<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- -----------
Commission File Number 1-1175
---------------------------------------------------------
Cooper Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-4156620
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 209-8400
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ---------
Number of shares outstanding of issuer's common stock as of July 20, 1998 was
116,392,461.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . $1,429.3 $1,384.9 $2,772.4 $2,703.8
Cost of sales . . . . . . . . . . . . . . . . 970.5 938.4 1,882.5 1,844.1
Selling and administrative expenses . . . . . 245.7 238.8 487.7 479.6
Goodwill amortization . . . . . . . . . . . . 19.2 16.1 37.5 32.1
Nonrecurring gains . . . . . . . . . . . . . - (69.8) - (69.8)
Nonrecurring charges . . . . . . . . . . . . - 70.5 - 70.5
Other (income) expense, net . . . . . . . . . (1.8) (0.6) (2.3) 0.9
Interest expense . . . . . . . . . . . . . . 27.4 21.3 52.7 50.9
-------- -------- -------- --------
Income before income taxes . . . . . . . 168.3 170.2 314.3 295.5
Income taxes . . . . . . . . . . . . . . . . 62.3 64.7 116.3 112.3
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . $ 106.0 $ 105.5 $ 198.0 $ 183.2
======== ======== ======== ========
INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . $ .89 $ .89 $ 1.66 $ 1.60
Diluted . . . . . . . . . . . . . . . . . $ .88 $ .86 $ 1.64 $ 1.52
CASH DIVIDENDS PER COMMON SHARE . . . . . . . $ .33 $ .33 $ .66 $ .66
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE> 3
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -------------
<S> <C> <C>
ASSETS (in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.6 $ 30.3
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,131.9 991.7
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 999.5 958.2
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158.5 156.5
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 2,306.5 2,136.7
-------- --------
Property, plant and equipment, less accumulated depreciation . . . . . . . 1,222.0 1,198.8
Intangibles, less accumulated amortization . . . . . . . . . . . . . . . . 2,562.6 2,389.9
Investments in marketable equity securities . . . . . . . . . . . . . . . . 279.1 274.8
Deferred income taxes and other assets . . . . . . . . . . . . . . . . . . 123.3 52.3
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,493.5 $6,052.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104.0 $139.0
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531.6 574.5
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660.2 589.5
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.0 23.8
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . 292.6 58.3
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 1,626.4 1,385.1
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,542.0 1,272.2
Postretirement benefits other than pensions . . . . . . . . . . . . . . . . 550.2 558.0
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 257.4 260.6
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 3,976.0 3,475.9
-------- --------
Common stock, $5.00 par value . . . . . . . . . . . . . . . . . . . . . . . 615.0 615.0
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . 673.3 679.8
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,634.6 1,514.5
Common stock held in treasury, at cost . . . . . . . . . . . . . . . . . . (314.9) (149.7)
Unearned employee stock ownership plan compensation . . . . . . . . . . . . (54.6) (66.5)
Accumulated other non-owner changes in equity . . . . . . . . . . . . . . . . (35.9) (16.5)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 2,517.5 2,576.6
-------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $6,493.5 $6,052.5
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE> 4
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198.0 $ 183.2
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 114.3 110.7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 5.5
Gain on the sale of Kirsch . . . . . . . . . . . . . . . . . . . . . . - (69.8)
Nonrecurring asset write-down . . . . . . . . . . . . . . . . . . . . . - 54.8
Changes in assets and liabilities: (1)
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122.8) (99.6)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46.3) (39.2)
Accounts payable and accrued liabilities . . . . . . . . . . . . . (23.8) (15.4)
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . 9.2 32.9
Other assets and liabilities, net . . . . . . . . . . . . . . . . . (24.4) (40.7)
------- -------
Net cash provided by operating activities . . . . . . . . . . 119.8 122.4
------- -------
Cash flows from investing activities:
Cash paid for acquired businesses . . . . . . . . . . . . . . . . . . . (251.4) (90.9)
Proceeds from the disposition of businesses . . . . . . . . . . . . . . - 216.0
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (100.8) (97.6)
Proceeds from sales of property, plant and equipment . . . . . . . . . 7.4 4.3
------- -------
Net cash provided by (used in) investing activities . . . . . (344.8) 31.8
------- -------
Cash flows from financing activities:
Proceeds from issuances of debt . . . . . . . . . . . . . . . . . . . . 582.2 160.0
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (113.6) (207.4)
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78.7) (77.6)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . (214.2) (38.0)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) -
Activity under stock plans . . . . . . . . . . . . . . . . . . . . . . 39.0 7.9
------- -------
Net cash provided by (used in) financing activities . . . . . 213.3 (155.1)
------- -------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . (2.0) -
------- -------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . (13.7) (0.9)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 30.3 16.1
------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $ 16.6 $ 15.2
======= =======
</TABLE>
(1) Net of the effects of acquisitions, divestitures and translation.
The accompanying notes are an integral part of these statements.
- 4 -
<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, 1997 included as
Appendix A to the Company's Proxy Statement dated March 11, 1998.
Income per Common Share - In the fourth quarter of 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, Earnings Per
Share. The new accounting standard required all prior periods' income per
Common share to be restated based on a new computational method for average
shares outstanding. Adopting the new standard had no impact on previously
reported fully diluted, currently referred to as diluted, income per Common
share for the quarter and six months ended June 30, 1997. Adopting the new
standard increased previously reported primary, currently referred to as basic,
income per common share $.01 for the quarter and $.01 for the six months ended
June 30, 1997. Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of common stock equivalents.
Net Income and Other Non-Owner Changes in Equity - Effective January
1, 1998, Cooper adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130"). The adoption of this statement
had no impact on net income or shareholders' equity. SFAS No. 130 requires the
reporting of comprehensive income, which includes net income plus non-owner
changes in equity, including unrealized gains or losses on investments, the
minimum pension liability adjustment and foreign currency translation. Net
income and other non-owner changes in equity were $93.7 million and $112.4
million, respectively during the three months ended June 30, 1998 and 1997 and
$178.6 million and $160.9 million, respectively during the six months ended
June 30, 1998 and 1997. The components of net income and other non-owner
changes in equity, net of related taxes, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . $106.0 $105.5 $198.0 $183.2
Foreign currency translation loss . . . (8.5) (2.9) (19.7) (29.3)
Unrealized gains (losses) on
investments . . . . . . . . . . . . . (3.8) 9.8 .3 7.0
------ ------ ------ ------
Net income and other non-owner
changes in equity . . . . . . . . . . $ 93.7 $112.4 $178.6 $160.9
====== ====== ====== ======
</TABLE>
Recently Issued Accounting Standards - In March 1998, the AICPA issued
SOP 98-1, Accounting for the Costs of Computer Software Developed for or
Obtained For Internal Use. The SOP requires companies to capitalize qualifying
computer software costs incurred during the application development stage. The
SOP is effective for fiscal years beginning after December 15, 1998 and permits
early adoption. The Company adopted the SOP in the first quarter of 1998. The
adoption had no impact on net income as the Company's policy was materially
consistent with the requirements of the SOP.
- 5 -
<PAGE> 6
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of
Start-up Activities. The SOP requires that all costs of start-up activities be
expensed as incurred. The SOP is effective for fiscal years beginning after
December 15,1998 and permits early adoption. The Company adopted this standard
in the second quarter of 1998. The adoption had no impact on net income as the
Company's policies are consistent with this standard.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
requires that all derivatives be recognized as assets and liabilities and
measured at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The SFAS is effective for fiscal years beginning after June 15,
1999 and early adoption is permitted. The Company is currently evaluating the
effects of the new standard. The Company does not anticipate that the new
standard will have an impact on net income. However, the new standard
requirement to mark to market certain of the Company's financial instruments
utilized to hedge currency and commodity price risks will result in
fluctuations in the fair value being included in shareholders' equity, net of
tax. Due to the Company's policies regarding financial instruments, it is not
likely that the adoption of the new standard will have a material effect on the
Company's Consolidated Balance Sheets.
NOTE 2. ACQUISITIONS AND DIVESTITURES
During the first half of 1998, the Company completed three
acquisitions in its Tools & Hardware segment and two small acquisitions in its
Electrical Products segment. In March 1998, the Company acquired INTOOL for a
total cost of $217.5 million. INTOOL manufactures and sells pneumatic and
electric assembly tools, precision-drilling equipment, fastening systems and
portable and fixed mounted tools used in industrial, automotive, aerospace and
energy markets and had annual revenues of approximately $117 million. The other
acquisitions included two small businesses in France and Germany that extend
the global product lines of the Company's Power Tools division and two small
Electrical Products businesses in Mexico. The acquisitions have been accounted
for as purchase transactions and the results of the acquisitions are included
in the Company's consolidated income statements from the date of acquisition.
Effective March 28, 1998, the Company completed the exchange of its
automotive temperature control business for the brake products business of
Standard Motor Products. In February 1998, the Company completed the sale of
its constant velocity joint remanufacturing business. For accounting purposes,
the exchange transaction is recorded as the sale of the Company's temperature
control business and the purchase of the Standard Motor Products' brake
business. The fair market value of the temperature control business assets was
equal to the net book value of the brake business assets after the write-down
of the temperature control business assets made in the second quarter of 1997.
The acquisition cost of the brake business assets was approximately $81
million, subject to adjustment based on the actual book value of certain assets
at the acquisition date. The constant velocity joint remanufacturing business
was sold for approximately $4 million.
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 geographic manufacturing and distribution facilities within
the Tools & Hardware and Automotive Products segments and information systems
relating to year 2000 compliance efforts. The charge included adjustments to
the carrying value of assets of $54.8 million and accruals for continuing
obligations for replaced systems and
- 6 -
<PAGE> 7
facility consolidations of $15.7 million. The charge, discussed in further
detail below, decreased operating earnings of the Electrical Products segment
by $15.9 million, the 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 began a consolidation of international manufacturing and
distribution in the Tools & Hardware segment and the consolidation of
international sales and distribution in the Automotive Products segment in the
second quarter of 1997. Adjustments to the carrying value of assets and
accruals, detailed above, were recorded for projects committed to by
management. Severance and certain other costs are not expensed until the
affected employees are notified even though management has committed to the
projects. Charges for additional consolidations were recorded in the third
quarter of 1997, including severance on certain projects accrued for in the
second quarter of 1997. At June 30, 1998, remaining cash expenditures and
anticipated additional charges related to these projects are insignificant.
During the second quarter of 1997, 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 charge in the second quarter of 1997 against the
Automotive Products segment included adjustments to the carrying value of
assets related to remanufacturing businesses, including a portion of the
temperature control business, which were divested in the first quarter of 1998.
The Company also completed during the second quarter of 1997, its
initial analysis of the impact of existing system capabilities to function at
the turn of the century. Four of the Company's nine divisions are implementing
new enterprise systems with the remaining five divisions modifying or replacing
existing software. Where possible, businesses have abandoned home-grown or
highly customized applications with purchased, year 2000 compliant replacements
or upgrades. In some situations, operations abandoned existing software and
migrated to consolidated hardware and software that is year 2000 compliant. The
Company recorded a $38.9 million charge in the second quarter of 1997 related
to the adjustment in the carrying value of abandoned hardware and software.
While depreciation is reduced by the effect of the write-down, depreciation of
new systems, as well as expenses related to revising current software to be
year 2000 compliant and implementation of new systems, are likely to exceed the
reduction in depreciation in most future periods.
NOTE 4. EVALUATION OF EXITING THE AUTOMOTIVE PRODUCTS SEGMENT
In April 1998, the Company announced that it had engaged an investment
banking firm to assist in the evaluation of options for exiting the automotive
business. For the year ended December 31, 1997, the Automotive Products segment
had revenues of $1.9 billion (36% of the Company's total revenues) and segment
operating earnings of $143.5 million ($186.9 million, excluding nonrecurring
charges - 25% of the Company's segment operating earnings, excluding
nonrecurring charges).
The Company is evaluating a possible initial public offering of the
Automotive Products segment as well as other alternatives, including a sale to
a third party. The Company anticipates completing the evaluation and the
Company's Board of Directors approving a transaction, if any, in the third
quarter of 1998.
- 7 -
<PAGE> 8
NOTE 5. INVENTORIES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in millions)
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296.5 $ 295.7
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188.9 178.7
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539.7 512.1
Perishable tooling and supplies . . . . . . . . . . . . . . . . . . . . . 54.8 54.5
-------- --------
1,079.9 1,041.0
Excess of current standard cost over LIFO costs . . . . . . . . . . . . . (80.4) (82.8)
-------- --------
Net inventories . . . . . . . . . . . . . . . . . . . . . . . $ 999.5 $ 958.2
======== ========
</TABLE>
NOTE 6. LONG-TERM DEBT
At June 30, 1998, commercial paper and bank loans totaling $600.0
million were 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.
During the six months ended June 30, 1998, the Company issued $250
million of five-year medium term notes at an average interest rate of 6.1%
under an existing shelf registration statement.
In December 1995, the Company issued DECS(SM) (Debt Exchangeable for
Common Stock), which mature on January 1, 1999. At maturity, the DECS are
mandatorily exchangeable into shares of 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 $85.6 million upon redemption of
the remaining DECS. This unrealized gain, plus any net appreciation of the
investment in Wyman-Gordon common stock offset by the appreciation attributable
to the DECS, is included in shareholders' equity as an unrealized gain on
investments in marketable equity securities, net of tax. Current maturities of
long-term debt included an increase of $3.8 million at June 30, 1998,
reflecting the increase, during the first six months of 1998, in the market
value of the Wyman-Gordon common stock exchangeable into the DECS.
NOTE 7. COMMON AND PREFERRED STOCK
During the first six months of 1998, the Company repurchased 3,142,400
shares of its Common shares at a cost of $214.2 million. An additional
1,550,200 shares of Common shares were purchased on July 1, 1998 at a cost of
$88.2 million. The Company reissued 904,030 treasury shares during the first
six months of 1998 primarily in connection with the exercise of employee stock
options and the Company's dividend reinvestment program.
- 8 -
<PAGE> 9
NOTE 8. NET INCOME PER COMMON SHARE
Basic and 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,
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
BASIC:
Net income . . . . . . . . . . . . . . . . . . . $106.0 $105.5 $198.0 $183.2
====== ====== ====== ======
Weighted average Common shares
outstanding . . . . . . . . . . . . . . . . . . 118.6 119.3 119.1 114.4
====== ====== ====== ======
DILUTED
Net income . . . . . . . . . . . . . . . . . . . $106.0 $105.5 $198.0 $183.2
Interest expense related to the
7.05% Convertible Subordinated
Debentures, net of tax . . . . . . . . . . . . - 0.1 - 5.8
------ ------ ------ ------
Net income and effect of assumed
conversions . . . . . . . . . . . . . . . . . . $106.0 $105.6 $198.0 $189.0
====== ====== ====== ======
Weighted average Common shares
outstanding . . . . . . . . . . . . . . . . . . 118.6 119.3 119.1 114.4
Incremental shares from assumed
conversions:
Options, performance-based stock
awards and other employee awards . . . . . 1.9 1.2 1.8 1.2
Additional shares assuming
conversion of the 7.05% Convertible
Subordinated Debentures . . . . . . . . . . - 3.0 - 8.6
------ ------ ------ ------
Weighted average Common shares and
Common share equivalents . . . . . . . . . . . 120.5 123.5 120.9 124.2
====== ====== ====== ======
</TABLE>
- 9 -
<PAGE> 10
NOTE 9. INDUSTRY SEGMENT REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Electrical Products . . . . . . . . . . . . . $723.9 $660.7 $1,429.9 $1,273.4
Tools & Hardware . . . . . . . . . . . . . . 227.3 195.7 415.4 375.8
Automotive Products . . . . . . . . . . . . . 478.1 486.7 927.1 957.2
-------- -------- -------- --------
Subtotal . . . . . . . . . . . . . . . 1,429.3 1,343.1 2,772.4 2,606.4
Kirsch . . . . . . . . . . . . . . . . . . . - 41.8 - 97.4
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . $1,429.3 $1,384.9 $2,772.4 $2,703.8
======== ======== ======== ========
</TABLE>
NOTE 10. 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,
----------------------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
Assets acquired and liabilities assumed or incurred from
the acquisition of businesses: (1)
Fair value of assets acquired . . . . . . . . . . . . . . . . . . $ 288.0 $ 100.9
Cash used to acquire businesses . . . . . . . . . . . . . . . . . (251.4) (90.9)
------- -------
Liabilities assumed or incurred . . . . . . . . . . . . . . $ 36.6 $ 10.0
======= =======
Conversion of 7.05% Convertible Subordinated Debentures
for Cooper Common stock . . . . . . . . . . . . . . . . . . . . . . $ - $ 610.0
</TABLE>
(1) Excludes approximately $81 million recorded on a preliminary basis for the
acquisition of Standard Motor Products' brake business in exchange for the
Company's automotive temperature control business.
- 10 -
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Net income for the second quarter of 1998 was $106.0 million on
revenues of $1.43 billion compared with 1997 net income of $105.5 million on
revenues of $1.38 billion. Second quarter diluted share earnings increased 2%
to $.88 from $.86 in 1997. Revenues, excluding the Kirsch window treatment
division ("Kirsch") which was divested May 30, 1997, increased 6%.
On May 30, 1997, the Company completed the sale of Kirsch and, during
the second quarter of 1997, incurred a charge for actions committed to by
management during the quarter (See Note 3 of Notes to Consolidated Financial
Statements).
REVENUES:
Revenues for the second quarter of 1998 increased 3% (increased 6%
excluding Kirsch revenues in 1997) compared to the second quarter of 1997.
After excluding the effects of acquisitions and divestitures, revenues were
slightly below 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 1% compared to the second quarter
of 1997.
Revenues in the Electrical Products segment increased 10% from the
second quarter of 1997. Excluding acquisitions, revenues were flat compared to
1997. Revenue growth from circuit protection, lighting products and new
products was offset by soft demand for hazardous duty electrical construction
materials and power equipment. These businesses were adversely affected by the
absence of large project orders, weak demand from utilities, the economic
conditions in Asia and increased competitive pressure in certain domestic
product lines.
Tools & Hardware segment revenues increased 16% compared to the second
quarter of 1997. Adjusted for recent acquisitions, revenues were 2% below last
year. Increased shipments of domestic assembly equipment and sales of new
products were offset by softening demand in the electronics and aerospace
industries, the timing of shipments for international assembly equipment, lower
exports due to the strong U.S. dollar and weak economic conditions in Brazil.
The Automotive Products segment revenues, with and without the impact
of recent acquisitions and divestitures, decreased 2% from the prior year
period. Increased steering and suspension and worldwide original equipment
sales and an improved European aftermarket for wiper products were offset by
weak domestic aftermarket demand for ignition, brake and wiper products and
European aftermarket ignition products. Also, revenues were affected by the
bankruptcy of a large customer in the first quarter of 1998. The customer was
converted, during the first quarter of 1998, to a cash basis significantly
reducing sales volume compared to the second quarter of 1997.
INCOME BEFORE INCOME TAXES:
Income before income taxes decreased 1% to $168.3 million for the
second quarter of 1998 compared to $170.2 million for the same period of 1997.
Cost of sales, as a percentage of revenues, increased one tenth of a point from
the comparable 1997 quarter. An unfavorable mix of power equipment products and
competitive conditions for hazardous duty construction materials accounted for
the increase. Selling and administrative expenses, as a percentage of sales,
were unchanged from the prior year period. Excluding Kirsch, which had
relatively higher selling and administrative expenses, the 1997 selling and
administrative expense would have been two tenths of a point lower. The
resulting increase in selling and
- 11 -
<PAGE> 12
administrative expenses as a percentage of revenues for 1998 related primarily
to lower sales in the Automotive Products segment and an increase in bad debt
expense in this segment. Interest expense increased $6.1 million over the same
period of last year as additional debt incurred to fund stock repurchases and
acquisitions and higher interest rate levels offset the impact of the 1997
conversion of $610 million of the Company's 7.05% Convertible Subordinated
Debentures to Cooper Common stock.
Excluding 1997 nonrecurring charges, operating earnings of the
Electrical Products segment increased over the second quarter of 1997.
Excluding acquisitions and 1997 nonrecurring charges, operating earnings were
flat compared to last year. Increased sales and margins in the circuit
protection and lighting businesses were offset by unfavorable product mix in
the power equipment business and lower sales and margins on certain hazardous
duty electrical construction materials.
Excluding Kirsch and 1997 nonrecurring gains and charges, the Tools &
Hardware segment's operating earnings reflect a significant increase over the
prior year. Without the impact of acquisitions and 1997 nonrecurring gains and
charges, the earnings improvement was driven by an improved product mix and
increased operating efficiencies.
Excluding 1997 nonrecurring charges, operating earnings of the
Automotive Products segment decreased compared to the same period last year.
Acquisitions and divestitures had a nominal impact on operating earnings.
Improved sales to original equipment manufacturers and improved steering and
suspension sales were offset by a weak domestic aftermarket for ignition, brake
and wiper products. Earnings were also unfavorably affected by the bankruptcy
of a large customer in the first quarter and an increase in the allowance for
doubtful accounts related to this customer during the second quarter.
Income Taxes:
The effective tax rate for the second quarter was 37.0% compared to
38.0% for the same period of 1997. The rate reduction from 38.0% to 37.0%
results from the Company's continuing tax planning efforts.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Net income for the first six months of 1998 increased 8% to $198.0
million on revenues of $2.77 billion compared with 1997 net income of $183.2
million on revenues of $2.70 billion. Diluted share earnings also increased 8%
to $1.64 from $1.52 in 1997. Revenues, excluding Kirsch, which was divested May
30, 1997, increased 6%.
REVENUES:
Revenues for the first six months of 1998 increased 3% (increased 6%
excluding Kirsch revenues in 1997) compared to the first six months of 1997.
After excluding the effects of acquisitions and divestitures, revenues were
flat with the same period of last year. Overall, the Company estimates that the
strengthening of the U.S. dollar against most European currencies decreased
reported revenues by approximately 1% from the first six months of 1997.
Revenues in the Electrical Products segment increased 12% from the
first six months of 1997. Excluding the impact of acquisitions, revenues
increased 2% over the same period of last year. This was the result of strong
sales of circuit protection, lighting products and new products. Partially
offsetting this impact were shortfalls in hazardous duty construction materials
and power equipment caused by the absence of large project orders, weak demand
from utilities and the continuing economic crisis in Asia.
Tools & Hardware segment revenues increased 11% compared to the same
period of 1997. Adjusted for recent acquisitions and divestitures, revenues
decreased 1% from last year. The decline resulted from softening demand in the
electronics and aerospace industries, lower exports due to the strong U.S.
dollar and
- 12 -
<PAGE> 13
weak economic conditions in Brazil. Absent the impact of acquisitions and
unfavorable currency effects, Tools & Hardware revenues increased 1% when
compared to the prior year.
The Automotive Products segment revenues decreased 3% from the prior
year period. Acquisitions and divestitures had a nominal effect on revenues.
Increased sales to worldwide original equipment manufacturers and improved
steering and suspension sales were more than offset by weak domestic
aftermarket demand in most product lines. Also, revenues were affected by the
bankruptcy of a large customer in the first quarter of 1998. The customer was
converted, during the first quarter of 1998, to a cash basis significantly
reducing sales volume compared to the first half of 1997. Ongoing market
consolidation continued to impact revenues through pricing pressure and other
competitive conditions.
INCOME BEFORE INCOME TAXES:
Income before income taxes for the first six months of 1998 increased
6% to $314.3 million compared to $295.5 million for the same period of 1997.
Cost of sales, as a percentage of revenues, decreased three tenths of a point
with most businesses improving gross margins. Selling and administrative
expenses, as a percentage of revenues, declined one tenth of a point from the
1997 level. Excluding Kirsch, which had relatively higher selling and
administrative expenses, the 1997 selling and administrative expenses would
have been three tenths of a point lower. The resulting two tenths of a point
increase for selling and administrative expenses as a percentage of sales
related primarily to lower sales and increased bad debt expense in the
Automotive Products segment. Interest expense increased $1.8 million from the
same period of last year as additional debt incurred to fund acquisitions and
stock repurchases more than offset the impact of the conversion during 1997 of
$610 million of the Company's 7.05% Convertible Subordinated Debentures to
Cooper Common stock.
Excluding 1997 nonrecurring charges, operating earnings of the
Electrical Products segment reflected an increase compared to the first six
months of 1997 both before and after the effects of acquisitions. Excluding
acquisitions and 1997 nonrecurring charges, the impact of increased revenue and
margin improvements in the circuit protection and lighting businesses more than
offset unfavorable product mix for power equipment and lower margins in the
second quarter of 1998 for several hazardous duty electrical construction
materials.
Excluding Kirsch and 1997 nonrecurring gains and charges, the Tools &
Hardware segment's operating earnings reflected a significant increase over the
prior year. Without the impact of acquisitions and 1997 nonrecurring gains and
charges, the earnings improvement was driven by an improved product mix and
increased operating efficiencies.
Excluding 1997 nonrecurring charges, operating earnings of the
Automotive Products segment decreased compared to the same period last year.
Acquisitions and divestitures had a nominal impact on operating earnings.
Improved sales to original equipment manufacturers and steering and suspension
customers were offset by a weak domestic aftermarket for most product lines.
Earnings were unfavorably affected by the bankruptcy of a large customer in the
first quarter and an increase in the allowance for doubtful accounts related to
the customer in the first half of 1998.
INCOME TAXES:
The effective tax rate for the first six months was 37.0% compared to
38.0% for the same period of 1997. The rate reduction from 38.0% to 37.0%
resulted from the Company's continuing tax planning efforts and a reduction in
the earnings impact of nondeductible goodwill.
- 13 -
<PAGE> 14
EARNINGS OUTLOOK:
The following sets forth Cooper's general business outlook for 1998,
based on current expectations, and updates the Company's earnings outlook set
forth in Appendix A to the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders to reflect the adverse impact of changing economic
conditions, lower overall demand for utility and hazardous duty electrical
products and the General Motors work stoppage. The statements are forward
looking and actual results may differ materially. The following comparative
figures for 1998 include the effects of acquisitions made during 1997 and 1998,
exclude 1997 nonrecurring items and the Kirsch division from the Tools &
Hardware segment and exclude the effect of exiting from the Automotive Products
segment prior to December 31, 1998.
Electrical Products segment revenues are expected to increase by
approximately ten to fifteen percent, Tools & Hardware segment revenues are
expected to increase approximately fifteen to twenty percent and Automotive
Products segment revenues are expected to be about the same or slightly below
1997 revenues. Cooper expects operating earnings for the Electrical Products
segment to increase by approximately five to ten percent. Operating earnings
for the Tools & Hardware segment are expected to increase by approximately
twenty to twenty-five percent. The Automotive Products segment operating
earnings are expected to increase by approximately five to ten percent.
The above statements are forward looking, and actual results may
differ materially. The above statements are based on a number of assumptions,
risks and uncertainties. The primary economic assumptions include, without
limitation, (1) modest growth in the domestic economy; (2) a modest improvement
in European markets; (3) no further deterioration in the Far East markets; (4)
a modest increase in construction spending worldwide; (5) no significant change
in raw material costs; (6) no major customer consolidation in the automotive
aftermarket; (7) no significant adverse changes in the relationship of the
currencies of Western European countries to the U.S. dollar; and (8) the
General Motors work stoppages are resolved in early August. The estimates also
assume, without limitation, no significant change in competitive conditions and
such other risk factors as are discussed from time to time in the Company's
periodic filings with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's operating working capital (defined as receivables and
inventories less accounts payable) increased $224 million during the first six
months of 1998 compared to an increase of $100 million in the first six months
of 1997. Operating working capital turnover was down slightly to 3.7 turns,
compared to 3.9 turns for the first six months of last year due to the impact
of acquisitions. Operating working capital, excluding acquisitions, increased
primarily due to the buildup of safety inventory stock during the conversion of
systems and the timing of accounts payable payments.
Cash flows from operating activities in the first six months of 1998
totaled $120 million as cash generated from earnings was sufficient to offset
increases in operating working capital. These funds, along with a net increase
in debt of $469 million and cash received from the exercise of stock options of
$39 million, were used to fund acquisitions of $251 million, capital
expenditures of $101 million, dividends of $79 million and purchases of the
Company's Common stock of $214 million. During the first six months of 1997,
cash flows from operating activities totaled $122 million. The cash flows from
operating activities plus proceeds from the sale of Kirsch of $216 million
provided funding for acquisitions of $91 million, capital expenditures of $98
million, dividends of $78 million, stock repurchases of $38 million and a net
debt reduction of $47 million during the first six months of 1997.
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, 1998 and June 30, 1997 was $4.2
million
- 14 -
<PAGE> 15
and $3.2 million, respectively. There were no significant additions to these
accruals during the first six months of 1998.
In April 1998, the Board of Directors approved a stock buyback for a
total of $300 million. During the first six months the Company purchased
3,142,400 shares of its outstanding Common stock for $214.2 million including
amounts under a prior authorization. In July 1998, the Company completed its
existing authorization by purchasing an additional 1,550,200 shares of its
Common stock for $88.2 million.
The Company has targeted a 35% to 45% debt-to-capitalization ratio,
with excess cash being utilized to fund acquisitions or to purchase shares of
the Company's Common stock. At June 30, 1998, the Company's debt-to-total
capitalization ratio was 43.5% compared to 33.7% at June 30, 1997. Excluding
the DECS, which at maturity are mandatorily exchangeable into shares of
Wyman-Gordon common stock or, at the Company's option, into cash in lieu of
shares, the Company's debt-to-total capitalization ratio was 40.3% at June 30,
1998 compared to 26.4% at June 30, 1997.
During the six months ended June 30, 1998, the Company issued $250
million of five-year medium-term notes at an average interest rate of 6.1%
under an existing shelf registration statement. At June 30, 1998 all notes
registered under the shelf registration statement had been issued. The issuance
of additional notes will require the filing of a new registration statement or
an amendment to the existing shelf registration statement.
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,
---------------------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Electrical Products . . . . . . . . . . . . . . . . . . . . . . . . . . . $280.2 $256.1
Tools & Hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.3 74.8
Automotive Products . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.3 110.3
------ ------
$501.8 $441.2
====== ======
</TABLE>
- 15 -
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 13, 1996, AlliedSignal Inc. instituted an action
in the United States District Court, District of Delaware,
against the Company's wholly-owned subsidiary Cooper
Automotive, Inc. (now named Cooper Automotive Products, Inc.)
("Cooper Automotive") alleging infringement of a process for
the manufacture of platinum tipped spark plug center
electrodes. On June 11, 1998, the trial jury found Cooper
Automotive liable for patent infringement and awarded
AlliedSignal $39,210,409 in damages. The judge in the case has
not entered a verdict or granted an injunction prohibiting the
continued manufacture of platinum tipped spark plug electrodes
using the accused process. Cooper Automotive has filed motions
for a Judgment as a Matter of Law, or, alternatively, a new
trial. Management believes that there is no infringement and
that the patent is invalid and that its position is supported
by the law and the evidence presented at trial. The Company
intends to pursue all available legal options, including an
appeal, if necessary. While it is not feasible to predict the
final outcome of this matter with certainty, management is of
the opinion that the ultimate disposition will not have a
material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on April 28, 1998
in Houston, Texas. Three proposals, as described in the
Company's Proxy statement dated March 11, 1998, were voted
upon at the meeting. Following is a brief description of the
matters voted upon and the results of voting.
<TABLE>
1. Proposal to elect four directors for three year terms expiring in 2001:
Alain J.P. Belda Harold S. Hook Frank A. Olson John D. Ong
---------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Votes For: 101,484,552 102,059,844 72,486,957 101,972,326
Votes Withheld: 3,269,791 2,694,499 32,267,386 2,782,017
2. Proposal to approve the Cooper Industries, Inc. Directors' Retainer Fee Stock Plan:
Votes For: 100,181,386
Votes Against: 3,830,768
Abstain: 742,189
3. Proposal to approve the amendment to the Cooper Industries, Inc. Management
Annual Incentive Plan:
Votes For: 100,513,849
Votes Against: 3,406,413
Abstain: 834,081
</TABLE>
- 16 -
<PAGE> 17
Item 5. Other Information
The deadline for submission of proposals by shareholders
pursuant to Rule 14a-8 issued under the Securities Exchange
Act of 1934 (the "Act") for inclusion in the proxy statement
for the Company's 1999 Annual Meeting of Shareholders is
November 10, 1998. Any proposals submitted other than pursuant
to Rule 14a-8 of the Act must be received by the Company no
later than January 25, 1999 or such proposals will be
considered untimely, and the Company may confer discretionary
voting with respect to such matters in its proxy for the 1999
Annual Meeting of Shareholders.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 3, 1998,
which included a copy of a press release announcing the
Company's decision to exit the Automotive business.
The Company filed a report on Form 8-K dated April 22, 1998,
which included a copy of a press release containing the
Company's financial results for the quarter ended March 31,
1998.
The Company filed a report on Form 8-K dated June 19, 1998,
which included a copy of a press release announcing a downward
adjustment to the Company's earnings estimate for the second
quarter of 1998.
- 17 -
<PAGE> 18
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: July 31, 1998 /s/ D. Bradley McWilliams
- ------------------------------------ ---------------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
Date: July 31, 1998 /s/ Terry A. Klebe
- ------------------------------------ ---------------------------------------
Terry A. Klebe
Vice President and Controller
and Chief Accounting Officer
- 18 -
<PAGE> 19
Exhibit Index
Exhibit No.
27. Financial Data Schedule.
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,600
<SECURITIES> 0
<RECEIVABLES> 1,131,900
<ALLOWANCES> 0
<INVENTORY> 999,500
<CURRENT-ASSETS> 2,306,500
<PP&E> 2,473,600
<DEPRECIATION> (1,251,600)
<TOTAL-ASSETS> 6,493,500
<CURRENT-LIABILITIES> 1,626,400
<BONDS> 1,542,000
0
0
<COMMON> 615,000
<OTHER-SE> 1,902,500
<TOTAL-LIABILITY-AND-EQUITY> 6,493,500
<SALES> 2,772,400
<TOTAL-REVENUES> 2,772,400
<CGS> 1,882,500
<TOTAL-COSTS> 1,882,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,700
<INCOME-PRETAX> 314,300
<INCOME-TAX> 116,300
<INCOME-CONTINUING> 198,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,000
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.64
</TABLE>
