<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-1175
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Cooper Industries, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 31-4156620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
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(Address of principal executive offices) (Zip Code)
(713) 209-8400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of issuer's common stock as of July 31, 1997 was
122,148,386.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
REVENUES ............................... $ 1,384.9 $ 1,351.4 $ 2,703.8 $ 2,643.1
Cost of sales .......................... 938.4 919.3 1,844.1 1,816.4
Selling and administrative expenses .... 238.8 232.8 479.6 466.4
Goodwill amortization .................. 16.1 16.4 32.1 32.6
Nonrecurring charges ................... 70.5 8.3 70.5 19.2
Other (income) expense, net ............ (70.4) (11.8) (68.9) (21.2)
Interest expense ....................... 21.3 36.8 50.9 74.4
--------- --------- --------- ---------
Income before income taxes .......... 170.2 149.6 295.5 255.3
Income taxes ........................... 64.7 61.3 112.3 104.9
--------- --------- --------- ---------
NET INCOME .......................... $ 105.5 $ 88.3 $ 183.2 $ 150.4
========= ========= ========= =========
INCOME PER COMMON SHARE:
Primary ............................ $ .88 $ .82 $ 1.59 $ 1.40
Fully Diluted ...................... $ .86 $ .77 $ 1.52 $ 1.33
CASH DIVIDENDS PER COMMON SHARE ........ $ .33 $ .33 $ .66 $ .66
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 3
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ----------
ASSETS (in millions)
<S> <C> <C>
Cash and cash equivalents ....................................... $ 15.2 $ 16.1
Receivables ..................................................... 1,010.2 959.4
Inventories ..................................................... 933.4 971.1
Other ........................................................... 177.5 151.5
---------- ----------
Total current assets ................................... 2,136.3 2,098.1
---------- ----------
Property, plant and equipment, less accumulated depreciation .... 1,132.0 1,241.3
Intangibles, less accumulated amortization ...................... 2,152.8 2,154.9
Investments in marketable equity securities ..................... 445.5 367.1
Deferred income taxes and other assets .......................... 53.8 89.0
---------- ----------
Total assets ........................................... $ 5,920.4 $ 5,950.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt ................................................. $ 105.3 $ 98.2
Accounts payable ................................................ 499.1 586.2
Accrued liabilities ............................................. 617.7 581.8
Accrued income taxes ............................................ 67.8 37.3
Current maturities of long-term debt ............................ 84.1 77.8
---------- ----------
Total current liabilities .............................. 1,374.0 1,381.3
---------- ----------
Long-term debt .................................................. 1,109.0 1,737.7
Postretirement benefits other than pensions ..................... 565.7 606.4
Other long-term liabilities ..................................... 312.0 334.8
---------- ----------
Total liabilities ...................................... 3,360.7 4,060.2
---------- ----------
Common stock, $5.00 par value ................................... 615.0 540.2
Capital in excess of par value .................................. 690.5 150.1
Retained earnings ............................................... 1,382.0 1,275.3
Unearned employee stock ownership plan compensation ............. (78.5) (92.9)
Common stock held in treasury, at cost .......................... (46.5) --
Other ........................................................... (2.8) 17.5
---------- ----------
Total shareholders' equity ............................. 2,559.7 1,890.2
---------- ----------
Total liabilities and shareholders' equity ............. $ 5,920.4 $ 5,950.4
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 4
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1997 1996
---------- ----------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 183.2 $ 150.4
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization .......................................... 110.7 118.0
Deferred income taxes .................................................. 5.5 7.2
Gain on sales of marketable equity securities .......................... -- (20.3)
Gain on the sale of Kirsch ............................................. (69.8) --
Nonrecurring asset write-down .......................................... 54.8 --
Changes in assets and liabilities: (1)
Receivables ....................................................... (99.6) (69.7)
Inventories ....................................................... (39.2) (13.6)
Accounts payable and accrued liabilities .......................... (15.4) (9.8)
Accrued income taxes .............................................. 32.9 16.3
Other assets and liabilities, net ................................. (40.7) 40.2
---------- ----------
Net cash provided by operating activities ............... 122.4 218.7
---------- ----------
Cash flows from investing activities:
Cash paid for acquired businesses ...................................... (90.9) (235.8)
Proceeds from the disposition of businesses ............................ 216.0 2.5
Capital expenditures ................................................... (97.6) (86.8)
Proceeds from sales of property, plant and equipment ................... 4.3 9.3
Proceeds from sales of marketable equity securities .................... -- 24.7
Other .................................................................. -- 0.1
---------- ----------
Net cash provided by (used in) investing activities ..... 31.8 (286.0)
---------- ----------
Cash flows from financing activities:
Proceeds from issuances of debt ........................................ 160.0 306.4
Repayments of debt ..................................................... (207.4) (169.3)
Dividends .............................................................. (77.6) (71.3)
Acquisition of treasury stock .......................................... (38.0) --
Debt issue costs ....................................................... -- (0.8)
Activity under employee stock plans and other .......................... 7.9 1.8
---------- ----------
Net cash provided by (used in) financing activities ..... (155.1) 66.8
---------- ----------
Effect of exchange rate changes on cash and cash equivalents .............. -- (1.0)
---------- ----------
Decrease in cash and cash equivalents ..................................... (0.9) (1.5)
Cash and cash equivalents, beginning of period ............................ 16.1 17.7
---------- ----------
Cash and cash equivalents, end of period .................................. $ 15.2 $ 16.2
========== ==========
</TABLE>
(1) Net of the effects of acquisitions, divestitures and translation.
The accompanying notes are an integral part of these statements.
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<PAGE> 5
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The financial information presented as of any date
other than December 31 has been prepared from the books and records without
audit. Financial information as of December 31 has been derived from the
audited financial statements of the Company, but does not include all
disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods indicated, have been included. For further information regarding
the Company's accounting policies, refer to the Consolidated Financial
Statements and related notes for the year ended December 31, 1996 included as
Appendix A to the Company's Proxy Statement dated March 12, 1997.
Derivative Financial Instruments - The Company enters into two types of
derivative financial instruments: foreign exchange forward contracts and
commodity contracts. All contracts are hedges of actual or anticipated
transactions with the gain or loss on the contract recognized in the same
period and in the same category of income or expense as the underlying hedged
transaction. The Company does not enter into speculative derivative
transactions or hedges of anticipated transactions unless there is a high
probability the transactions will occur. In December 1996, the Company hedged
its investment in marketable equity securities of Wyman-Gordon Company (See
Note 5 of Notes to Consolidated Financial Statements).
NOTE 2. STATEMENTS OF OPERATIONS RECLASSIFICATIONS
The June 30, 1996 consolidated statements of income have been reclassified
to (i) conform the classification of amounts billed to customers and refunded
upon the return of a rebuildable part; (ii) include depreciation expense in its
natural expense categories of cost of sales and selling and administrative
expenses; and (iii) reflect goodwill amortization, nonrecurring charges and
other income and expense as separate line items. The reclassifications resulted
in a decrease in revenue in Cooper's Automotive Products segment for amounts
billed to customers and refunded when the customer returns a rebuildable part.
Previously, several businesses of Cooper presented these billings and refunds
in various manners. The conforming of the classification of these billings and
refunds and the other reclassifications had no effect on segment operating
earnings or net income. The new statement of income presentation is more
consistent with the presentation of other companies in similar lines of
business.
NOTE 3. NONRECURRING INCOME AND EXPENSES
On May 30, 1997, the Company completed the sale of the Kirsch window
treatment division. The sale resulted in a gain before income taxes of $69.8
million ($43.3 million after income taxes). During the second quarter of 1997
the Company incurred a charge of $70.5 million ($43.7 million after income
taxes) for actions management committed to during the quarter after concluding
an evaluation of (i) geographic manufacturing distribution and certain product
lines within the Tools & Hardware and Automotive Products segments and (ii)
information systems relating to year 2000 compliance. The charge includes
adjustments to the carrying value of assets of $54.9 million and
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<PAGE> 6
accruals for continuing obligations for replaced systems and facility
consolidations of $15.6 million. The charge, discussed in further detail below,
decreased operating earnings of the Electrical Products segment by $15.9
million, Tools & Hardware segment by $18.7 million, and the Automotive Products
segment by $33.8 million and increased general corporate expenses by $2.1
million.
The Company anticipates that accruals for announced consolidations will be
expended during the second half of 1997 and the majority of the accruals for
continuing obligations for replaced systems and facility consolidations will be
expended in 1998 and 1999. As a result, cash expenditures will be relatively
uniform over the next two years and will not have a significant impact on cash
flows in any period.
The Company has begun a consolidation of international manufacturing and
distribution in the Tools & Hardware segment and is in the initial phases of
consolidating international sales and distribution in the Automotive Products
segment. Adjustments to the carrying value of assets and accruals, detailed
above, were recorded for projects committed to by management. Additional
consolidations are being considered which could result in additional charges in
future periods within these segments. In addition, severance and certain other
costs related to projects committed to by management are not expensed until the
affected employees are notified. The majority of the committed but unannounced
consolidations are currently anticipated to be phased in over the next two
years, which should limit the expense in any quarterly period to less than $1
million.
During the second quarter, the Company began negotiations with Standard
Motor Products to exchange its temperature control business for the brake
products business owned by Standard Motor Products and executed a letter of
intent in July 1997. The second quarter charge against the Automotive Products
segment includes adjustments to the carrying value of assets related to
remanufacturing businesses, including a portion of the temperature control
business, which are in the process of being divested.
The Company, during the second quarter of 1997, also completed its initial
analysis of the impact of existing system capabilities to function at the turn
of the century. Four of the Company's eight divisions are implementing new
enterprise systems with the remaining four divisions revising or replacing
existing software. Accordingly, the Company recorded a $38.9 million charge
primarily related to the adjustment in the carrying value of existing hardware
and software which will be abandoned when the enterprise systems are
implemented or replaced as the other systems are upgraded to comply with year
2000 requirements. While depreciation and amortization will be reduced as
existing hardware and software is abandoned or replaced, depreciation and
amortization of new systems, as well as expenses related to revising current
software and implementation of new systems, are likely to exceed the reduction
in depreciation and amortization in most future periods. Based on the current
assessment and decisions to replace systems, the Company does not anticipate
that expenditures related to revising current software to comply with year 2000
requirements will exceed $2 million in any quarterly period through the
anticipated completion date in early 1999.
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<PAGE> 7
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ----------
(in millions)
<S> <C> <C>
Raw materials ............................... $ 274.3 $ 302.9
Work-in-process ............................. 185.8 205.2
Finished goods .............................. 534.8 513.8
Perishable tooling and supplies ............. 53.7 54.2
---------- ----------
1,048.6 1,076.1
Less allowances (primarily LIFO reserves) ... (115.2) (105.0)
---------- ----------
Net inventories .................... $ 933.4 $ 971.1
========== ==========
</TABLE>
NOTE 5. LONG-TERM DEBT
At June 30, 1997, $123.6 million of commercial paper and bank loans was
reclassified to long-term debt, reflecting the Company's intention to refinance
this amount during the 12-month period following the balance sheet date through
either continued short-term borrowing or utilization of available revolving
bank credit facilities.
In December 1995, the Company issued DECS(sm) (Debt Exchangeable for
Common Stock) which at maturity, are mandatorily exchangeable into shares of
Wyman-Gordon Company ("Wyman-Gordon") common stock or, at the Company's option,
into cash in lieu of shares. The DECS are a hedge of the Company's investment
in Wyman-Gordon common stock and will result in the Company realizing a minimum
after-tax gain of $100.6 million at maturity of the DECS. This unrealized gain,
plus any net appreciation of the investment in Wyman-Gordon common stock offset
by the appreciation attributable to the DECS since the issuance of the DECS, is
included in shareholders' equity as an unrealized gain on investments in
marketable equity securities, net of tax. Long-term debt included an increase
of $67.6 million at June 30, 1997 as compared to December 31, 1996, reflecting
the increase in the market value of the Wyman-Gordon common stock exchangeable
into the DECS during the six months ended June 30, 1997.
During the second quarter, the Company completed calls for redemption of
the remaining $494 million of its 7.05% Convertible Subordinated Debentures,
which resulted in $438 million being converted to approximately 10.6 million
shares of Cooper Common stock and $56 million being redeemed for cash. The
Company has now retired all $690 million of the debentures. Of these
debentures, a total of $610 million was converted to approximately 14.8 million
shares of Cooper Common stock and approximately $80 million was redeemed for
cash.
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<PAGE> 8
NOTE 6. NET INCOME PER COMMON SHARE
Primary and fully diluted net income per Common share is computed based on
the following information:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
PRIMARY: (in millions)
<S> <C> <C> <C> <C>
Net income .................................. $ 105.5 $ 88.3 $ 183.2 $ 150.4
======== ======== ======== ========
Average Common shares and
Common share equivalents ................. 120.0 107.7 115.1 107.5
======== ======== ======== ========
FULLY DILUTED:
Net income .................................. $ 105.5 $ 88.3 $ 183.2 $ 150.4
Interest expense related to the 7.05%
Convertible Subordinated Debentures,
net of tax ............................... 0.1 7.3 5.8 14.6
-------- -------- -------- --------
Net income applicable to Common stock ....... $ 105.6 $ 95.6 $ 189.0 $ 165.0
======== ======== ======== ========
Average Common shares and
Common share equivalents ................. 120.1 107.7 115.3 107.7
Additional shares assuming conversion of
the 7.05% Convertible Subordinated
Debentures ............................... 3.0 16.7 8.7 16.7
-------- -------- -------- --------
Average Common shares and
Common share equivalents ................. 123.1 124.4 124.0 124.4
======== ======== ======== ========
</TABLE>
NOTE 7. INDUSTRY SEGMENT REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Electrical Products .................... $ 660.7 $ 611.3 $ 1,273.4 $ 1,185.8
Tools & Hardware (excluding Kirsch) .... 195.7 178.9 375.8 355.5
Kirsch ................................. 41.8 66.2 97.4 125.9
Automotive Products .................... 486.7 495.0 957.2 975.9
--------- --------- --------- ---------
$ 1,384.9 $ 1,351.4 $ 2,703.8 $ 2,643.1
========= ========= ========= =========
</TABLE>
NOTE 8. INCOME TAXES
See Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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<PAGE> 9
NOTE 9. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following noncash transactions have been excluded from the
consolidated statements of cash flows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1997 1996
------ ------
(in millions)
<S> <C> <C>
Assets acquired and liabilities assumed or incurred from the acquisition of
businesses:
Fair value of assets acquired ........................................... $100.9 $ 96.2
Cash used to acquire businesses (1) ..................................... (90.9) (72.2)
------ ------
Liabilities assumed or incurred ....................................... $ 10.0 $ 24.0
====== ======
Conversion of 7.05% Convertible Subordinated Debentures
for Cooper Common stock .................................................... $610.0 $ --
</TABLE>
(1) An additional $163.6 million was paid during the first quarter of 1996 for
the December 31, 1995 acquisition of CEAG.
NOTE 10. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement is effective for financial statements issued for periods ending after
December 15, 1997, does not permit earlier application and requires all prior
period earnings per share to be restated to conform to a new computational
method. The Company does not anticipate that the implementation of this new
standard will impact earnings per share by more than 3% on an annual basis.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
Net income for the second quarter of 1997 increased 20% to $105.5 million
on revenues of $1.38 billion compared with 1996 net income of $88.3 million on
revenues of $1.35 billion. Second quarter fully diluted share earnings
increased 12% to $.86 from $.77 in 1996. Net income for the second quarter of
this year includes the benefit of a lower effective income tax rate of 38.0%
compared to 41.0% for the same period of last year. The Company also called the
remaining $494 million of its outstanding 7.05% Convertible Subordinated
Debentures in the second quarter of 1997 resulting in $438 million of the
debentures being converted into shares of Cooper Common Stock during the
quarter. The impact of the lower effective tax rate and the redemption of the
7.05% Convertible Subordinated Debentures increased net income and earnings per
share for the quarter by approximately $12 million and $.04, respectively.
On May 30, 1997 the Company completed the sale of the Kirsch window
treatment division ("Kirsch") and, during the second quarter, incurred a charge
for actions management committed to during the quarter. (See Note 3 of Notes to
Consolidated Financial Statements.)
REVENUES:
Revenues for the second quarter of 1997 increased 2% (5% excluding Kirsch
from both periods) compared to the second quarter of 1996. After excluding the
effects of acquisitions and the Kirsch divestiture, revenues increased 4%
compared to the second quarter of last year. Overall, the Company estimates
that the strengthening of the U.S. dollar against most European currencies
decreased reported revenues by approximately $14 million, or 1%, compared to
the second quarter of 1996.
Revenues of the Electrical Products segment were up 8% from the second
quarter of 1996 with a negligible impact from recent acquisitions. Sales of
fuses, power equipment and lighting fixtures benefitted from continued strength
in North American industrial production and construction and renovation
activity. These gains were offset somewhat by the strengthening of the U.S.
dollar against most European currencies, which reduced European sales measured
in U.S. dollars. However, revenues increased in Latin America reflecting an
improvement in the Mexican economy.
Tools & Hardware segment revenues, excluding Kirsch, increased 9% compared
to the second quarter of 1996. Adjusted for recent acquisitions, revenues were
7% above last year. Domestically, sales were up due to continued growth in
demand for power tools for the automotive and aircraft assembly market and a
rebound in hand tools sales. In addition, the segment experienced continued
strong sales of assembly tools to European automotive manufacturers.
Revenues in the Automotive Products segment decreased 2% from the prior
year period. A recent acquisition had a negligible impact on the year-to-year
decrease in revenues. Revenues for the segment were affected by a continued
sluggish domestic and European aftermarket and the strengthening U.S. dollar.
In addition, sales of weather-related products declined to more normal
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<PAGE> 11
levels due to less severe winter weather compared to the prior year.
Temperature control products continued to experience severe competitive market
conditions. However, some improvement was seen in domestic demand for ignition,
lighting and brake products. Latin American demand continued to improve.
INCOME BEFORE INCOME TAXES:
Income before income taxes increased 14% to $170.2 million for the second
quarter of 1997, compared to $149.6 million for the same period of 1996. Cost
of sales, as a percentage of revenues, declined primarily due to product cost
improvements and an overall favorable mix of higher margin products in the
Electrical Products and Tools & Hardware segments. Weak aftermarket sales and
higher original equipment sales in the Automotive Products segment resulted in
an increase in cost of sales as a percentage of revenues in this segment.
Selling and administrative expenses as a percentage of revenues remained flat
in the second quarter of 1997 compared to the second quarter of 1996.
Nonrecurring charges for the 1997 second quarter are discussed in Note 3 of
Notes to Consolidated Financial Statements. Nonrecurring charges for the second
quarter of 1996 included expenses related to a plant closing and product line
rationalization. Other (income) expense increased in the second quarter of 1997
due to the gain of $69.8 million on the sale of the Kirsch division. The 1996
second quarter included a $9.5 million gain on the sale of marketable equity
securities. Interest expense declined $15.5 million from the same period of
last year due to lower interest rates, lower debt levels and the conversion of
$610 million of the Company's 7.05% Convertible Subordinated Debentures to
Cooper Common Stock.
Excluding nonrecurring charges, operating earnings of the Electrical
Products segment reflected a significant increase compared to the second
quarter of 1996 both before and after the effects of recent acquisitions. The
improvement resulted from revenue increases in most major product lines and
continuing emphasis on cost reduction.
Excluding nonrecurring charges and Kirsch, the Tools & Hardware segment's
operating earnings improved significantly compared to the same period last year
with only a minor impact from recent acquisitions. Volume increases and several
cost improvement actions, including the 1996 upgrade of the hand tools
distribution center and consolidation of forged tool production, more than
offset the impact of a stronger U.S. dollar on European sales.
Excluding nonrecurring charges, operating earnings of the Automotive
Products segment decreased compared to the same period last year at a greater
rate than the decrease in revenues. Lower demand for aftermarket wiper blades
and ignition, chassis, and temperature control products and higher demand for
lower margin original equipment products were the primary causes of the
decrease in earnings.
INCOME TAXES:
The effective tax rate (income tax expense as a percentage of income
before income taxes) for the second quarter was 38.0%, compared to 41.0% for
the same period of 1996. The rate reduction stems from the Company's tax
planning efforts, including changing its international tax structure,
maximizing tax incentives for exports and increasing research and development
tax credits. In addition, as earnings have increased, nondeductible goodwill
has less of an impact on the effective tax rate.
- 11 -
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Net income for the first six months of 1997 increased 22% to $183.2
million on revenues of $2.70 billion compared with 1996 net income of $150.4
million on revenues of $2.64 billion. Fully diluted share earnings increased
14% to $1.52 from $1.33 in 1996. Net income for the first six months of this
year includes the benefit of a lower effective income tax rate of 38.0%
compared to 41.1% for the same period of last year. The Company also called
$690 million of its outstanding 7.05% Convertible Subordinated Debentures in
the first six months of 1997 resulting in $610 million of the debentures being
converted into Cooper Common Stock. The impact of the lower effective tax rate
and the redemption of the 7.05% Convertible Subordinated Debentures increased
net income and earnings per share by approximately $18 million and $.07,
respectively.
REVENUES:
Revenues for the first six months of 1997 increased 2% (4% excluding
Kirsch from both periods) compared to the first six months of 1996. After
excluding the effects of acquisitions and the Kirsch divestiture, revenues
increased 2% compared to the first six months of 1996. Overall, the Company
estimates that the strengthening of the U.S. dollar against most European
currencies resulted in lower reported sales of approximately $23 million
compared to the first six months of 1996.
Revenues of the Electrical Products segment were up 7% from the first six
months of 1996. Adjusted for recent acquisitions, revenues increased 6%. Sales
of fuses, power equipment and lighting fixtures benefitted from continued
strength in North American industrial production and construction and
renovation activity. These gains were tempered somewhat by a strengthening of
the U.S. dollar against most European currencies, which reduced European sales
measured in U.S. dollars compared to the first six months of 1996. Revenues
increased in Latin America reflecting an improvement in the Mexican economy.
Tools & Hardware segment revenues, excluding Kirsch, increased 6% compared
to the first six months of 1996. Adjusted for recent acquisitions, revenues
were 3% above last year. Domestically, sales were up due to continued growth in
demand for power tools for the automotive and aircraft assembly market and hand
tools for industrial use. The strengthening of the U.S. dollar resulted in a
decline in tool sales measured in U.S. dollars. The segment experienced
continued strong sales of assembly tools to European automotive manufacturers.
Revenues in the Automotive Products segment decreased 2% from the prior
year period. Adjusted for the effects of recent acquisitions, revenues in the
Automotive Products segment were down 3% from last year. Revenues for the
segment were affected by a continued sluggish domestic and European aftermarket
and the strengthening U.S. dollar. In addition, sales of weather-related
products declined to more normal levels due to less severe winter weather
compared to the prior year. Temperature control products continued to
experience severe competitive market conditions. Latin American revenues
increased in all markets.
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<PAGE> 13
INCOME BEFORE INCOME TAXES:
Income before income taxes increased 16% to $295.5 million for the first
six months of 1997, compared to $255.3 million for the same period of 1996.
Cost of sales, as a percentage of revenues, declined primarily due to product
cost improvements and an overall favorable mix of higher margin products.
Selling and administrative expenses increased slightly as a percentage of
revenues in the first six months of 1997 compared to the first six months of
1996. Expansion of international sales offices for electrical construction
materials and continued investment in new products and sales promotions in the
hand tools and automotive operations led to the increase. Nonrecurring charges
for 1997 are discussed in Note 3 of Notes to Consolidated Financial Statements.
Nonrecurring charges for 1996 include costs associated with plant
consolidations and product line rationalization, and environmental expenses
related to divested businesses. Excluding the $69.8 million gain on the sale of
the Kirsch division in 1997 and gains of $20.3 million on the sale of
marketable equity securities in the first six months of 1996, other (income)
expense was essentially unchanged from the prior year. Interest expense
declined $23.5 million from the same period of last year due to lower interest
rates, lower debt levels and the conversion during the period of $610 million
of the Company's 7.05% Convertible Subordinated Debentures to Cooper Common
Stock.
Excluding nonrecurring charges, operating earnings of the Electrical
Products segment reflected a significant increase compared to the first six
months of 1996 both before and after the effects of recent acquisitions. The
improvement resulted from revenue increases in most major product lines and
various cost reduction actions.
Excluding nonrecurring charges and Kirsch, the Tools & Hardware segment's
operating earnings improved compared to the same period last year both before
and after considering recent acquisitions. Increased revenues and cost
improvement actions, including the 1996 upgrade of the hand tools distribution
center and consolidation of forged tool production, were primarily responsible
for the earnings improvement.
Excluding nonrecurring charges, operating earnings of the Automotive
Products segment were down compared to the same period last year. Lower demand
for wiper blades, compared to the abnormally high sales volume in the same
period last year, and lower sales of ignition, chassis and temperature control
products were the primary drivers of the decrease in earnings.
INCOME TAXES:
The effective tax rate (income tax expense as a percentage of income
before income taxes) for the first six months was 38.0%, compared to 41.1% for
the same period of 1996. The rate reduction stems from the Company's tax
planning efforts, including changing its international tax structure,
maximizing tax incentives for exports and increasing research and development
tax credits. In addition, as earnings have increased, nondeductible goodwill
has less of an impact on the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's "operating working capital" (defined as receivables and
inventories less accounts payable) increased $100.2 million during the first
six months of 1997 compared to an increase of $133.5 million in the first six
months of 1996. Operating working capital turnover improved to 3.9 turns from
3.6 turns for the first six months of last year.
- 13 -
<PAGE> 14
Cash flows from operating activities in the first six months of 1997
totalled $122 million as cash generated from earnings more than offset
increases in operating working capital. These funds, along with $216 million in
proceeds from the sale of Kirsch, were used to fund acquisitions of $91
million, capital expenditures of $98 million, dividends of $78 million, stock
repurchases of $38 million, and net debt repayments of $47 million. During the
first six months of 1996 cash flows from operating activities totalled $219
million. The cash flows from operating activities plus proceeds from the sale
of securities and an increase in debt provided funding for capital expenditures
of $87 million, dividends of $71 million and acquisitions totalling $236
million during the first six months of 1996. The 1997 cash flows from operating
activities were reduced by $56 million due to advance funding of employee
welfare plans versus no advance funding of these plans at June 30, 1996.
In connection with acquisitions accounted for as purchases, the Company
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired
businesses into existing Company operations. Cash flows from operating
activities are reduced by the amounts expended against the various accruals
established in connection with each acquisition. Spending against these
accruals for the six months ended June 30, 1997 and June 30, 1996 was $3.2
million and $7.3 million, respectively. There were no significant additions to
these accruals during the first six months of 1997.
During the first six months, the Company made three calls for redemption
of its 7.05% Convertible Subordinated Debentures. The first redemption call for
$190 million of debentures on January 22, 1997, resulted in $165.4 million
being converted into approximately 4 million shares of Cooper Common Stock, and
$24.6 million being redeemed for cash on February 21, 1997. In addition, $6.6
million of debentures were voluntarily converted to 162,000 shares of common
stock during the quarter. The second redemption call, on March 19, 1997, for
$300 million of outstanding debentures resulted in $250 million being converted
into approximately 6 million shares of Cooper Common Stock, and $50 million
being redeemed for cash on April 18, 1997. On April 22, 1997, the Company
called for redemption the remaining $194 million of debentures, which resulted
in $188 million being converted into approximately 4.6 million shares of Cooper
Common Stock, and $6 million being redeemed for cash on May 22, 1997.
At June 30, 1997, the Company's debt-to-total capitalization ratio was
33.7% compared to 54.4% at June 30, 1996. Excluding the DECS, which at maturity
are mandatorily exchangeable into shares of Wyman-Gordon Company common stock
or, at the Company's option, into cash in lieu of shares, the Company's
debt-to-total capitalization ratio was 26.4% at June 30, 1997 compared to 51.5%
at June 30, 1996.
During the second quarter, the Company purchased approximately one million
shares of its outstanding Common Stock for $50 million ($12 million payable in
July 1997). This action was taken as part of the remaining $275 million Common
Stock repurchase authorization program.
The Company is continuing to strategically review product lines and
geographic manufacturing and distribution which could result in future charges
in the Tools & Hardware and Automotive Products segments. The Company does not
anticipate that any actions resulting from these evaluations will require cash
outflows that would significantly affect liquidity and capital resources.
- 14 -
<PAGE> 15
BACKLOG:
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
--------- ---------
(in millions)
<S> <C> <C>
Electrical Products ......................... $ 256.1 $ 234.8
Tools & Hardware (1) ........................ 74.8 84.8
Automotive Products ......................... 110.3 103.4
--------- ---------
$ 441.2 $ 423.0
========= =========
</TABLE>
(1) 1996 includes Kirsch sales backlog of $6.3 million.
- 15 -
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders was held on April 29, 1997 in Houston,
Texas. The sole matter voted upon was the election of three persons to the
Company's Board of Directors for the term expiring in the year 2000. Set forth
below are the results of voting:
<TABLE>
<CAPTION>
Clifford J. Grum Sir Ralph H. Robins James R. Wilson
<S> <C> <C> <C>
Votes For: 98,025,100 98,009,658 98,022,999
Votes Withheld: 1,398,430 1,413,872 1,400,531
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 1996 through 1992 and the Six Months Ended
June 30, 1997 and 1996.
27. Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 23, 1997,
which included a copy of a press release containing the
Company's financial results for the three months ended March 31,
1997.
- 16 -
<PAGE> 17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cooper Industries, Inc.
-----------------------------------
(Registrant)
Date August 13, 1997 /s/ D. Bradley McWilliams
- --------------------------------- -----------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
Date August 13, 1997 /s/ Terry A. Klebe
- --------------------------------- -----------------------------------
Terry A. Klebe
Vice President and Controller
and Chief Accounting Officer
- 17 -
<PAGE> 18
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 1996 through 1992 and the Six Months Ended
June 30, 1997 and 1996.
27. Financial Data Schedule.
</TABLE>
- 18 -
<PAGE> 1
EXHIBIT 12
COOPER INDUSTRIES, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Expense $ 50,900 $ 74,400 $ 142,100 $ 151,000 $ 73,300 $ 80,900 $ 92,500
Estimated Interest Portion
of Rent Expense 9,800 9,103 17,362 16,865 19,289 20,701 16,178
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges $ 60,700 $ 83,503 $ 159,462 $ 167,865 $ 92,589 $ 101,601 $ 108,678
========= ========= ========= ========= ========= ========= =========
Income From Continuing
Operations Before Income Taxes $ 295,500 $ 255,300 $ 558,000 $ 478,000 $ 504,700 $ 506,000 $ 392,100
Add: Fixed Charges 60,700 83,503 159,462 167,865 92,589 101,601 108,678
Dividends From Less Than
50% Owned Companies -- 97 359 968 835 2,395 2,278
Less: Equity in Earnings
of Less Than 50% Owned
Companies (243) (619) (1,281) (1,000) (1,900) (1,200) (1,900)
--------- --------- --------- --------- --------- --------- ---------
Earnings Before Fixed Charges $ 355,957 $ 338,281 $ 716,540 $ 645,833 $ 596,224 $ 608,796 $ 501,156
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 5.9x 4.1x 4.5x 3.8x 6.4x 6.0x 4.6x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER INDICATED AS
REPORTED ON THE COMPANY'S FORM 10-Q FOR SUCH PERIOD AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,200
<SECURITIES> 0
<RECEIVABLES> 1,010,200
<ALLOWANCES> 0
<INVENTORY> 933,400
<CURRENT-ASSETS> 2,136,300
<PP&E> 2,282,200
<DEPRECIATION> 1,150,200
<TOTAL-ASSETS> 5,920,400
<CURRENT-LIABILITIES> 1,374,000
<BONDS> 1,109,000
0
0
<COMMON> 615,000
<OTHER-SE> 1,944,700
<TOTAL-LIABILITY-AND-EQUITY> 5,920,400
<SALES> 2,703,800
<TOTAL-REVENUES> 2,703,800
<CGS> 1,844,100
<TOTAL-COSTS> 1,844,100
<OTHER-EXPENSES> 70,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,900
<INCOME-PRETAX> 295,500
<INCOME-TAX> 112,300
<INCOME-CONTINUING> 183,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183,200
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.52
</TABLE>
