 1/2 6 5 5 1/2
International 4-6 4-6 4-5 1/2 4-6
Expected long-term rate of return on assets:
Domestic 9 9 1/2 - -
International 7 1/2-10 7 1/2-10 - -
Benefit basis:
Salaried plans-earnings during career
Hourly plans-dollar unit, multiplied
by years of service
Funding policy: 5 to 30 years
==============================================================================================================
</TABLE>
The continuing operations' $74.1-million ($14.6-million for total operations in
1992) minimum liability for pension plans with accumulated benefits in excess
of assets has been recorded in the Company's Consolidated Balance Sheet as a
long-term liability with a $6.8-million offsetting intangible asset
($6.9-million for total operations in 1992) and a $67.3-million reduction in
shareholders' equity ($7.7-million for total operations in 1992). Shareholders'
equity also includes a $6.3-million balance related to the minimum pension
liability for discontinued operations. The assets of the various domestic and
foreign plans are maintained in various trusts and consist primarily of equity
and fixed-income securities.
The Company partially or completely settled or curtailed four defined benefit
plans for hourly employees during 1993 (three during 1992). The settlements and
curtailments resulted in a net loss of $.5 million (a net loss of $2.5 million
in 1992) and reversion to the Company of surplus assets totaling $.9 million
during 1992. In 1992, six Canadian defined benefit plans were converted to
defined contribution plans and the surplus assets relating to the plans are
being used to reduce required future Company contributions.
19
<PAGE> 20
NOTE 14: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As described in Note 4, the Company adopted the provisions of SFAS No. 106
(Employers' Accounting for Postretirement Benefits Other Than Pensions)
beginning in 1992. The benefits provided under the Company's various plans, all
of which are unfunded, include retiree medical care, dental care, prescriptions
and life insurance with medical care accounting for over 90% of the total.
While the Company has numerous plans, primarily resulting from the Company's
extensive acquisition activity, the vast majority of the annual expense is
related to employees who are already retired. In fact, as a result of actions
taken by the Company starting in 1989, virtually no active salaried employees
continue to earn retiree medical benefits and the number of active hourly
employees earning such benefits has been greatly diminished. Additionally, the
Company continues to amend its various plans to provide for appropriate levels
of cost sharing and other cost-control measures.
The table below reflects detailed information for continuing operations and
summary information for discontinued operations, each determined in accordance
with the new standard.
<TABLE>
<CAPTION>
Items Not Yet Recorded
in Financial Statements Amounts Per Financial Statements
------------------------ --------------------------------
Accumulated Liability for
Postretirement Postretirement Net
Benefit Obligation Prior Service Actuarial Benefits Other Than Annual
(millions except percentages) (APBO) Cost Net Gain Pensions Expense
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE-DECEMBER 31, 1991 $(141.7) $ - $ - $(141.7) $ -
Adoption of SFAS No. 106 (669.1) (669.1)
Acquisition of Moog
Automotive (44.7) (44.7)
Plan activity:
Service cost (3.4) 3.4
Interest cost (43.8) 43.8
Benefit payments 30.3 30.3
Plan amendments .6 (.6)
Amortization of prior
service cost .1 (.1)
Curtailment gain (one plan) 1.5 (1.5)
-----------
Net annual expense (45.6) 45.6
===========
Net activity of
discontinued operations (4.5) (4.5) 13.2
- ------------------------------------------------------------------------------------------- ===========
BALANCE-DECEMBER 31, 1992 (874.8) (.5) - (875.3)
Plan activity:
Service cost (1.9) 1.9
Interest cost (40.1) 40.1
Benefit payments 33.3 33.3
Plan amendments 31.8 (31.8)
Actuarial net gain 15.6 (15.6)
Amortization of prior
service cost 3.2 (3.2)
Curtailment gains (four
plans) 11.3 (11.3)
Business dispositions 32.1 8.1 (11.0) 29.2
Moog curtailments
affecting goodwill 17.8 17.8
-----------
Net annual expense (27.5) 27.5
===========
Net activity of
discontinued operations 40.0 (7.1) (30.7) 2.2 3.7
- --------------------------------------------------------------------------------------------- ===========
BALANCE-DECEMBER 31, 1993 (734.9) (28.1) (57.3) (820.3)
Reclassification of amounts
pertaining to Forged Products 9.1 (1.3) 4.4 12.2
Reclassification to "Net
assets of discontinued
operations" 135.8 7.1 30.7 173.6
- ---------------------------------------------------------------------------------------------
ADJUSTED BALANCES
CONTINUING OPERATIONS $(590.0) $ (22.3) $ (22.2) $(634.5)
=============================================================================================
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amount of APBO related to:
Retired employees $(676.2) $(711.2)
Employees eligible to retire (27.2) (66.7)
Other employees (31.5) (96.9)
Actuarial assumptions:
Discount rate 7.58% 7.64%
Ensuing year to 2002-health-care
cost trend rate 17% ratable to 5.5% 20% ratable to 5.5%
Effect of 1% change in health-care cost trend rate:
Increase year-end APBO 9% 9%
Increase expense 10% 10%
==============================================================================================================
</TABLE>
NOTE 15: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
Common Stock
------------------------------------
Range of
Shares Option Prices
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stock options outstanding at January 1, 1993 2,207,998 $ 13.625-56.50
Options granted to employees 1,624,200 50.13-52.81
Options granted to nonemployee directors in lieu of retainer 4,000 24.00
Options exercised (446,097) 26.815-46.31
Options cancelled (226,867) 26.815-56.50
- --------------------------------------------------------------------------------------------------------------------------
Stock options outstanding at December 31, 1993 3,163,234 $ 13.625-56.50
==========================================================================================================================
</TABLE>
Options to purchase Common stock are granted to employees under the Cooper
stock option plans at not less than 100% of the market value of the Company's
stock at the date of grant. The options expire five years from the date of
grant and generally become exercisable ratably over a three-year period
commencing one year from the date of grant. At December 31, 1993, options under
the various plans for 1,020,994 Common shares were exercisable at $13.625 to
$56.50 and 1,103,855 (2,506,889 at December 31, 1992) Common shares were
reserved for future grants. Options for 583,807 Common shares at $13.625 to
$46.31 per share were exercised during the year ended December 31, 1992.
Under a director stock option plan, each year a nonemployee director may elect
to receive, in lieu of the annual retainer fee, a nonqualified stock option
covering 2,000 shares of Common stock. The exercise price is determined by a
formula based on the fair market value of the stock and the director's annual
retainer. All relevant share amounts with respect to this plan are included in
the table and other information set forth above.
EMPLOYEE STOCK PURCHASE PLAN Participants in the Employee Stock Purchase Plan
receive an option to purchase Common stock at a price that is the lesser of 90%
of the market value on the offering date or 100% of the market value on the
purchase date. On September 9, 1993, 475,256 shares were sold to 8,028
employees at $49.56 per share. At December 31, 1993, subscriptions for
1,030,830 shares of Common stock were outstanding at $45.56 per share or, if
lower, the average market price on September 9, 1995, which is the purchase
date. At December 31, 1993, an aggregate of 2,841,209 shares of Common stock
were reserved for future offerings.
21
<PAGE> 22
NOTE 16: INDUSTRY SEGMENTS, DOMESTIC AND INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
Revenues Operating Earnings Identifiable Assets
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992(1) 1993(1) 1992(1) 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Electrical Products(2) $ 2,177.5 $ 2,190.3 $ 359.0 $ 353.2 $ 1,739.3 $ 1,920.0
Tools & Hardware 807.9 812.0 91.6 83.4 757.4 708.8
Automotive Products 1,670.0 1,285.4 188.9 139.0 2,208.8 2,245.5
- --------------------------------------------------------------------------------------------------------------
Operating revenues 4,655.4 4,287.7 639.5 575.6 4,705.5 4,874.3
Cameron Forged Products(3) 109.7 167.9 1.7 10.0 74.9 146.1
Other 11.3 12.8 11.3 12.8
--------------------------
Consolidated revenues $ 4,776.4 $ 4,468.4
==========================
Nonrecurring income(4) 273.8 6.6
Nonrecurring expense(4) (273.8) (50.1)
Interest expense (80.9) (92.5)
General corporate (65.6) (70.3) 474.9 430.8
--------------------------
Consolidated income
from continuing
operations
before income taxes(5) $ 506.0 $ 392.1
==========================
Businesses held for
divestiture 17.6 88.7
Discontinued operations(3) 1,061.8 2,030.5
Investment in
unconsolidated
subsidiaries 20.7 5.2
--------------------------
Consolidated assets $ 6,355.4 $ 7,575.6
==========================
</TABLE>
(1) Restated to exclude discontinued operations.
(2) The Electrical Power Equipment segment has been combined with the
Electrical Products segment for all periods presented.
(3) The amounts reflected for Cameron Forged Products and Discontinued
Operations in 1992 are based on the gross assets of the businesses
as reflected in the various balance sheet captions. The 1993 amounts are
based on the restated balance sheet and reflect Cooper's net assets/
investment in the various businesses pending completion of the announced
transactions.
(4) See the separate table for segment detail of nonrecurring items.
(5) Before the cumulative effect of changes in accounting principles in 1992.
INDUSTRY SEGMENTS The Company's continuing operations are organized into three
segments.
The Electrical Products segment manufactures and markets electrical and
electronic distribution and circuit protection products for use in residential,
commercial and industrial construction, maintenance and repair and products for
use by utilities and industries for primary power distribution and control.
This segment also manufactured and marketed wire and cable for electronic
signal transmission through September 30, 1993.
The Tools & Hardware segment produces and markets tools and hardware items for
use in residential, commercial and industrial construction, maintenance and
repair, and for general industrial and consumer use. The Automotive Products
segment primarily manufactures and distributes spark plugs, wiper blades, lamps
and other products for use by the automotive aftermarket and in automobile
assemblies. In addition, this segment manufactures and distributes suspension,
steering, temperature control, driveline and brake system components for the
automotive aftermarket.
The businesses included in discontinued operations primarily manufacture,
market and service machinery and equipment used in oil and natural gas
exploration, drilling, production, transmission, storage and processing, as
well as equipment and repair parts used in compression markets.
Intersegment sales and related receivables for each of the years shown were
immaterial.
22
<PAGE> 23
<TABLE>
<CAPTION>
Revenues Operating Earnings Identifiable Assets
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992(1) 1993(1) 1992(1) 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 4,028.9 $ 3,593.7 $ 572.5 $ 466.3 $ 3,845.2 $ 3,967.2
- --------------------------------------------------------------------------------------------------------------
International
Europe 385.3 415.2 26.9 51.5 562.0 592.2
Canada 254.7 285.1 .1 12.5 115.2 155.9
Other 207.1 196.7 44.6 47.0 349.9 292.4
- --------------------------------------------------------------------------------------------------------------
Sub-total
International 847.1 897.0 71.6 111.0 1,027.1 1,040.5
- --------------------------------------------------------------------------------------------------------------
Eliminations:
Transfers to
International (174.5) (138.5) (53.7) (75.1)
Transfers to
Domestic (46.1) (64.5) (103.2) (48.1)
Other (4.6) (1.7) (9.9) (10.2)
- --------------------------------------------------------------------------------------------------------------
Operating revenues 4,655.4 4,287.7 639.5 575.6 4,705.5 4,874.3
Cameron Forged Products(2) 109.7 167.9 1.7 10.0 74.9 146.1
Other 11.3 12.8 11.3 12.8
-------------------------
Consolidated revenues $ 4,776.4 $ 4,468.4
=========================
Nonrecurring income 273.8 6.6
Nonrecurring expense (273.8) (50.1)
Interest expense (80.9) (92.5)
General corporate (65.6) (70.3) 474.9 430.8
--------------------------
Consolidated income from
continuing operations
before income taxes(3) $ 506.0 $ 392.1
==========================
Businesses held for
divestiture 17.6 88.7
Discontinued operations(2) 1,061.8 2,030.5
Investment in
unconsolidated
subsidiaries 20.7 5.2
-------------------------
Consolidated assets $ 6,355.4 $ 7,575.6
=========================
</TABLE>
(1) Restated to exclude discontinued operations.
(2) The amounts reflected for Cameron Forged Products and Discontinued
Operations in 1992 are based on the gross assets of the businesses as
reflected in the various balance sheet captions. The 1993 amounts are
based on the restated balance sheet and reflect Cooper's net assets/
investment in the various businesses pending completion of the announced
transactions.
(3) Before the cumulative effect of changes in accounting principles in 1992.
DOMESTIC AND INTERNATIONAL OPERATIONS Transfers between domestic and
international operations, principally inventory transfers, are charged to the
receiving organization at prices sufficient to recover manufacturing costs and
provide a reasonable return. Continuing operations' export sales to
unaffiliated customers included in domestic sales were $273.8 million in 1993
and $264.3 million in 1992. Of total export sales of continuing operations,
approximately 41% (38% in 1992) were to Asia, Africa, Australia and the Middle
East, 24% (32% in 1992) were to Canada and Europe, and 35% (30% in 1992) were
to Latin America.
Translation losses related to Brazil were $4.3 million in 1993 ($.04 per fully
diluted share) and $5.5 million in 1992 ($.05 per fully diluted share). Other
translation and transaction gains and losses included in each year's restated
Consolidated Results of Operations were not significant.
23
<PAGE> 24
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Percentage of Segment Percentage of Total
Inventory Valued at LIFO LIFO Liquidation Income
- --------------------------------------------------------------------------------------------------------------
December 31, Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1993 1992 1993(1) 1992(1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electrical Products(2) 86 % 86 % 91 % 61 %
Tools & Hardware 62 69 20 50
Automotive Products 74 66 (11) (11)
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nonrecurring
Depreciation Amortization (Income)/Expense
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993(1) 1992(1) 1993(1) 1992(1) 1993(1) 1992(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Electrical Products(2) $ 58.5 $ 67.7 $ 29.5 $ 29.0 $ 155.3 $ 9.8
Tools & Hardware 29.4 30.5 6.7 6.0 16.5 20.9
Automotive Products 50.4 42.0 32.3 24.9 26.5 7.4
Corporate 6.9 9.3 2.2 2.4 (198.3) 5.4
- --------------------------------------------------------------------------------------------------------------
$ 145.2 $ 149.5 $ 70.7 $ 62.3 $ - $ 43.5
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Capital Translation Component
Expenditures Increase (Decrease)
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(millions) 1993 1992 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Electrical Products(2) $ 78.0 $ 63.7 $ (2.3) $ (7.3)
Tools & Hardware 29.4 34.5 (9.2) (15.3)
Automotive Products 72.3 63.7 (12.3) (41.7)
Corporate 8.7 20.0 (2.2) (3.8)
- --------------------------------------------------------------------------------------------------------------
Total continuing operations 188.4 181.9 (26.0) (68.1)
- --------------------------------------------------------------------------------------------------------------
Discontinued operations 86.7 91.6 (18.7) (90.6)
- --------------------------------------------------------------------------------------------------------------
$ 275.1 $ 273.5 $ (44.7) $ (158.7)
==============================================================================================================
</TABLE>
(1) Restated to exclude discontinued operations.
(2) The Electrical Power Equipment segment has been combined with the
Electrical Products segment for all periods presented.
NOTE 17: OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE
OF FINANCIAL INSTRUMENTS
OFF-BALANCE-SHEET RISK The Company enters into forward exchange contracts to
hedge certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. The Company does not engage in
speculation, nor does the Company typically hedge nontransaction-related
balance sheet exposure. While the forward contracts affect the Company's
results of operations, they do so only in connection with the underlying
transactions. As a result, they do not subject the Company to risk from
exchange rate movements, because gains and losses on these contracts offset
losses and gains on the transactions being hedged. At December 31, 1993, for
continuing operations the Company had $83 million of foreign exchange contracts
outstanding, 99% of which were in European, Canadian and Japanese currencies.
At December 31, 1992, comparable amounts for total operations were $84 million
and 97%. The forward exchange contracts generally have maturities that do not
exceed six months. The Company's other off-balance-sheet risks are not
material.
CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to
trade receivables are limited due to the wide variety of customers and markets
into which the Company's products are sold, as well as their dispersion across
many different geographic areas. As a result, at December 31, 1993, the Company
does not consider itself to have any significant concentrations of credit risk.
24
<PAGE> 25
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments
consist primarily of cash and cash equivalents, trade receivables, trade
payables, debt instruments and foreign currency forward contracts. The book
values of cash and cash equivalents, trade receivables and trade payables are
considered to be representative of their respective fair values. The Company
had approximately $1.5 billion of debt instruments at December 31, 1993, for
which the fair value (based primarily on discounted cash flows) exceeded the
book value by approximately 1%. Based on year-end exchange rates and the
various maturity dates of the foreign currency forward contracts, the Company
estimates the aggregate contract value to be representative of the fair value
of these items at December 31, 1993.
NOTE 18: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
(millions) 1993 1992
-----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Employee stock ownership plan (ESOP):
Principal payments and difference between
Company expense and cash contributions $ 24.5 $ 25.7
Unearned ESOP compensation - (26.2)
Common stock issued for:
Employee stock ownership plan - 26.2
Executive restricted stock incentive plan - 7.1
Acquired companies .3 2.4
Employee stock purchase plan 23.6 -
$1.60 Preferred stock issued for conversion of debentures 2.9 3.9
</TABLE>
The above information supplements the disclosures required by SFAS No. 95
(Statement of Cash Flows).
NOTE 19: NET INCOME (LOSS) PER COMMON SHARE(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Primary Fully Diluted
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
($ in millions, shares in thousands) 1993 1992 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations
before cumulative effect of changes
in accounting principles $ 299.0 $ 239.6 $ 299.0 $ 239.6
Discontinued operations 68.1 121.7 68.1 121.7
Dividends applicable to $1.60
Convertible Exchangeable Preferred stock (53.1) (52.8) (53.1) (52.8)
- ----------------------------------------------------------------------------------------------------------------------
Income applicable to Common stock before
cumulative effect of changes in
accounting principles 314.0 308.5 314.0 308.5
Cumulative effect on prior years of changes
in accounting principles - (590.0) - (590.0)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 314.0 $ (281.5) $ 314.0 $ (281.5)
======================================================================================================================
Average Common shares and Common
share equivalents 114,201 113,830 114,201 113,830
======================================================================================================================
</TABLE>
(1) Restated to reflect discontinued operations.
25
<PAGE> 26
NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(millions except per-share data) 1993 (by quarter)
- ----------------------------------------------------------------------------------------------------------------------
1 2 3(2) 4(3)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,150.3 $1,234.2 $1,232.7 $1,159.2
Gross margin 380.6 425.0 407.1 400.7
Income from continuing operations 56.8 83.7 83.3 75.2
Discontinued operations 6.3 19.2 15.6 27.0
Net income 63.1 102.9 98.9 102.2
Net income applicable to Common stock 49.8 89.7 85.6 88.9
Income per Common share:
Primary:
Continuing operations $ .38 $ .62 $ .61 $ .54
Discontinued operations .06 .17 .14 .24
------------------------------------------------------------------------
Net income $ .44 $ .79 $ .75 $ .78
========================================================================
Fully Diluted:
Continuing operations $ .38 $ .63(4) $ .61 $ .57(4)
Discontinued operations .06 .15(4) .14 .20(4)
------------------------------------------------------------------------
Net income $ .44 $ .78(4) $ .75 $ .77(4)
========================================================================
</TABLE>
(1) Restated to reflect discontinued opeartions.
(2) Includes nonrecurring income and expense items as further described in
Management's Discussion and Financial Review.
(3) Includes $2.7 million ($.02 per fully diluted share) for continuing
operations and $5.4 million ($.04 per fully diluted share) for discontinued
operations related to LIFO inventory liquidations.
(4) Assumes the conversion of the 7% debentures and the $1.60 Preferred stock
to Common. As a result, Preferred dividends are not deducted in the
computations. Interest on the debentures is not material.
26
<PAGE> 1
Exhibit 99.3
MANAGEMENT'S DISCUSSION AND FINANCIAL REVIEW
BASIS OF PRESENTATION
The earnings discussion that follows has been rewritten, as compared with the
discussion previously set forth in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, to place primary emphasis on the results of
the Company's continuing operations. The segment discussions which follow
reflect the combination of Electrical Power Equipment with Electrical Products
in order to be consistent with the segment structure adopted in the third
quarter of 1994. (See 1994 Third Quarter Report on Form 10-Q for further
information). Because the December 31, 1993 balance sheet has been restated to
classify the net assets related to the discontinued operations in a separate
caption entitled "Net assets of discontinued operations," certain of the review
and discussion related to financial position has also been revised. The
statements of consolidated cash flows and of changes in shareholders' equity
are essentially unchanged and accordingly the discussions regarding liquidity
and capital resources as well as capital expenditures and commitments have not
been rewritten.
OVERVIEW
During the last three years, the Company's continuing operations have completed
a total of 13 acquisitions and 8 divestitures, with one additional divestiture
pending. The net effect of these transactions, combined with an erratic and
often slow-growth global economy, was a 13% increase in earnings during the
period. The Cooper of 1993 however, is a much different company than it was in
1990, and one that is better-prepared for the increasingly competitive world
marketplace. The acquisitions have been in complementary product lines that
enhance known areas of strength, while the dispositions have been of noncore or
poor-performing businesses. The discussion that follows, as well as the
financial statements and related footnotes, will aid in understanding the
Company's results of operations as well as its financial position, cash flows,
indebtedness and other key financial information.
CONTINUING OPERATIONS
REVENUES
1993 REVENUES Revenues from continuing operations of $4.78 billion in 1993
were up 7% from the $4.47 billion in 1992. Higher revenues in the Automotive
Products segment, resulting from the inclusion of a full year's revenues of
Moog Automotive, more than offset the effects of business dispositions.
The Automotive Products segment generated revenues of $1.67 billion in 1993,
which accounted for 36% of 1993 operating revenues, compared with $1.29 billion
in 1992. This 30% increase was due to the inclusion of 12 months of Moog
Automotive revenues in 1993 versus only three months in 1992. Excluding the
effects of Moog, revenues were down 1% compared with the preceding year. Sales
to domestic original equipment manufacturers improved over 1992 resulting in
higher sales of wiper and lighting products during 1993. However, declines in
domestic and Canadian sales of brake products and in European sales of spark
plugs and wiper products more than offset otherwise steady demand from the
automotive aftermarket.
Revenues from the Electrical Products segment were $2.18 billion, comprising
47% of the Company's operating revenues in 1993. Sales were down 1% compared
with 1992 because of the inclusion of only nine months' revenues related to the
Belden wire and cable business, which was sold at the end of the third quarter
(see Note 3 of the Notes to Consolidated Financial Statements for further
information). After excluding the revenues of Belden from both periods, and
adjusting for the effects of 1993 acquisitions and a small 1992 divestiture,
revenues in the segment improved by 4%. All major product offerings in the
segment, except for large power transformers, reported steady revenue gains,
led by improved demand for fluorescent, industrial and airport lighting,
electrical circuit protection equipment, distribution transformers and
transformer components. Large power transformers
1
<PAGE> 2
continued to be adversely affectd by lower capital spending by utility
customers.
The Tools & Hardware segment, which comprised 17% of 1993 operating revenues,
reported revenues of $808 million compared with $812 million in 1992. After
excluding the effects of acquisitions made during 1993 and 1992, revenues were
down 3%. The revenue decline resulted primarily from the combined effects of
weak consumer confidence and severe price competition in window coverings
markets, and sluggish European and export demand for tools. These weaknesses
more than offset the modest improvement in domestic hand tool sales caused by
strengthening residential construction activity and industrial production.
1992 REVENUES Cooper's 1992 revenues from continuing operations of $4.47
billion (excluding nonrecurring income items discussed below) were up 4%
compared with 1991. Improvements in demand in the Electrical Products and
Automotive Products segments, along with the acquisition of Moog Automotive,
more than offset softness in Canadian and some European markets.
Revenues in the Automotive Products segment were $1.29 billion, or 30% of total
operating revenues during 1992, an increase of 12%, compared with the $1.15
billion reported in 1991. Excluding the effects of Moog Automotive, which was
acquired during the fourth quarter of 1992 (see Note 5 of the Notes to
Consolidated Financial Statements), revenues were up 2%. Aftermarket demand,
which accounted for the vast majority of this segment's sales, improved
moderately in most product areas. Demand from domestic original equipment
manufacturers also improved, reflecting increased production of trucks and
minivans. These increases were partially offset by weak European markets,
primarily affecting spark plug sales.
The Electrical Products segment contributed 51% of the Company's total
operating revenues, improving 3% from $2.12 billion in 1991 to $2.19 billion in
1992 (up about 6% after adjusting both periods for recent divestitures). Higher
levels of housing construction activity, as well as improved industrial
production and maintenance and repair spending, favorably impacted sales of
lighting fixtures, fuses and some electrical construction materials. Gains by
electronics producers also contributed to increased sales of electronic wire
and cable compared with the prior year. Utility customers continued to spend on
maintenance and efficiency improvement projects, however capital spending
remained at low levels. In addition, the prior-year results were adversely
impacted by a third-quarter work stoppage at the Company's large power
transformer plant.
Revenues from the Tools & Hardware segment declined 4% to $812 million,
representing 19% of total operating revenues. Adjusted for recent
acquisitions, revenues decreased approximately 7% compared with the prior year.
Demand for the Company's hand- and air-powered tools fell as durable goods
manufacturing activity slowed internationally. The rise in domestic residential
construction activity and industrial production was modestly beneficial to the
Company's domestic hand tools operations; however, reduced spending on
residential redecorating and price competition depressed revenues in this
segment's window treatments business.
NONRECURRING ITEMS
At the end of the third quarter of 1993, the Company commenced the final phase
of a multi-year program designed to revitalize ongoing operations and eliminate
noncore businesses. The completion of the public offering of the stock of
Belden Inc. provided a $274-million pretax gain. That gain was entirely offset
by a number of management actions including, as restated and realigned to
segregate continuing and discontinued operations, the write-down of the Cameron
Forged Products operations to reflect the final sales price of this business to
Wyman-Gordon Company; a write-down of internally developed capitalized
software; a reduction in the carrying value of the machinery and equipment and
certain other plant and equipment associated with the Company's transformer
product line within the Electrical Products segment; and accruals of $126
million for a number of facility consolidations, shutdowns and
rationalizations. The facility projects are planned for all of the Company's
continuing segments and involve operations in the United States, Canada and
Europe. While the majority of the spending for these projects will occur in
1994 and 1995, some projects will not be completed until 1996.
2
<PAGE> 3
These actions are in addition to those provided for in the third quarter of
1992, as well as the realignment of the Champion Spark Plug operations
undertaken in connection with that acquisition. While the Champion realignments
are largely completed domestically, they are still in the early stages in
Europe and other parts of the world. Although these projects involve
significant expenditures, the spending is over several years, thus the various
projects will not constitute a significant strain on the Company's overall
financial resources or create a liquidity problem. Each of the projects was
approved only after careful assessment that indicated that each project, when
completed, will provide significant gains in productivity, operating
efficiencies or other cost savings in the future.
Coincident with the sale of Belden, the Company announced an agreement in
principle to sell its Cameron Forged Products Division to Wyman-Gordon Company
and its intention to spin off to Cooper's Common shareholders the Company's
Gardner-Denver Industrial Machinery operations headquartered in Quincy,
Illinois. Additional information regarding 1993 nonrecurring income and
expense items is set forth in Note 3 of the Notes to Consolidated Financial
Statements.
The Company's pretax earnings for 1992 include nonrecurring corporate income of
$6.6 million and nonrecurring expense of $50 million. The net after-tax effect
of these nonrecurring items ($29 million) was partially offset by $11 million
of income tax expense reductions. See Note 3 of the Notes to Consolidated
Financial Statements for additional information. The $50 million of
nonrecurring expense resulted from establishing accruals with respect to
productivity improvement, consolidation and asset disposition programs in all
of the Company's continuing segments. These programs, which started in 1993,
will be largely completed by late 1994 or early 1995 and are expected to result
in a favorable earnings payback in the form of reduced costs, increased
efficiency and other ancillary benefits.
Also, during the year ended December 31, 1992, the Company elected early
adoption of Statement of Financial Accounting Standards (SFAS) No. 106
(Employer's Accounting for Postretirement Benefits Other Than Pensions), SFAS
No. 109 (Accounting for Income Taxes) and SFAS No. 112 (Employers' Accounting
for Postemployment Benefits). Applying the new provisions resulted in a
one-time charge against first-quarter 1992 net earnings of $590 million, or
$5.19 per fully diluted share. In addition, income from continuing operations
was decreased by $18 million, or 16 cents a share, to reflect the 1992
current-year effects of the new standards. See Note 4 of the Notes to
Consolidated Financial Statements for further information.
OPERATING EARNINGS
1993 OPERATING EARNINGS Operating earnings (defined as earnings from
continuing operations before consideration of corporate income and expense,
interest, taxes and nonrecurring items) improved 11% from $576 million in 1992
to $640 million in 1993. Significant improvement in the Company's Automotive
Products segment, caused by the acquisition of Moog Automotive, augmented
steady improvements in the Company's other continuing business segments.
The Automotive Products segment generated operating earnings of $189 million in
1993, compared with $139 million in 1992, with the entire increase being
attributable to the inclusion of Moog for a full year in 1993 versus only one
quarter in 1992. This segment's earnings represented 30% of the Company's total
operating earnings. Absent Moog's revenues and earnings, operating earnings
would have declined in line with the small revenues decrease discussed
previously. The gross margin percentage (defined as revenues less cost of
sales, as a percentage of revenues) improved slightly primarily due to the
inclusion of Moog. Selling and administrative expenses as a percentage of
revenues were only slightly less favorable than the prior year despite the
higher ratio of such costs at the acquired Moog operations as compared to
Cooper's existing operations. This reflected management's emphasis on keeping
such spending in line with operating levels.
Operating earnings of the Tools & Hardware segment increased 10% to $92 million
in 1993 and represented 14% of operating earnings. Excluding the earnings gains
from acquisitions, the segment's operating income improved in excess of 4%
despite continued sluggishness in Europe and depressed conditions in North
American
3
<PAGE> 4
window coverings markets. Profit improvement programs over the past several
years and current spending controls provided the basis for the earnings
improvement despite the small decline in revenues.
The Electrical Products segment continued to post steady improvements in
operating earnings, which grew 2% to $359 million, and comprised 56% of the
Company's operating earnings, even with the inclusion of only nine months'
earnings from the Belden wire and cable business. Excluding the results of
Belden and the effects of acquisitions from both periods, operating earnings
outpaced the sales growth, improving 6% from the previous year. The segment's
earnings also benefited from operating efficiencies and cost-containment
measures, which resulted in a lower percentage of selling and administrative
expenses per sales dollar. These benefits were partially offset, however, by
the decline in demand for higher-margin power products and weak pricing for
distribution transformers.
During 1993, the Company's continuing operations recorded $6.5 million in
operating earnings attributable to LIFO inventory liquidations, compared with
$5.6 million in 1992. The percentage of LIFO income recorded by each segment is
set forth in Note 16 of the Notes to Consolidated Financial Statements.
Operating earnings from continuing operations were 13.4% of revenues in 1993,
compared with 12.9% in 1992.
1992 OPERATING EARNINGS The following table shows the 1992 operating earnings
of the Company's continuing segments before and after the effects of the
accounting changes discussed above and in Note 4 of the Notes to Consolidated
Financial Statements. The discussion that follows focuses on the Comparative
Segment Totals.
1992 OPERATING EARNINGS BY SEGMENT
<TABLE>
<CAPTION>
--------------------------------------------------------------
Add Back Effects of Comparative
(millions) As Reported Accounting Segment
in Note 16 Changes Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electrical Products $ 353.2 $ 5.1 $ 358.3
Tools & Hardware 83.4 2.2 85.6
Automotive Products 139.0 16.2 155.2
- ------------------------------------------------------------------------------------------------------------------------
$ 575.6 $ 23.5 $ 599.1
========================================================================================================================
</TABLE>
Operating earnings of $599 million were up 4% compared with $574 million in
1991. Modest improvements in earnings from the Electrical Products and
Automotive Products segments more than offset the significant decline in the
Tools & Hardware segment.
The Electrical Products segment generated operating earnings of $358 million in
1992, 60% of total operating earnings and an 8% improvement over the $330
million in the prior year. The improvement was primarily the result of higher
sales volumes generated by the strong demand for lighting fixtures, electrical
circuit protection equipment and electronic wire and cable discussed under
"Revenues." Operating efficiencies also resulted in margin improvements and
lower selling and administrative expenses per sales dollar, which supplemented
the earnings improvement.
The Automotive Products segment represented 26% of Cooper's total operating
earnings for 1992, with operating earnings of $155 million, compared with $145
million in the prior year. This 7% increase over 1991 was attributable to the
acquisition of Moog Automotive. Excluding the effects of the Moog acquisition,
earnings for the year were flat. Lower overhead spending from cost controls
throughout this segment was essentially offset by the effect on margins of
sluggish spark plug sales.
Operating earnings in the Tools & Hardware segment declined from $98 million in
1991 to $86 million in 1992, and represented 14% of total operating earnings.
Earnings were impacted primarily by the lower sales volumes. The gross margin
on sales improved slightly as a result of operating adjustments made in
response to the lower activity.
4
<PAGE> 5
PRICING AND VOLUME
In each of Cooper's continuing segments, the nature of many of the products
sold is such that an accurate determination of the changes in unit volume of
sales is neither practical nor, in some cases, meaningful. Each segment
produces a family of products, within which there exist considerable variations
in size, configuration and other characteristics.
It is the Company's best judgment that, excluding the year-to-year effects of
acquisitions and divestitures, during 1993, unit volume increased in the
Electrical Products segment, was relatively unchanged in the Automotive
Products segment, and decreased in Tools & Hardware; and, during 1992, unit
volume increased in the Electrical Products and Automotive Products segments,
and decreased in the Tools & Hardware segment.
During 1993 and 1992, the Company experienced resistance to price increases in
selected product offerings in all segments. The Company has been able to
control costs during this period such that the resistance to price increases
has not significantly impacted profitability in the segments except for power
equipment products within the Electrical Products segment and the Tools &
Hardware segment during the 1992 period.
EFFECT OF INFLATION
During each year, inflation has had a relatively minor effect on Cooper's
continuing results of operations. This is true primarily for three reasons.
First, in recent years, the rate of inflation in Cooper's primary markets has
been fairly low. Second, Cooper makes extensive use of the LIFO method of
accounting for inventories. The LIFO method results in current inventory costs
being matched against current sales dollars, such that inflation affects
earnings on a current basis. Finally, many of the assets and liabilities
included in Cooper's Consolidated Balance Sheet were recorded in business
combinations that were accounted for as purchases. At the time of such
acquisitions, the assets and liabilities were adjusted to a fair market value
and, therefore, the cumulative long-term effect of inflation is reduced.
1993 NET OF TAX EARNINGS FROM CONTINUING OPERATIONS
Net of tax earnings from continuing operations for the year 1993 increased 25%
to $299.0 million compared to $239.6 million in 1992. This improvement
reflects the higher operating earnings discussed previously, augmented by lower
interest and corporate general expense partially offset by the effect of a
higher tax rate. Continuing operations' interest expense decreased 13% or $11.6
million primarily as a result of lower interest rates. During 1993, the
Company's interest rate swaps resulted in $2.8 million of higher interest
expense than would have resulted if the Company's expense had been based on the
actual floating-rate of its commercial paper borrowings. The interest rate
swaps have been considered to relate entirely to continuing operations. (See
Note 11 of the Notes to Consolidated Financial Statements for further
information on the Company's debt structure and the statement of Consolidated
Cash Flows for information regarding debt activity.) General corporate expenses
declined as a result of management's focus on cost controls during the year.
The effective tax rate for continuing operations increased 2.0 percentage
points from 1992's rate, which was favorably impacted by a nonrecurring tax
adjustment.
1992 NET OF TAX EARNINGS FROM CONTINUING OPERATIONS
Net of tax earnings from continuing operations for the year 1992 increased 4%
to $239.6 million compared with $231.2 million in 1991. Improved operating
performance was almost entirely offset by the current year effect of the
accounting principle changes such that lower interest expense (partially offset
by higher corporate general expense) and a reduction in the effective tax rate
accounted for essentially all of the year to year increase. Interest expense
related to continuing operations declined 26% to $93 million for the year.
Lower debt levels during most of the year, largely due to strong operating cash
flows, combined with lower effective borrowing rates for the decrease. General
corporate expenses increased $10 million and the effective tax rate declined by
4.3 percentage points, largely due to the nonrecurring tax adjustment discussed
previously.
5
<PAGE> 6
DISCONTINUED OPERATIONS
REVENUES AND EARNINGS
Income from discontinued operations was $68.1 million in 1993, compared with
$121.7 million in 1992. Revenues declined 10% to $1.50 billion in 1993,
compared with $1.67 billion in 1992. Excluding the effects attributable to the
early 1993 disposition of the mining and construction operations, the revenue
decline was 6%. Earnings declined primarily because of the decrease in
revenues, caused by the continued decline in worldwide oil and gas production
and transmission projects and augmented by the fourth-quarter drop in oil
prices. The depressed market conditions and the resulting pricing pressures
caused margins to shrink faster than management's ability to adjust short-term
operating levels. Although selling and administrative expenses declined
significantly in the segment, they were slightly higher than the previous year
as a percentage of revenues due to the severity of the revenue decline.
In 1992, income from discontinued operations was $121.7 million, compared with
$162.0 million in the previous year. Revenues were $1.67 billion, compared
with $1.85 billion in 1991. The decline in demand for domestic oil and gas
exploration and production equipment due to the general condition of the
domestic energy markets, coupled with weak markets for industrial equipment,
had a significant, unfavorable impact on the earnings of this segment. Sales
declined faster than the Company's ability to adjust selling and administrative
expenses in the short term, further contributing to the decline.
EARNINGS OUTLOOK
During January 1994, the Company announced that share earnings could be down by
as much as 25% in 1994 in comparison to 1993. After taking into account the
businesses divested in 1993 and the planned divestitures, the projected drop in
share earnings is entirely due to a downturn in the Petroleum & Industrial
Equipment segment, caused by the significant late-1993 drop in oil prices and
the resulting impact on worldwide exploration and production projects, which
affect demand for the Company's oilfield equipment. These effects are being
compounded by the impact of delays in several, major, gas compression projects
worldwide. The impact of this decline is expected to more than exceed projected
earnings improvements in the Electrical Products and Tools & Hardware segments.
The Company anticipates steady performance in the Automotive Products
operations. In the third quarter 1994 report to shareholders, the Company
updated this outlook with the following:
"The Company's outlook for the year remains relatively unchanged.
Excluding the impact of separating our Petroleum & Industrial Equipment
operations, we expect earnings from continuing operations for 1994 to be about
five percent lower than last year's earnings. On a restated basis, Cooper's
1993 share earnings from continuing operations were $2.15, including a 22-cent
contribution from the divested Belden Division".
FULLY DILUTED EARNINGS PER SHARE
Earnings per fully diluted share increased to $2.75 in 1993, up 1% from 1992's
income before the cumulative effect of changes in accounting principles. Income
from continuing operations improved from $1.64 per share in 1992 to $2.15 per
share in 1993, while per-share earnings from discontinued operations fell from
$1.07 in 1992 to $0.60 in 1993. The same factors discussed above contributed to
the change in fully diluted share earnings, partially offset by higher shares
utilized in the calculation. The number of weighted average shares used in the
fully diluted earnings per share computation was 114.2 million in 1993 compared
with 113.8 million in 1992. In addition to normal annual activity, the increase
in shares reflects the issuance of 475,256 shares in September 1993 in
connection with the Company's biennial employee stock purchase program as
further discussed in Note 15 of the Notes to Consolidated Financial Statements.
Earnings per fully diluted share before the cumulative effect of changes in
accounting principles decreased from $3.01 in 1991 to $2.71 in 1992. Income
from continuing operations decreased from $1.78 per share to $1.64 per
6
<PAGE> 7
share, while discontinued operations fell from $1.23 per share to $1.07 per
share in 1992. That continuing operations' fully diluted earnings per share
would decline by 14 cents, while net of tax income is increasing by $8.4
million is an anomoly created by the rules governing the computations of
earnings per share when multiple computations are involved. Under these rules
all earnings per share amounts must be computed utilizing the same computation
even though one of the computations results in an "anti-dilutive" result, which
is normally not allowed. The situation arose in 1991 when the shares issuable
with respect to the $1.60 Preferred Stock are more dilutive to net income than
the dividend with respect to the Preferred. The cumulative effect of changes in
accounting principles during 1992 amounted to $5.19 per fully diluted share,
resulting in a net loss for the year of $2.48 per share. The same factors
discussed above led to the decline in share earnings. The assumed conversion of
the 7% debentures and the $1.60 Convertible Exchangeable Preferred into Common
stock was anti-dilutive at the net income level in 1992; therefore, conversion
was not assumed in the 1992 computation of share earnings.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
WORKING CAPITAL
During 1993, "operating working capital" (defined as receivables and
inventories less accounts payable and accrued liabilities, excluding the
initial effects of acquisitions and divestitures, as well as foreign currency
translation, nonrecurring income and expense items and the cumulative effect of
accounting changes and before the restatement to reflect discontinued
operations) increased $3 million. Higher receivables at year-end 1993 more than
offset reductions in inventories and increases in accounts payable and accrued
liabilities compared with the previous year end. The increase in receivables
and the reduction in inventories primarily occurred in the discontinued
operations and was largely due to the timing of several large compressor
projects that shipped during the month of December. The increase in accounts
payable and accrued liabilities was due to normal operating activities.
During 1992, operating working capital increased by $29 million. This change
was comprised of the effects of lower receivables and inventories and lower
accounts payable and accrued liabilities. The decrease in receivables and
inventories primarily was due to effective working capital management. The
lower accounts payable and accrued liabilities resulted primarily from normal
operating activity.
CASH FLOWS
During 1993, cash flows from continuing and discontinued operating activities
were $578 million. These cash flows were augmented by proceeds from the
disposition of businesses of $413 million (including approximately $390 million
from the sale of Belden), proceeds from sales of fixed assets of $26 million
and proceeds from activity under stock option and other plans of $12 million.
These cash flows allowed the Company to fund capital expenditures of $275
million, dividends of $203 million and acquisitions of $101 million (see Note 5
of the Notes to Consolidated Financial Statements) and to reduce indebtedness
by $453 million.
As discussed under "Nonrecurring Items" above, during the past two years, the
Company has accelerated consideration of a number of projects that will involve
significant spending over the next several years. The Company does not believe
that the resources required for the projects will strain the Company's overall
liquidity or capital resources.
In January 1994, the Company announced that it expected net income for 1994 to
decline from 1993 by as much as 25%. Although the earnings decline will result
in lower cash flows for 1994, the cash flow reduction is not expected to
inhibit the Company's ability to meet its cash requirements or its ability to
respond to opportunities that may arise. See "Earnings Outlook" for further
discussion.
During 1992, cash flows from continuing and discontinued operating activities
totaled $653 million. These positive cash flows, along with $39 million of
proceeds from business divestitures, $32 million from sales of plant and
7
<PAGE> 8
equipment and $45 million from stock option and other plans, allowed the
Company to expend $638 million on acquisitions and $274 million on capital
expenditures and to pay $193 million of dividends, while only increasing
outstanding indebtedness, exclusive of debt assumed in acquisitions, by $334
million.
DEBT
The ratio of continuing operations' debt to total capitalization at December
31, 1993, was 27.5% compared with 42.0% (based on total debt) at year-end 1992.
The decrease from the previous year was due to debt reductions associated with
the sale of Belden and the classification of $445 million of allocated
indebtedness and $5 million of other debt to discontinued operations in "Net
assets of discontinued operations" at December 31, 1993. Excluding the
reclassification to discontinued operations, the ratio would be 34.6%. See
Notes 1 and 3 of the Notes to Consolidated Financial Statements for further
information regarding the disposition of Belden, the spin-off of Gardner-Denver
Industrial Machinery Division and the exchange offer relating to the other
petroleum and industrial equipment businesses.
As of December 31, 1993, the Company had entered into several interest rate
swap agreements maturing at various dates through February 22, 1994, that
effectively converted $500 million of floating-rate borrowings into fixed-rate
borrowings that will have an effective borrowing rate of approximately 3.73%.
See Note 11 of the Notes to Consolidated Financial Statements for further
information.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital projects to reduce product costs, improve product quality, increase
manufacturing efficiency and operating flexibility, or expand production
capacity resulted in expenditures of $275 million in 1993, compared with $274
million in 1992. At December 31, 1993, commitments for capital expenditures
amounted to $270 million, compared with $288 million at year-end 1992.
The commitments for 1994 include approximately $42 million for capacity
expansion, $136 million for machinery and equipment modernization and
enhancement, $23 million for various computer hardware and software projects,
$13 million for environmental projects, and $56 million for other items.
FINANCIAL POSITION
The Company's restated financial position reflects the various factors
discussed previously under "Revenues," "Nonrecurring Items," "Operating
Earnings," "Working Capital," "Cash Flows," "Debt," and "Capital Expenditures
and Commitments."
The decreases in plant and equipment, intangibles and postretirement benefits
other than pensions reflect the sale of Belden during 1993, and the
classification of the respective balances related to Cameron Forged Products
and discontinued operations to separate line items on the restated December 31,
1993 consolidated balance sheet. Other changes in the various components of
the Company's financial position were the result of normal operating
activities.
8
