<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 13, 1998
-------------------------------
Cooper Industries, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Ohio
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-1175 31-4156620
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(Commission File Number) (I.R.S. Employer 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)
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 5. Other Events
On October 9, 1998, Cooper Industries, Inc. (the "Company")
completed the sale of its Automotive Products segment. The
information attached hereto as Exhibits reflects a restatement
of the Company's December 31, 1997 financial information
originally filed under Form 10-K for the year-ended December
31, 1997 to reflect the Automotive Products segment as a
discontinued operation. The information attached hereto as
Exhibits does not revise or update the information originally
filed in the Form 10-K for the year ended December 31, 1997.
Filings with the Securities and Exchange Commission on Form
8-K and 10-Q during 1998, including the Company's Form 10-Q
for the quarter and nine months ended September 30, 1998,
contain information regarding events occurring subsequent to
the Form 10-K for the year ended December 31, 1997. The
Company is filing a restated Management's Discussion and
Analysis of Financial Condition and Results of Operations, a
split dated report of independent auditors, and restated
consolidated financial statements as Exhibits 99.1, 99.2 and
99.3, respectively.
Item 7. Financial Statements and Exhibits
Exhibits
23.1 Consent of Independent Auditors
99.1 Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.2 Report of Independent Auditors
99.3 Consolidated Financial Statements
<PAGE> 3
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: November 13, 1998 /s/ D. Bradley McWilliams
- -------------------------------- ----------------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
Exhibit No.
23.1 Consent of Independent Auditors
99.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations
99.2 Report of Independent Auditors
99.3 Consolidated Financial Statements
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Form 8-K dated November 13, 1998 of Cooper
Industries, Inc. of our report dated January 23, 1998 (except for Note 1, as to
which the date is October 9, 1998) with respect to the consolidated financial
statements of Cooper Industries, Inc.
We also consent to the incorporation by reference in the following Registration
Statements on Form S-8 or Form S-3 of Cooper Industries, Inc. and in each
related Prospectus of our report dated January 23, 1998 (except for Note 1, as
to which the date is October 9, 1998) with respect to the consolidated financial
statements of Cooper Industries, Inc.
<TABLE>
<CAPTION>
Registration
Statement No. Purpose
- ------------- -------
<S> <C>
No. 2-71732 Form S-8 Registration Statement for Shares issuable
pursuant to Substitute Deferred Compensation Agreements
in connection with the acquisition of Crouse-Hinds
Company
No. 2-33-14542 Form S-8 Registration Statement for Cooper Industries,
Inc. 1985 and 1989 Employee Stock Purchase Plans
No. 2-33-19574 Form S-8 Registration Statement for Cooper Industries,
Inc. 1986 Stock Option Plan
No. 2-33-29302 Form S-8 Registration Statement for 1989 Director Stock
Option Plan
No. 33-57829 Form S-8 Registration Statement for Cooper Industries,
Inc. 1986 Stock Option Plan
No. 333-02847 Form S-8 Registration Statement for Cooper Industries,
Inc. Directors' Stock Plan
No. 333-08277 Form S-8 Registration Statement for Cooper Industries,
Inc. Stock Incentive Plan
No. 333-24237 Form S-3 Registration Statement for Cooper Industries,
Inc. Dividend Reinvestment and Stock Purchase Plan
No. 33-63457 Form S-3 Registration Statement for Cooper Industries,
Inc. Debt Exchangeable for Common Stock (DECS(sm))
No. 333-51439 Form S-8 Registration Statement for Cooper Industries,
Inc. Directors' Retainer Fee Stock Plan
No. 333-51441 Form S-8 Registration Statement for Cooper Industries,
Inc. Amended and Restated Management Annual Incentive
Plan
</TABLE>
ERNST & YOUNG LLP
Houston, Texas
November 13, 1998
<PAGE> 1
Exhibit No. 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In April 1998, Cooper Industries, Inc. ("Cooper") announced that it
engaged an investment banking firm to assist in the evaluation of options for
exiting the automotive business. On October 9, 1998 the sale of the Automotive
Products segment was consummated with Cooper receiving $1.9 billion in proceeds.
The book value of the Automotive Products segment assets less the liabilities
assumed by the buyer plus costs related to the transaction resulted in a small
loss before income taxes. The loss before income taxes was offset by income tax
benefits derived through the sale of the common stock of the entity holding the
Automotive Products segment versus a sale of the net assets of the business.
As a consequence of treating this segment as a discontinued operation,
Cooper's results of operations and the related footnote information for all
periods presented in its consolidated financial statements will exclude the
results of the Automotive Products segment from continuing operations' revenues
and other components of income and expenses. The discontinued segment's results
are presented separately in a single caption, "Income from discontinued
operations, net of income taxes." Cooper's net income remains unchanged.
In order to facilitate an understanding of Cooper's continuing
operations, Cooper has elected to restate the Consolidated Balance Sheets as of
December 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and 1995. The net assets of discontinued
operations have been segregated into a single line, "Net assets of discontinued
operations" in the Consolidated Balance Sheets. The cash flow from discontinued
operations have been summarized into a single line "Cash provided by
discontinued operations" in the Consolidated Statements of Cash Flows. No cash
or debt has been allocated to the discontinued operations.
The discussion that follows has been rewritten, as compared to the
discussion previously set forth in Appendix A to the Proxy Statement for the
1998 Annual Meeting of Shareholders dated March 11, 1998, to place primary
emphasis on the results of Cooper's continuing operations. The information does
not revise or update the information originally filed for events occurring
subsequent to the filing of the Form 10-K for the year ended December 31, 1997.
Filings with the Securities and Exchange Commission on Form 8-K and 10-Q during
1998 contain such updated information, including the Company's Form 10-Q for the
quarter and nine months ended September 30, 1998.
Acquisitions and Divestitures During the last three calendar years,
Cooper's continuing operations have completed 13 acquisitions and 3
divestitures. The acquisitions have been in complementary product lines that
enhance areas of strength, while the dispositions have been of noncore or
under-performing businesses. In 1995, Cooper divested the remaining businesses
comprising the former Petroleum & Industrial Equipment segment through an
exchange offer with shareholders for common stock of Cooper Cameron Corporation
("Cooper Cameron"). On May 30, 1997, Cooper completed the sale of its Kirsch
window treatment division for $216.0 million. For the five months ended May 30,
1997, and the year ended December 31, 1996, Kirsch had revenues of $97.4 million
and $252.9 million, and operating earnings of $4.8 million and $20.0 million,
respectively. In addition, on October 9, 1998, Cooper completed the sale of its
Automotive Products segment for $1.9 billion. The Petroleum & Industrial
Equipment segment and the Automotive Products segments are reflected as
discontinued operations in the Consolidated Financial Statements. The Kirsch
operations are included in the continuing operations of Cooper until the date of
the sale.
Nonrecurring Income and Expenses In the third quarter of 1995, Cooper
began to sell the common shares of Belden Inc. ("Belden") that it retained
following the 1993 initial public offering of Belden's common stock. In 1995,
Cooper recognized gains from the sale of the Belden marketable equity securities
of $.05 per share.
In 1996, Cooper sold the remaining common shares of Belden and all of
the shares of Cooper Cameron retained in the 1995 exchange offer with
shareholders. Also in 1996, Cooper initiated a strategic review of most of its
businesses and operations. Actions resulting from this review included the
decision to retain an investment banking firm to evaluate the possible sale of
Kirsch; and nonrecurring charges related primarily to facility closings and
consolidations and resolution of environmental litigation. The 1996 nonrecurring
charges, when combined with the realization of gains from the sale of marketable
equity securities, resulted in a net gain of $.67 per share.
A-1
<PAGE> 2
On May 30, 1997, Cooper completed the sale of its Kirsch window
treatment division. The sale resulted in a gain of $69.8 million. During 1997,
Cooper also exchanged a portion of its DECS(SM) (Debt Exchangeable for Common
Stock) for Wyman-Gordon Company ("Wyman-Gordon") common stock and realized a
gain of $23.2 million. Cooper incurred charges of $40.5 million for actions
management committed to during 1997 after concluding an evaluation of geographic
manufacturing and distribution facilities within the Tools & Hardware segment
and information systems relating to year 2000 compliance efforts. The 1997
charges included adjustments to the carrying value of assets of $24.2 million
and accruals for continuing obligations for replaced systems and facility
consolidations of $16.3 million. Cooper also recorded a tax benefit of $6.1
million related to favorable settlements of state income tax issues in 1997. For
1997, the nonrecurring gains, net of the nonrecurring charges, and the tax
benefit increased earnings per share by $.32.
Cooper currently is not considering additional consolidations in the
Electrical Products segment. The Tools & Hardware segment is currently in the
process of consolidating certain international manufacturing and distribution
facilities. Adjustments to the carrying value of assets and accruals, noted
above, were recorded for projects committed to by management. Severance and
certain other costs related to projects committed to by management are not
expensed until affected employees are notified. A majority of the consolidations
have been announced and such costs were accrued and expended by the end of 1997.
Cash expenditures related to the payout of accrued severance and other
expenditures related to the committed consolidations in 1998 will not be
significant. However, Cooper could incur additional expenses as the projects are
completed, resulting from consolidation disruptions to operations and additional
consolidation expenses. These additional expenses are currently not anticipated
to be significant to any quarterly period in 1998. In addition, other charges
could be incurred during 1998 should management add to the strategic projects
committed to in the Tools & Hardware segment.
With the exception of the sale of Kirsch, the actions committed to in
1997 will not have a continuing significant impact on revenues, segment
operating earnings or cash flows. See Notes 3 and 7 of Notes to Consolidated
Financial Statements for additional information on nonrecurring gains and
charges.
Capitalization Effective January 1, 1995, Cooper exchanged all of its
outstanding $1.60 Convertible Exchangeable Preferred Stock for $691.2 million of
7.05% Convertible Subordinated Debentures due 2015 and $3.8 million in cash
related to fractional shares. While the exchange increased the debt-to-total
capitalization ratio above Cooper's preferred target, it generated in excess of
$20 million per year of additional net cash flows. During the first half of
1997, Cooper completed calls for redemption of all of its outstanding 7.05%
Convertible Subordinated Debentures with a total of $610 million converted to
approximately 14.8 million shares of Cooper Common stock and approximately $80
million redeemed for cash.
On June 30, 1995, Cooper reduced common shares outstanding by 9.5
million shares through the completion of the exchange offer with its
shareholders for the common stock of Cooper Cameron. In December 1995, Cooper
issued $222.8 million in 6% Exchangeable Notes (DECS(sm) - Debt Exchangeable
for Common Stock) due January 1, 1999. The notes are mandatorily exchangeable
into shares of Wyman-Gordon common stock owned by Cooper or, at Cooper's option,
into cash in lieu of shares. The notes are, in effect, a monetization of
Cooper's investment in Wyman-Gordon common stock. In addition, Cooper retained
the first 16% of appreciation in the fair market value of the Wyman-Gordon
common stock between the date of issuance of the notes and their maturity, plus
13.8% of any additional appreciation beyond the first 16%. During 1997, Cooper
exchanged $33.8 million of its DECS for Wyman-Gordon common stock. At December
31, 1997, a minimum of $85 million after income taxes will be realized as a gain
on the Wyman-Gordon common stock through the DECS monetization. This gain plus
any additional appreciation will be realized upon redemption of the DECS.
During 1997, Cooper purchased approximately 3.6 million shares of its
Common stock for $192 million. This action was taken as part of the remaining
$275 million Common stock repurchase authorization program to maintain Cooper's
debt-to-total capitalization between 35% and 45%.
Cooper has invested $335 million in capital assets related to
modernization and expansion of facilities plus significant amounts related to
the integration of newly acquired businesses and the revitalization of existing
ones during the last three years.
A-2
<PAGE> 3
YEAR 2000 INFORMATION SYSTEMS ASSESSMENTS
Many of Cooper's purchased and internally developed information systems
programs were written using two digits rather than four to identify a year. With
the turn of the century, time sensitive software using two digits may not
identify the year 2000, which could result in system failures and
miscalculations disrupting the ability to conduct normal business operations.
Cooper completed an assessment of its major information systems for year 2000
compliance during 1997 and developed detailed plans to resolve all major issues
by the end of 1998. Cooper has seven divisions with multiple hardware platforms
and software products in use. At the time the assessment was completed, several
businesses were, in the normal course, upgrading software and systems to
increase efficiency and customer responsiveness. Therefore, while the assessment
expedited certain systems conversions and upgrades, it did not initiate all of
the actions subsequently described. Cooper also assesses major information
systems of newly acquired businesses for year 2000 compliance as part of its
assessment program.
Three of Cooper's divisions are implementing new enterprise systems
with the remaining divisions revising or upgrading existing software to be year
2000 compliant. The divisions are planning the rollouts of the new enterprise
systems in 1998. Where possible, businesses have abandoned home-grown or highly
customized applications with purchased, year 2000 compliant replacements or
upgrades. In some situations, operations within a business abandoned existing
software and migrated to consolidated hardware and software that is year 2000
compliant. Where these solutions were not possible, businesses have contracted
with third parties or committed internal resources to ensure that all major
systems are year 2000 compliant. Cooper believes it was close to fifty percent
complete with its efforts to convert software or install systems that are year
2000 compliant at the end of 1997. While most efforts are anticipated to be
completed by the end of 1998, it is likely that certain efforts will be delayed
into early 1999.
Cooper has also initiated formal communications with its significant
suppliers and large customers to determine the potential risk of disruption to
Cooper's operations if these companies fail to remediate year 2000 issues. The
greatest year 2000 compliance risk to Cooper is that implementation of new
enterprise systems will be delayed beyond the anticipated completion dates in
1998 and the severe shortage of qualified information systems personnel, both
internally and externally, could delay compliance efforts.
Cooper's total annual capital investment has not increased
significantly over historical expenditures, although like most companies, the
investment in information technology has become a larger percentage of annual
capital expenditures. During the period 1996 through 1998, Cooper estimates that
it will have capital expenditures of close to $75 million on information
technology related to new systems installations. During 1997 and until
completion of year 2000 compliance efforts, considerable internal resources are
being devoted to these projects. In addition to the internal resources, Cooper
has been incurring, and anticipates continuing to incur, approximately $1.5
million of quarterly expense in its compliance efforts.
The capital expenditures and expenses of the projects, the estimated
percentage of completion to date, and the dates on which Cooper believes it will
complete the year 2000 compliance efforts are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
A-3
<PAGE> 4
RESULTS OF OPERATIONS
The financial information and discussions that follow, along with the
Consolidated Financial Statements and related footnotes, will aid in
understanding Cooper's results of continuing operations as well as its financial
position, cash flows and indebtedness.
REVENUES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(in millions)
<S> <C> <C> <C>
Electrical Products ............................ $ 2,568.3 $ 2,407.5 $ 2,089.7
Tools & Hardware ............................... 749.9 720.1 702.9
---------- ---------- ----------
Continuing Revenues ....................... 3,318.2 3,127.6 2,792.6
Kirsch ......................................... 97.4 252.9 259.5
---------- ---------- ----------
Total Revenues - Continuing Operations .... $ 3,415.6 $ 3,380.5 $ 3,052.1
========== ========== ==========
</TABLE>
1997 vs. 1996 Revenues. Cooper's 1997 revenues, excluding Kirsch,
increased 6% over 1996. Excluding the impact of six 1997 acquisitions and the
carryover impact of 1996 acquisitions, revenues for 1997 increased 4%. The
strengthening of the U.S. dollar against most of the functional currencies in
which international operations conduct business reduced revenues measured in
U.S. dollars by approximately $45 million or 1.3% compared to 1996. The strong
dollar also had a negative unquantifiable impact on export sales.
The Electrical Products segment contributed approximately 77% of
Cooper's continuing revenues in 1997, as revenues increased 7% over 1996.
Excluding the effects of 1997 acquisitions and the carryover impact of 1996
acquisitions, revenues increased 5%. Revenue growth is attributable to strong
sales increases of distribution and transmission equipment and circuit
protection products. Lighting fixtures also benefited from strong demand in the
housing and non-residential construction markets. Strong international demand in
Mexico and Canada for construction materials was offset somewhat by a soft
European market and the effects of a strong dollar.
The Tools & Hardware segment, excluding Kirsch, contributed
approximately 23% of Cooper's continuing revenues in 1997, with revenues
increasing 4% over the prior year. Excluding the carryover impact of 1996
acquisitions, revenues increased 2% compared to 1996. Sales of domestic
hand-held power tools and worldwide assembly equipment grew to meet continued
demand from the automotive and aerospace industries. Providing a partial offset
to this increase was a slight decline in demand for hand tool products in North
America and the effects of a stronger U.S. dollar against most European
currencies.
1996 vs. 1995 Revenues. Cooper's 1996 revenues, excluding Kirsch,
increased 12% over 1995. Excluding the impact of five 1996 acquisitions, the
carryover impact of 1995 acquisitions (including the CEAG acquisition on
December 31, 1995) and one small 1996 divestiture, revenues for 1996 increased
4%.
The Electrical Products segment comprised approximately 77% of
continuing revenues, as revenues increased 15% over 1995. Excluding the effects
of 1996 acquisitions and the carryover impact of 1995 acquisitions (including
the CEAG acquisition on December 31, 1995), revenues increased 6%. Sales of
electrical construction materials, lighting fixtures and power distribution
products benefited from continued strength in industrial production and
commercial and industrial construction and renovation activity. Strong
international demand for a number of the segment's transformer and power
management products and a recovery from the 1995 economic downturn in Mexico
contributed to the revenue increase. New product introductions also added to
revenues in 1996.
A-4
<PAGE> 5
The Tools & Hardware segment, excluding Kirsch, made up approximately
23% of continuing revenues, with revenues increasing 2% over the 1995 level.
Excluding the effects of two small 1996 acquisitions, revenues were flat when
compared to 1995. Sales of power tools and assembly equipment continued to grow
to meet demand from the automotive and aircraft assembly industries, both
domestically and internationally. However, slowing demand in the European
markets for hand tools and drapery hardware products and the disruptions from
the implementation of a new hand tools distribution center in North America
offset the revenue gains from power tools and assembly equipment.
SEGMENT OPERATING EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Reported Segment Operating Earnings: 1997 1996 1995
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Electrical Products ........................................ $ 445.7 $ 405.3 $ 355.5
Tools & Hardware ........................................... 77.1 91.4 96.5
-------- -------- --------
Continuing Segment Operating Earnings ................. 522.8 496.7 452.0
Kirsch ..................................................... 74.6 20.0 14.7
-------- -------- --------
Segment Operating Earnings - Continuing Operations .... $ 597.4 $ 516.7 $ 466.7
======== ======== ========
</TABLE>
Segment Operating Earnings Excluding Nonrecurring Items:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Electrical Products ........................................ $ 461.6 $ 408.3 $ 355.5
Tools & Hardware ........................................... 99.6 91.4 96.5
-------- -------- --------
Continuing Segment Operating Earnings ................. 561.2 499.7 452.0
Kirsch ..................................................... 4.8 22.0 14.7
-------- -------- --------
Segment Operating Earnings - Continuing Operations .... $ 566.0 $ 521.7 $ 466.7
======== ======== ========
</TABLE>
1997 vs. 1996 Segment Operating Earnings. Segment operating earnings in
1997 include nonrecurring charges of $38.4 million for adjustments to the
carrying value of assets, accruals for facility consolidations and related
severance and other obligations committed to by management. Reported segment
operating earnings also include a $69.8 million gain on the sale of Kirsch.
Segment operating earnings in 1996 include $5.0 million in nonrecurring charges.
See Nonrecurring Income and Expenses in the Overview section and Note 3 of Notes
to Consolidated Financial Statements. Excluding nonrecurring items in 1997 and
nonrecurring charges in 1996, segment operating earnings increased 8% over 1996.
Excluding Kirsch results from both years, segment operating earnings increased
12% over 1996. Acquisitions contributed approximately $9 million or 2% of the
increase in segment operating earnings over 1996.
The Electrical Products segment operating earnings, excluding
nonrecurring charges of $15.9 million in 1997 and $3.0 million in 1996, improved
13% over the prior year and contributed 82% of Cooper's continuing segment
operating earnings. Excluding nonrecurring items, return on revenues improved in
1997 to 18% from 17% in 1996. The 1997 acquisitions and the carryover impact of
1996 acquisitions contributed approximately $8 million of the increase in
earnings. Excluding this impact and nonrecurring items, segment operating
earnings were up 11% over 1996. This strong growth in earnings is primarily
attributable to cost savings in transformer products, strong revenue growth in
higher margin distribution and certain transmission equipment and circuit
protection products and cost containment
A-5
<PAGE> 6
across all businesses. All electrical products businesses had increases in
return on revenues, excluding nonrecurring charges, during 1997.
The Tools & Hardware segment operating earnings, excluding nonrecurring
items of $22.5 million in 1997 and Kirsch, increased 9% from 1996 and
contributed 18% of the continuing segment operating earnings. The incremental
earnings of the carryover impact of two small acquisitions was less than
approximately $1 million. Excluding Kirsch and nonrecurring items, return on
revenues increased to 13.3%, up six tenths of a point from the prior year.
Increased sales of hand-held power tools and assembly equipment and leveraging
of costs, primarily in the power tools and assembly equipment businesses, were
the primary drivers of the performance. The absence of implementation costs
incurred in the 1996 warehouse and distribution system conversion at the hand
tools operations also contributed to the increase in return on revenues,
partially offset by lower sales volume for hand tools.
1996 vs. 1995 Segment Operating Earnings. Segment operating earnings in
1996 included $5.0 million in nonrecurring charges. See Nonrecurring Income and
Expense in the Overview section and Note 3 of Notes to Consolidated Financial
Statements. Excluding the nonrecurring charges and Kirsch, segment operating
earnings in 1996 increased 11% over 1995. Acquisitions contributed approximately
$37 million or 8% of the increase in segment operating earnings over 1995.
The Electrical Products segment operating earnings, excluding
nonrecurring charges, improved 15% from 1995, and contributed 78% of Cooper's
total segment operating earnings. Excluding nonrecurring charges, return on
revenues decreased slightly in 1996 to 16.8% due to an unfavorable mix of power
distribution products and a proportionately lower contribution of higher-margin
fuse products. The 1996 acquisitions and the carryover impact of 1995
acquisitions, including CEAG, added approximately $36 million of incremental
earnings to 1996. Excluding this impact and nonrecurring charges, segment
operating earnings increased 4% over 1995. This resulted from the growth in
revenues from improvements in construction markets, cost reduction efforts and a
more favorable product line mix beginning in the third quarter of 1996.
The Tools & Hardware segment operating earnings, excluding Kirsch,
declined $5.1 million when compared to 1995 with the segment, including Kirsch,
contributing 22% of total segment operating earnings before nonrecurring
charges. The incremental earnings impact from 1996 acquisitions was less than $2
million. Return on revenues, excluding Kirsch, of 12.7% in 1996 was below the
1995 level of 13.7%. The favorable impact from prior cost improvement actions,
including the consolidation of forged hand tools manufacturing, and increased
sales of power assembly tools were offset by implementation costs incurred in
the warehouse and distribution system conversion at the hand tools operations
and the effects of slower European markets. Kirsch results included nonrecurring
expenses of $2 million for legal and other costs related to sales of imported
mini blinds containing lead paint.
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Segment Operating Earnings(1) ................................... $ 597.4 $ 516.7 $ 466.7
Nonrecurring Gains .............................................. 23.2 150.4 11.7
General Corporate Expenses and Other ............................ (47.0) (54.3) (30.1)
Interest Expense ................................................ (90.4) (142.1) (151.0)
-------- -------- --------
Income from Continuing Operations before Income Taxes ....... $ 483.2 $ 470.7 $ 297.3
======== ======== ========
</TABLE>
(1) Includes nonrecurring gain on sale of Kirsch and nonrecurring
charges.
A-6
<PAGE> 7
Nonrecurring Gains. Nonrecurring gains decreased by $127.2 million in
1997 from 1996. The gain on the exchange of the Wyman-Gordon DECS of $23.2
million was recognized in 1997 while 1996 included $150.4 million in gains on
the sale of marketable equity securities of Belden and Cooper Cameron.
Nonrecurring gains increased $138.7 million in 1996 from 1995 due to lower gains
on sales of marketable equity securities in 1995.
General Corporate Expense and Other. General corporate expenses and
other decreased $7.3 million in 1997 compared to 1996. The 1997 and 1996 general
corporate expenses and other included nonrecurring charges of $2.1 million and
$10.9 million, respectfully. The 1997 charge relates primarily to information
systems and the 1996 charge related primarily to environmental litigation.
Excluding these nonrecurring charges, general corporate expenses and other
increased $1.5 million in 1997 compared to 1996. The increase was primarily due
to increased executive incentive plan expenses. Excluding the 1996 nonrecurring
charges, general corporate expenses and other increased $13.3 million in 1996
compared to 1995. The increase from 1995 is related to costs in connection with
the executive incentive plan adopted by shareholders in 1996 and severance and
retirement expenses.
Interest Expense. Interest expense for 1997 decreased $51.7 million
from 1996. The majority of the decrease was due to the conversion during 1997 of
$610 million of Cooper's 7.05% Convertible Subordinated Debentures to Cooper
Common stock. Average debt levels in 1997, excluding the $610 million converted
debt, were also lower than 1996 and contributed to the decline in interest
expense. Interest expense decreased $8.9 million in 1996 from the 1995 level.
The decline was driven by lower average interest rates and lower average debt
levels.
INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C>
Income from continuing operations before income taxes .... $ 483.2 $ 470.7 $ 297.3
Income taxes ............................................. 173.2 185.6 118.7
--------- --------- ---------
Income from continuing operations ........................ $ 310.0 $ 285.1 $ 178.6
========= ========= =========
Diluted earnings per share from continuing operations .... $ 2.57 $ 2.52 $ 1.60
========= ========= =========
</TABLE>
1997 vs. 1996 Income from Continuing Operations. Income from continuing
operations before income taxes for 1997, exclusive of 1997 net nonrecurring
gains of $52.5 million and 1996 net nonrecurring gains of $134.5 million,
increased to $430.7 million from $336.2 million, a 28% increase. This increase
was primarily the result of the increased segment earnings and lower interest
expense.
The effective tax rate decreased from 39.4% in 1996 to 35.8% in 1997.
The effective tax rate for 1997 includes $6.1 million related to the favorable
settlements of several state income tax issues. Excluding this 1997 nonrecurring
tax benefit and income taxes on net nonrecurring gains, the 1997 and 1996
effective tax rates were 37.0% and 40.0%, respectively. The rate reduction from
40.0% to 37.0% stems from Cooper's tax planning efforts, including changing its
international tax structure, maximizing tax incentives for exports and
increasing research and development tax credits and the increase in income from
continuing operations before income taxes diluting the impact of nondeductible
goodwill amortization.
Income from continuing operations increased 9% over 1996. Excluding net
nonrecurring gains and the 1997 nonrecurring tax benefit, income from continuing
operations increased to $270.9 million from $201.7 million or 35%. This increase
includes the effect of (1) the redemption and conversion of Cooper's 7.05%
Convertible Subordinated Debentures, (2) the purchase of approximately 3.6
million shares of Cooper's Common stock, and (3) the absence of the Kirsch
business for seven months of 1997. Diluted earnings per share from continuing
operations increased 2% from the 1996 level. Excluding $.32 earnings per share
in 1997, and $.67 earnings per share in 1996 from net nonrecurring items,
diluted earnings per share from continuing operations increased 22%. The lower
interest expense in 1997 related to the conversion of $610 million of 7.05%
Convertible Subordinated Debentures to Cooper Common stock, had no
A-7
<PAGE> 8
effect on diluted earnings per share as the interest expense is excluded and the
equivalent Cooper Common stock is included in the calculation of diluted
earnings per share for both 1997 and 1996.
While the purchase of Cooper Common stock and the impact of the $80
million of 7.05% Convertible Subordinated Debentures redeemed for cash reduced
average shares utilized in the computation of diluted earnings per share, the
funding of these two items increased interest expense, offsetting most of the
benefit on diluted earnings per share. After considering the impact of
additional common stock equivalents, primarily resulting from an increase in
market price of a share of Cooper Common stock during the year, diluted earnings
per share were not impacted by the net reduction in average shares during 1997.
The absence of the Kirsch operations, net of the effect of lower interest
expense resulting from repaying debt with the net proceeds of the sale, reduced
earnings per share from continuing operations for 1997 by approximately $.05.
1996 vs. 1995 Income from Continuing Operations. Income from continuing
operations before income taxes, exclusive of the 1996 nonrecurring gain of
$150.4 million on the sale of marketable equity securities and $15.9 million of
nonrecurring charges, and the 1995 nonrecurring gain on the sale of marketable
equity securities of $11.7 million, increased 18% to $336.2 million compared to
$285.6 million in 1995. The increase results primarily from the increase in
operating earnings and the reduction in interest expense, offset partially by an
increase in general corporate expense and other.
The effective tax rate decreased to 39.4% in 1996 from 39.9% in 1995.
Excluding the gain on the sale of marketable equity securities and nonrecurring
charges in 1996, the effective tax rate was approximately 40% in both years.
Income from continuing operations increased 60% due to the factors
outlined above, while diluted earnings per share from continuing operations
increased 56%. Excluding nonrecurring items, income from continuing operations
increased from $171.6 million in 1995 to $201.7 million in 1996 or 18% and
diluted earnings per share from continuing operations, excluding $.67 per share
in 1996 and $.05 per share in 1995 from nonrecurring items, increased 18%. The
full-year impact of the reduction in average shares outstanding resulting from
the Cooper Cameron Exchange Offer completed in mid-year 1995, accounted for $.09
per share of the earnings per share increase. See Note 19 of Notes to
Consolidated Financial Statement.
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.............................................................. 100.0% 100.0% 100.0%
Cost of Sales........................................................ 66.8% 67.3% 67.6%
Selling and Administrative........................................... 17.0% 17.6% 17.2%
</TABLE>
1997 vs. 1996 Percentage of Revenues. Cost of sales, as a percentage of
revenues, declined to 66.8% in 1997 from 67.3% in 1996. The decline resulted
primarily from product cost improvements and containments and an overall
favorable mix of higher margin electrical products. Most of the improvement in
cost of sales as a percentage of revenue was in the Electrical Products segment,
with the Tools & Hardware segment, excluding Kirsch, improving to a lesser
extent. Selling and administrative expenses decreased, as a percentage of
revenues, to 17.0% in 1997 from 17.6% in 1996. Including Kirsch for five months
in 1997 and for the full year in 1996, represented .2 percentage points of the
improvement. Each of the segments contributed to the remaining improvement.
1996 vs. 1995 Percentage of Revenues. Cost of sales, as a percentage of
revenues, declined to 67.3% from 67.6% in 1995. The improvement in the cost of
sales percentage reflects the continued improvement in operating efficiencies
achieved through manufacturing and distribution improvement programs, the
emphasis beginning in 1995 on top line growth through new products, market
penetration and acquisitions offset in part by disruptions resulting from
consolidations and facility closings and the large increase in transformer
sales, which carry a lower margin. Selling and administrative expense, as a
percentage of revenues, increased to 17.6% in 1996 from 17.2% in 1995. The
increase of
A-8
<PAGE> 9
.4 percentage points in 1996, is primarily attributable to higher selling and
administrative expenses of the CEAG acquisition acquired December 31, 1995, the
higher corporate general expenses discussed under "General Corporate Expense and
Other", additional investments in personnel and other sales expenses, primarily
in the businesses comprising the Electrical Products segment.
DISCONTINUED OPERATIONS - AUTOMOTIVE PRODUCTS SEGMENT
1997 vs. 1996 Revenues. Revenues for the discontinued Automotive
Products segment were $1,873.2 million in 1997, decreasing slightly from
$1,903.2 million in 1996. Excluding the effects of two small 1997 acquisitions
and the carryover impact of one 1996 acquisition, revenues declined 2% from the
prior year. Sales in the original equipment market improved as vehicle
production levels increased on existing vehicle platform contracts. Sales in the
aftermarket were hampered by weak demand in most product lines. Temperature
control product sales and remanufactured product lines declined due primarily to
competitive price pressures. Wiper volume declined significantly in the first
half of 1997 as more normal winter weather patterns were experienced in 1997
than in 1996.
1996 vs. 1995 Revenues. Revenues for the discontinued Automotive
Products segment increased 8% to $1,903.2 million in 1996 as compared to
$1,758.8 million in 1996. Excluding the effects of two 1996 acquisitions and
carryover impact of one 1995 acquisition, revenues increased 5% over the prior
year. Harsh winter weather and lean distributor inventories boosted domestic
aftermarket demand for wiper blades and ignition products early in the year. New
customers for lighting products and a partial recovery from the 1995 economic
downturn in Mexico also increased revenues. Product sales in the original
equipment market improved as a result of increased light vehicle production and
increased placement of products on new vehicle platforms. However, a decline in
sales of temperature control products, the result of a mild summer and related
product returns; a decline in domestic sales of heavy duty brake components, the
result of decreases in original equipment production; and lower European
aftermarket sales, influenced by weak economic conditions there, offset some of
the gains made in other product categories.
1997 vs. 1996 Segment Operating Earnings. The discontinued Automotive
Products segment operating earnings, excluding nonrecurring charges of $43.4
million in 1997 and $102.0 million in 1996, decreased 1% from the prior year.
Segment operating earnings excluding nonrecurring charges were $186.9 million in
1997 as compared to $189.3 million in 1996. Without the impact of two
acquisitions, operating earnings declined 2%. Excluding nonrecurring charges,
return on revenues increased from 9.9% in 1996 to 10.0% in 1997. Lower sales
volume in the domestic aftermarket for most chassis, temperature control and
wiper products, coupled with competitor price pressures, and a weak European
aftermarket for ignition products contributed to the earnings decline. Increased
sales in the original equipment market, lower spending on promotional expenses
and other costs and lower depreciation and amortization due to the 1996
write-down of brake assets provided a partial offset.
1996 vs. 1995 Segment Operating Earnings. The discontinued Automotive
Products segment operating earnings, before nonrecurring expenses of $102
million, increased 5% from 1995. Segment operating earnings excluding
nonrecurring charges were $189.3 million in 1996 as compared to $180.7 million
in 1995. Acquisitions provided all of the increase in the Automotive Products
segment operating earnings. Return on revenues, before nonrecurring expenses,
declined from 10.3% in 1995 to 9.9% in 1996. Increased sales in the North
American market for most ignition, wiper, lighting and steering and suspension
products in 1996 contributed to earnings. However, the North American reduction
in production of vehicles utilizing heavy-duty brake products, continuing severe
price competition for brake and temperature control products and a weak European
aftermarket offset the increased sales and related earnings and contributed to
the decline in return on revenues. In addition, customer changeover costs more
than doubled in 1996 as a result of adding two new large customers and several
smaller customers. Price competition continued in 1996, offsetting many of the
efficiency gains achieved through facility consolidations.
1997 vs. 1996 Income from Discontinued Operations, Net of Taxes. Income
from discontinued operations, net of taxes, increased from $30.3 million in 1996
($.25 per diluted share) to $84.6 million in 1997 ($.69 per diluted share).
Excluding nonrecurring charges, income from discontinued operations, net of
taxes, would have increased approximately 5%.
A-9
<PAGE> 10
1996 vs. 1995 Income from Discontinued Operations, Net of Taxes. Income
from discontinued operations, net of taxes for the Automotive Product segment
decreased from $102.0 million ($.91 per diluted share) in 1995 to $30.3 million
in 1996 ($.25 per diluted share). Excluding 1996 nonrecurring charges, income
from discontinued operations, net of tax for the Automotive Products segment
would have increased approximately 3%.
DISCONTINUED OPERATIONS - PETROLEUM AND INDUSTRIAL EQUIPMENT SEGMENT
In September 1994, Cooper announced its decision to discontinue its
Petroleum & Industrial Equipment segment through an exchange offer with holders
of Cooper Common stock. On June 30, 1995, Cooper's Common shareholders exchanged
9.5 million shares of their Cooper Common stock for common stock of Cooper
Cameron Corporation, a newly formed company that included all of the assets and
liabilities of the four divisions that comprised Cooper's Petroleum & Industrial
Equipment segment, as well as $375 million of allocated indebtedness. See Note
19 of the Notes to Consolidated Financial Statements for additional information.
In the second quarter of 1995, Cooper recorded a charge of $186.6
million ($1.67 per diluted share) to reflect the actual loss on the split-off of
Cooper Cameron. The charge was composed of the difference between the historical
cost of Cooper's investment in Cooper Cameron remaining after the September 1994
estimated charge and the market value of Cooper Cameron common stock during the
first few days the common stock traded on a national exchange ($162.8 million),
additional Cooper Cameron operating losses during the period October 1, 1994
through June 30, 1995 ($20.3 million) and additional transaction costs ($3.5
million). The additional operating losses and transaction costs resulted
primarily from the delay in completing the exchange transaction and the
recording by Cooper Cameron of a $17 million pretax charge in the second quarter
of 1995 for the write-down of receivables due from customers in Iran.
Under the provisions of the Asset Transfer Agreement between Cooper and
Cooper Cameron, Cooper Cameron was responsible, other than for certain agreed
amounts of estimated operating losses, for its cash requirements between October
1, 1994 and the expiration date of the Exchange Offer. Other than for income tax
liabilities for periods prior to the completion of the Exchange Offer, Cooper
did not retain any liabilities, contingent or otherwise, with respect to the
discontinued operations.
PRICING AND VOLUME
In each of Cooper's segments, the nature of many of the products sold
is such that an accurate determination of the changes in unit volume of sales is
neither practical nor, in some cases, meaningful. Each segment produces a family
of products, within which there exist considerable variations in size,
configuration and other characteristics.
It is Cooper's best judgment that, excluding the year-to-year effects
of acquisitions and divestitures, unit volume increased in the Electrical
Products and Tools & Hardware segments in 1997. During 1996, Cooper's best
judgment is that unit volume increased in the Electrical Products segment and
decreased in the Tools & Hardware segment.
During the three-year period ending in 1997, Cooper was unable to
increase prices to fully offset cost increases in selected product offerings in
both segments. Cooper has been able to control costs through manufacturing
improvements and other actions during this period so that the inability to
increase prices has not significantly affected profitability in the segments.
EFFECT OF INFLATION
During each year, inflation has had a relatively minor effect on
Cooper's results of operations. This is true primarily for three reasons. First,
in recent years, the rate of inflation in Cooper's primary markets has been
fairly low. Second, Cooper makes extensive use of the LIFO method of accounting
for inventories. The LIFO method results in current inventory costs being
matched against current sales dollars, such that inflation affects earnings on a
current basis. Finally, many of the assets and liabilities included in Cooper's
Consolidated Balance Sheets are recorded in connection with business
combinations that are accounted for as purchases. At the time of such
acquisitions, the assets and liabilities are adjusted to fair market value and,
therefore, the cumulative long-term effect of inflation is reduced.
A-10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
For purposes of this discussion, operating working capital is defined
as receivables and inventories less accounts payable.
In 1997, operating working capital, as reported in the Consolidated
Balance Sheet, increased $31 million. Excluding acquisitions consummated in
December 1997, operating working capital decreased $18 million primarily as a
result of a $46 million decrease in inventories offset by a $26 million decrease
in accounts payable. Excluding the impact of the December 1997 acquisitions,
operating working capital turns increased from 4.9 to 5.3 turns in 1997, an 8%
improvement.
In 1996, operating working capital decreased $68 million as a reduction
in accounts receivable of $62 million accounted for the improvement. Operating
working capital turns increased in excess of 10%.
In 1995, operating working capital increased $19 million primarily
driven by an increase in receivables, partially offset by an increase in
accounts payable.
Cash Flows
Net cash provided by operating activities in 1997 totaled $325 million.
These funds, along with $216 million in proceeds from the sale of Kirsch, an
increase in debt of $213 million (net of acquisition related assumed debt) and
$74 million provided by discontinued operations were used to finance net cash
outflows for acquisitions of $366 million, capital expenditures of $117 million,
dividends of $157 million and purchases of Cooper's Common stock of $192
million.
Net cash provided by operating activities in 1996 totaled $350 million.
The cash generated from operating activities, $249 million provided from the
sales of marketable equity securities and property, plant and equipment and $79
million provided by discontinued operations was utilized to finance net cash
flows for acquisitions of $202 million, capital expenditures of $115 million,
dividends of $143 million and debt reduction of $227 million.
Net cash flows provided by operating activities in 1995 totaled $304
million. This cash, in addition to $33 million generated by sales of property,
plant and equipment and marketable equity securities and $113 million provided
by discontinued operations was used to fund capital spending of $103 million,
dividends of $164 million and debt reduction of $186 million.
In connection with accounting for purchase business combinations,
Cooper records, to the extent appropriate, accruals for the costs of closing
duplicate facilities, severing redundant personnel and integrating the acquired
business into existing Cooper operations. Cash flow from operating activities
for each of the three years in the period ended December 31, 1997, is reduced by
the amounts expended on the various accruals established in connection with each
acquisition. At December 31, 1997, Cooper had accruals totaling $6.2 million
related to these activities. Cooper spent $4.9 million, $3.4 million and $7.0
million in 1997, 1996 and 1995, respectively. See Note 8 of the Notes to
Consolidated Financial Statements for further information.
Debt
The ratio of debt-to-total capitalization was 35.4%, 49.3% and 53.5% at
year-end 1997, 1996 and 1995, respectively. The 1997 and 1996 debt-to-total
capitalization ratio includes the noncash effect of marking the DECS to market.
The 1997 ratio reflects the conversion of $610 million of 7.05% Convertible
Subordinated Debentures into Cooper Common stock and the subsequent purchase of
$192 million of Cooper Common stock. The 1995 ratio reflected the exchange, on
January 1, 1995, of the $1.60 Convertible Exchangeable Preferred Stock for 7.05%
Convertible
A-11
<PAGE> 12
Subordinated Debentures and the $614.1 million reduction in shareholders'
equity from the June 30, 1995 exchange of Cooper Common stock for Cooper
Cameron common stock.
During 1996, Cooper filed a shelf registration statement for $300
million of medium-term notes and issued $50 million of five-year notes at an
average rate of 5.74%. At December 31,1997, $250 million was available for
issuance under the shelf registration statement.
During 1997 Cooper called for redemption its 7.05% Convertible
Subordinated Debentures. Cooper 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.
Cooper has targeted a 35% to 45% debt-to-capitalization ratio and
intends to utilize cash flows to maintain approximately a minimum of a 35%
debt-to-capitalization ratio with excess cash utilized to purchase shares of
Cooper's Common stock or fund acquisitions.
Capital Expenditures and Commitments
Capital expenditures on projects to reduce product costs, improve
product quality, increase manufacturing efficiency and operating flexibility, or
expand product capacity were $117 million in 1997, $115 million in 1996 and $103
million in 1995. Projected capital expenditures for 1998 are anticipated to
exceed 1997 expenditures by 15 to 20%. The 1998 anticipated capital spending
represents approximately 59% for various cost-reduction and capacity-maintenance
projects, including machinery and equipment modernization and enhancement and
computer hardware and software projects, 13% for capacity expansion, 6% related
to environmental matters and 22% for other items.
INTEREST RATE AND FOREIGN CURRENCY RISK
Changes in interest rates and foreign currency exchange rates affect
Cooper's earnings and cash flows. In countries where Cooper has significant
investments and where practical, debt is either borrowed in the local functional
currency or foreign currency forward contracts are entered into to, in effect,
exchange U.S. dollar denominated debt into local functional currency debt. While
the purpose of borrowing in local functional currencies is primarily driven by
tax planning considerations, it also reduces the cash flow risk as a significant
portion of cash flows generated by the operations are utilized to pay interest
and principal on the debt. The earnings risk is also reduced since interest
expense is in the same currency as the operating earnings are generated.
Cooper uses forward foreign currency exchange contracts to reduce the
risk associated with changes in the exchange rates for firm commitments and
anticipated sales or purchases where a product is manufactured or purchased in
one country and sold or consumed in the manufacturing process in another
country. Cooper's policy is to hedge firm commitments to eliminate this risk if
natural hedges do not exist. Anticipated sales or purchases are hedged at the
discretion of the operating businesses. Substantially all forward contracts
expire within one year. At December 31, 1997, insignificant amounts of
anticipated sales and purchases were hedged. Cooper believes that the effects of
currency movements on the respective underlying hedged transactions offset any
gain or loss on forward exchange contracts.
A-12
<PAGE> 13
The table below provides information about Cooper's financial
instruments at December 31, 1997 that are sensitive to changes in interest
rates. The table presents principal cash flows by expected maturity dates and
weighted average interest rates for debt obligations.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total
------- ------- ------- ------- ------- ---------- -------
(in millions, where applicable)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate $ 57.8 $ 235.7(1) $ 0.5 $ 50.4 $ 60.3 $ 250.0 $ 654.7
Average interest rate 6.0% 6.5% 6.5% 6.6% 6.6% 6.7% 6.0%
Variable rate $ 0.5 $ 58.4 $ 545.4 $ 0.5 $ 0.5 $ 70.5 $ 675.8
Average interest rate 5.8% 5.7% 5.6% 6.1% 6.1% 6.1% 5.8%
</TABLE>
(1) Includes $235.2 of 6.0% DECS which are mandatorily exchangeable into
shares of Wyman-Gordon common stock, or at Cooper's option, into cash
in lieu of shares. Cooper anticipates delivering the Wyman-Gordon
common stock upon redemption of the DECS in late 1998.
The table below provides information about Cooper's financial
instruments at December 31, 1997 in excess of $5 million that are sensitive to
foreign currency exchange rate changes by functional currency. For foreign
currency denominated debt obligations, the table provides principal cash flows,
weighted average interest rates by expected maturity dates and the applicable
foreign currency exchange rate. For foreign currency forward contracts, the
table presents the notional amounts and weighted average exchange rates by
contractual maturity dates. These notional amounts are used to calculate the
contractual payments to be exchanged under the contracts. All amounts are
presented in U.S. dollar equivalents.
<TABLE>
<CAPTION>
1998 2000
------------ ------------
(in millions, where applicable)
<S> <C> <C>
U.S. Dollar Functional Currency
Long-term debt denominated in German Deutschemark ..... -- $ 128.3
Average interest rate ................................. -- 4.0%
Foreign currency exchange rate ........................ -- .56
Forward Exchange Contracts:
Sell Pounds Sterling/Buy U.S. Dollars
Notional amount ................................... $ 175.3 --
Average contract rate ............................. 1.66 --
Buy Australian Dollars/Sell U.S. Dollars
Notional amount ................................... $ 7.2 --
Average contract rate ............................. .67 --
Buy Italian Lira/Sell U.S. Dollars
Notional amount ................................... $ 5.4 --
Average contract rate ............................. .00057 --
Pounds Sterling Functional Currency
Forward Exchange Contracts:
Buy U.S. Dollars/Sell Pounds Sterling
Notional amount ................................... $ 5.0 --
Average contract rate ............................. 1.63 --
</TABLE>
See Note 17 of Notes to Consolidated Financial Statements for
additional information regarding the fair value of Cooper's financial
instruments.
A-13
<PAGE> 14
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 Reporting Comprehensive Income ("FAS
No. 130") and No. 131 Disclosures About Segments of an Enterprise and Related
Information ("FAS No. 131"). Both FAS No. 130 and FAS No. 131 are effective for
Cooper's calendar year ending December 31, 1998.
FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Upon
adopting the new standard in 1998, Cooper will report and display comprehensive
income which includes net income plus non-owner changes in equity such as the
change in foreign currency translation, the minimum pension liability, and
unrealized gains or losses on investments in marketable equity securities.
FAS No. 131 changes the way segment information is presented from an
industry segment approach to a management approach. Under the management
approach, segments are determined based on the operations regularly reviewed by
the chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance. FAS No. 131 also allows the
presentation of information on an internally reported basis and changes certain
other disclosures. Cooper is managed in a similar structure to the present
segment disclosures and information reviewed with the Board of Directors and
senior management is in a similar format. Cooper has not presently determined
the extent to which the segment groupings and related disclosures will be
revised when FAS No. 131 is adopted, but does not anticipate major revisions
that would make the information lack all comparability with the current
presentation.
A-14
<PAGE> 15
REPORT OF MANAGEMENT
The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. Such Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed estimates and judgments of management. Management also
prepared the other information included in the 1998 Proxy Statement and is
responsible for its accuracy and consistency with the Consolidated Financial
Statements.
The Consolidated Financial Statements have been audited by an
independent accounting firm, Ernst & Young LLP, which was given unrestricted
access to all financial records and related data, including minutes of meetings
of shareholders, the Board of Directors, and committees of the Board. Management
believes that all representations made to the independent auditors during their
audit were valid and appropriate.
Cooper maintains a system of internal control designed to provide
reasonable assurance to Cooper's management and Board of Directors that assets
are safeguarded against loss, that transactions are authorized, executed and
recorded in accordance with management's instructions, and accounting records
are reliable for preparing published financial statements. The system of
internal control includes: a documented organizational structure and division of
responsibility; regular management review of financial performance and internal
control activities; comprehensive written policies and procedures (including a
code of conduct to foster a sound ethical climate) that are communicated
throughout Cooper; and the careful selection, training and development of
employees. Cooper's internal audit department monitors the operation of the
internal control system and reports findings and recommendations to management
and the Audit Committee. Prompt corrective action is taken to address control
deficiencies and other opportunities for improving the internal control system.
The Audit Committee of the Board of Directors, which is composed
entirely of directors who are not officers or employees of Cooper, meets
periodically with management, the independent auditors, and the director of
internal audit to discuss the adequacy of internal control and to review
accounting, reporting, auditing and other internal control matters. The internal
and independent auditors have unrestricted access to the Audit Committee.
H. John Riley, Jr. D. Bradley McWilliams Terry A. Klebe
Chairman, President and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
A-15
<PAGE> 1
Exhibit No. 99.2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cooper Industries, Inc.
We have audited the accompanying consolidated balance sheets of Cooper
Industries, Inc. as of December 31, 1997 and 1996, and the related consolidated
income statements, statements of shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cooper
Industries, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
January 23, 1998,
Except for Note 1, as to which
the date is October 9, 1998
A-16
<PAGE> 1
Exhibit No. 99.3
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
(in millions, except per share data)
<S> <C> <C> <C>
Revenues ..................................................... $ 3,415.6 $ 3,380.5 $ 3,052.1
Cost of sales ................................................ 2,281.6 2,275.5 2,062.6
Selling and administrative expenses .......................... 580.5 595.2 525.0
Goodwill amortization ........................................ 32.4 31.5 27.9
Nonrecurring gains ........................................... (93.0) (150.4) (11.7)
Nonrecurring charges ......................................... 40.5 15.9 --
Interest expense ............................................. 90.4 142.1 151.0
----------- ----------- -----------
Income from continuing operations before income taxes .. 483.2 470.7 297.3
Income taxes ................................................. 173.2 185.6 118.7
----------- ----------- -----------
Income from continuing operations ...................... 310.0 285.1 178.6
Income from discontinued operations
(Automotive Products), net of income taxes ............... 84.6 30.3 102.0
Charge for discontinued operations
(Petroleum & Industrial Equipment) ....................... -- -- (186.6)
----------- ----------- -----------
Net income .......................................... $ 394.6 $ 315.4 $ 94.0
=========== =========== ===========
Income per Common share
Basic:
Income from continuing operations ...................... $ 2.64 $ 2.66 $ 1.60
Income from discontinued operations
(Automotive Products) .............................. .72 .28 .92
Charge for discontinued operations
(Petroleum & Industrial Equipment) ................. -- -- (1.67)
----------- ----------- -----------
Net income .......................................... $ 3.36 $ 2.94 $ 0.85
=========== =========== ===========
Diluted:
Income from continuing operations ..................... $ 2.57 $ 2.52 $ 1.60
Income from discontinued operations
(Automotive Products) ............................. .69 .25 .91
Charge for discontinued operations
(Petroleum & Industrial Equipment) ............... -- -- (1.67)
----------- ----------- -----------
Net income .......................................... $ 3.26 $ 2.77 $ 0.84
=========== =========== ===========
Cash dividends per Common share .............................. $ 1.32 $ 1.32 $ 1.32
=========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
A-17
<PAGE> 2
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
ASSETS (in millions)
<S> <C> <C>
Cash and cash equivalents ........................................ $ 30.3 $ 16.1
Receivables ...................................................... 596.4 547.1
Inventories ...................................................... 484.8 509.5
Deferred income taxes and other current assets ................... 106.6 105.5
---------- ----------
Total current assets .................................... 1,218.1 1,178.2
---------- ----------
Net assets of discontinued operations ............................ 1,973.7 1,963.3
Property, plant and equipment, less accumulated depreciation ..... 673.3 708.0
Intangibles, less accumulated amortization ....................... 1,279.0 1,015.8
Investments in marketable equity securities ...................... 274.8 367.1
Other assets ..................................................... 88.4 86.5
---------- ----------
Total assets ............................................ $ 5,507.3 $ 5,318.9
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt .................................................. $ 139.0 $ 98.2
Accounts payable ................................................. 397.3 403.3
Accrued liabilities .............................................. 426.8 396.2
Accrued income taxes ............................................. 5.5 --
Current maturities of long-term debt ............................. 58.3 77.8
---------- ----------
Total current liabilities ............................... 1,026.9 975.5
---------- ----------
Long-term debt ................................................... 1,272.2 1,737.7
Postretirement benefits other than pensions ...................... 241.9 287.4
Deferred income taxes and other long-term liabilities ............ 282.8 351.1
---------- ----------
Total liabilities ....................................... 2,823.8 3,351.7
---------- ----------
Common stock, $5.00 par value .................................... 615.0 540.2
Capital in excess of par value ................................... 679.8 150.1
Retained earnings ................................................ 1,514.5 1,275.3
Common stock held in treasury, at cost ........................... (149.7) --
Unearned employee stock ownership plan compensation .............. (66.5) (92.9)
Other ............................................................ 90.4 94.5
---------- ----------
Total shareholders' equity .............................. 2,683.5 1,967.2
---------- ----------
Total liabilities and shareholders' equity .............. $ 5,507.3 $ 5,318.9
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
A-18
<PAGE> 3
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 394.6 $ 315.4 $ 94.0
Less: (Income) loss from discontinued operations ........................ (84.6) (30.3) 84.6
-------- -------- --------
Income from continuing operations ........................................ 310.0 285.1 178.6
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization .......................................... 122.0 132.7 119.7
Deferred income taxes .................................................. (6.6) (59.8) (50.3)
Gain on sales of marketable equity securities and DECS exchange ........ (23.2) (150.4) (11.7)
Gain on disposition of Kirsch .......................................... (69.8) -- --
Nonrecurring asset write-down .......................................... 24.2 -- --
Changes in assets and liabilities: (1)
Receivables .......................................................... (40.6) 67.3 (13.9)
Inventories .......................................................... (17.6) (2.1) 44.9
Accounts payable and accrued liabilities ............................. 53.9 46.2 (17.4)
Accrued income taxes ................................................. 3.1 (3.7) 4.6
Other assets and liabilities, net .................................... (30.7) 35.0 49.6
-------- -------- --------
Net cash provided by operating activities .......................... 324.7 350.3 304.1
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquired businesses ........................................ (366.4) (201.8) (3.0)
Proceeds from disposition of business .................................... 216.0 2.3 --
Capital expenditures ..................................................... (117.3) (114.8) (102.7)
Proceeds from sales of marketable equity securities ...................... -- 231.4 14.4
Proceeds from sales of property, plant and equipment ..................... 5.2 17.7 18.5
-------- -------- --------
Net cash used in investing activities .............................. (262.5) (65.2) (72.8)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuances of debt .......................................... 564.7 316.0 704.7
Repayments of debt ....................................................... (351.8) (542.7) (890.3)
Dividends ................................................................ (157.4) (142.6) (164.0)
Acquisition of treasury shares ........................................... (191.5) -- --
Activity under employee stock plans and other ............................ 15.6 1.7 (5.8)
-------- -------- --------
Net cash used in financing activities .............................. (120.4) (367.6) (355.4)
-------- -------- --------
Cash flows provided by discontinued operations .............................. 74.2 78.5 112.5
Effect of exchange rate changes on cash and cash equivalents ................ (1.8) 2.4 4.0
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............................ 14.2 (1.6) (7.6)
Cash and cash equivalents, beginning of year ................................ 16.1 17.7 25.3
-------- -------- --------
Cash and cash equivalents, end of year ...................................... $ 30.3 $ 16.1 $ 17.7
======== ======== ========
</TABLE>
(1) Net of the effects of acquisitions, divestitures and translation.
The Notes to Consolidated Financial Statements are an integral part of
these statements. See Note 18 for information on noncash investing and financing
activities.
A-19
<PAGE> 4
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
$1.60
Convertible Capital Unearned
Exchangeable In Excess Employee Stock
Preferred Common Of Par Retained Treasury Ownership Plan
Stock Stock Value Earnings Stock Compensation Other
------- -------- ---------- ---------- ------ ------------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 $ 30.6 $ 584.6 $ 1,176.5 $ 1,153.4 $ -- $ (147.4) $ (9.2)
Net income................................... 94.0
Common stock dividends....................... (148.4)
Exchange of Common stock for
Cooper Cameron common stock.............. (47.5) (382.6) 2.6
Redemption of $1.60 Preferred for 7.05%
Convertible Subordinated Debentures...... (30.6) (664.4)
Stock issued under employee stock plans...... 1.8 12.0
Principal payments by ESOP................... 25.4
Adjustment for minimum pension liability..... 15.0
Translation.................................. 2.7
Unrealized gain on investments in
Marketable equity securities............. 126.8
Reclassification to realized gain............ (7.2)
Other activity............................... 0.5 0.1 1.3 (2.2)
------- -------- ---------- ---------- -------- -------- ------
BALANCE DECEMBER 31, 1995 -- 539.4 141.6 1,100.3 -- (121.6) 128.1
Net income................................... 315.4
Common stock dividends....................... (142.6)
Stock issued under employee stock plans...... 0.5 4.4
Principal payments by ESOP................... 28.7
Adjustment for minimum pension liability..... (0.9)
Translation.................................. 0.2
Unrealized gain on investments in
Marketable equity securities............. 60.3
Reclassification to realized gain............ (93.2)
Other activity............................... 0.3 4.1 2.2
------- -------- ---------- ---------- -------- -------- ------
BALANCE DECEMBER 31, 1996 -- 540.2 150.1 1,275.3 -- (92.9) 94.5
Net income................................... 394.6
Common stock dividends....................... (157.4)
Conversion of 7.05% Convertible
Subordinated Debentures.................. 73.9 536.3
Purchase of treasury shares.................. (191.5)
Stock issued under employee stock plans...... 0.7 (7.5) 40.9
Principal payments by ESOP................... 26.4
Adjustment for minimum pension liability..... 23.6
Translation.................................. (4.2)
Unrealized loss on investments in
Marketable equity securities............. (9.1)
Reclassification to realized gain............ (14.4)
Other activity............................... 0.2 0.9 2.0 0.9
------- -------- ---------- ---------- -------- -------- ------
BALANCE DECEMBER 31, 1997 $ -- $ 615.0 $ 679.8 $ 1,514.5 $ (149.7) $ (66.5) $ 90.4 (1)
======= ======== ========== ========== ======== ======== ======
</TABLE>
(1) At December 31, 1997, "Other" included, net of tax, the minimum pension
liability of $(2.7) million, cumulative translation adjustments of $(17.8)
million and the unrealized gain on Cooper's investment in Wyman-Gordon, net
of the increase in the market value of the DECS(sm), of $110.9 million.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
A-20
<PAGE> 5
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUBSEQUENT EVENT - AUTOMOTIVE PRODUCTS SEGMENT
SEPARATED AS DISCONTINUED OPERATION
In April 1998, Cooper Industries, Inc. ("Cooper") announced that it
engaged an investment banking firm to assist in the evaluation of options for
exiting the automotive business. On October 9, 1998 the sale of the Automotive
Products segment was consummated with Cooper receiving $1.9 billion in proceeds.
The book value of the Automotive Products segment assets less the liabilities
assumed by the buyer plus costs related to the transaction resulted in a small
loss before income taxes. The loss before income taxes was offset by income tax
benefits derived through the sale of the common stock of the entity holding the
Automotive Products segment versus a sale of the net assets of the business.
As a consequence of treating this segment as discontinued operations,
Cooper's results of operations and the related footnote information for all
periods presented here and when presented elsewhere in the future will exclude
the results of the Automotive Products segment from continuing operations'
revenues and other components of income and expense. The discontinued segment
results prior to the measurement date will be presented separately in a single
caption, "Income from discontinued operations, net of income taxes". Net income
remains unchanged. Revenues from the discontinued Automotive Products segment
were $1.9 billion, $1.9 billion and $1.8 billion during 1997, 1996 and 1995,
respectively. Income from the discontinued Automotive Products segment was $84.6
million (net of $58.9 million of income taxes) in 1997, $30.3 million (net of
$57.0 million of income taxes) in 1996, and $102.0 million (net of $78.7 million
of income taxes) in 1995.
In order to facilitate an understanding of Cooper's continuing
operations, Cooper has elected to restate the Consolidated Balance Sheets as of
December 31, 1997 and 1996, the Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 and all related footnote
disclosures. The net assets of discontinued operations have been segregated into
a single line, Net assets of Discontinued Operations in the Consolidated Balance
Sheets. The cash flows from discontinued operations have been summarized into a
single line "cash flow provided by discontinued operations" in the Consolidated
Statements of Cash Flows. No cash or debt has been allocated to the discontinued
operations. See Note 19 for information on the Petroleum & Industrial Equipment
segment discontinued operations that were disposed of in 1995.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Cooper and its majority-owned subsidiaries. Affiliated companies are
accounted for on the equity method where Cooper owns more than 20% but less than
50% of the affiliate unless significant economic, political or contractual
considerations indicate that the cost method is appropriate.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: For purposes of the Consolidated Statements of Cash Flows,
Cooper considers all investments purchased with original maturities of three
months or less to be cash equivalents.
INVENTORIES: Inventories are carried at cost or, if lower, net realizable value.
On the basis of current costs, 71% of inventories at December 31, 1997 and 1996
were carried on the last-in, first-out (LIFO) method. The remaining inventories,
which are primarily located outside the United States, are carried on the
first-in, first-out (FIFO) method.
A-21
<PAGE> 6
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. This method is applied to group asset
accounts, which in general have the following lives: buildings -- 10 to 40
years; machinery and equipment -- 3 to 18 years; and tooling, dies, patterns and
other -- 5 to 10 years.
INTANGIBLES: Intangibles consist primarily of goodwill related to purchase
acquisitions. With minor exceptions, the goodwill is being amortized over 40
years from the respective acquisition dates. The carrying value of goodwill is
reviewed at the lowest level feasible whenever there are indications that the
goodwill may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows over the remaining
amortization periods, the carrying value of the goodwill will be reduced by the
estimated shortfall in discounted cash flows.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES: Marketable equity securities
received or retained in connection with the divestiture of businesses are
reflected as available-for-sale securities and are stated at fair market value
at each balance sheet date, with unrealized gains and losses, net of tax,
reported as a component of shareholders' equity. The cost of securities sold is
determined based on the specific identification method for purposes of recording
realized gains and losses.
DERIVATIVE FINANCIAL INSTRUMENTS: On a recurring basis, foreign currency forward
exchange contracts and commodity contracts are entered into to reduce risks of
adverse changes in foreign exchange rates and commodity prices. 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. Cooper does not enter into
speculative derivative transactions or hedges of anticipated transactions unless
there is a high probability the transactions will occur. Due to the short term
of contracts and a restrictive policy, contract terminations or anticipated
transactions that do not occur are rare and insignificant events which are
accounted for through income in the period they occur. As discussed in Note 7,
in December 1995, Cooper hedged its investment in marketable equity securities
of Wyman-Gordon Company ("Wyman-Gordon"). Cooper currently is not a party to any
interest rate swap agreements used to manage its interest rate risk. Cooper's
policy is to recognize the interest rate differential to be received or paid
over the lives of the interest rate swap as an adjustment to interest expense.
COMMON STOCK BASED COMPENSATION: Cooper follows the intrinsic value method of
accounting for stock options and performance-based stock awards as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.
INCOME PER COMMON SHARE: In the fourth quarter of 1997, Cooper 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, net income per Common share for the years
ended December 31, 1996 and 1995 and increased primary, currently referred to as
basic, income per common share $.01 in each of the years ended December 31, 1996
and 1995. Unlike primary earnings per share, basic earnings per share excludes
the dilutive effects of common stock equivalents.
NOTE 3: NONRECURRING ITEMS
During 1997, Cooper realized a gain of $69.8 million before income
taxes from the sale of Kirsch (See Note 4) and exchanged a portion of its
DECS(SM) (Debt Exchangeable for Common Stock) for Wyman-Gordon common stock
and realized a gain of $23.2 million before income taxes (See Note 7). Cooper
also incurred charges of $40.5 million for actions management committed to
during the period after concluding an evaluation of geographic manufacturing and
distribution facilities within the Tools & Hardware segment; and information
systems relating to year 2000 compliance efforts. The 1997 charges include
adjustments to the carrying value of assets of $24.2 million and accruals for
A-22
<PAGE> 7
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
continuing obligations for replaced systems and facility consolidations of $16.3
million. The charges decreased operating earnings of the Electrical Products
segment by $15.9 million and Tools & Hardware segment by $22.5 million and
increased general corporate expenses by $2.1 million. The gains, combined with
nonrecurring charges and a $6.1 million income tax benefit related to the
settlements of certain state income tax matters (See Note 12), resulted in a net
nonrecurring gain of $52.5 million before income taxes ($39.1 million after
income taxes) and a net $.32 per share of nonrecurring income being recognized
in 1997.
Cooper has begun a consolidation of certain international manufacturing
and distribution facilities in the Tools & Hardware segment. Adjustments to the
carrying value of assets and accruals were recorded for projects committed to by
management. Severance and certain other costs related to projects committed to
by management are not expensed until the affected employees are notified. A
majority of the consolidations have been announced and such costs were accrued
and expensed during 1997. The remaining committed but unannounced consolidations
are not anticipated to result in significant additional expenses.
During 1997, Cooper also assessed the impact of existing system
capabilities to function at the turn of the century. Three of Cooper's seven
divisions are implementing new enterprise systems with the remaining 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 within a
business abandoned existing software and migrated to consolidated hardware and
software that is year 2000 compliant. Where these solutions were not possible,
businesses either contracted to third parties or committed internal resources to
ensure that all major systems are year 2000 compliant. Cooper recorded a $28.5
million charge in 1997 primarily related to the adjustment in the carrying value
of abandoned hardware and software. While depreciation and amortization are
reduced by the effect of the write-down, depreciation and amortization of new
systems and equipment, as well as expenses incurred to revise current software
to be year 2000 compliant, and implementation costs of new systems, are likely
to exceed the reduction in depreciation and amortization in most future periods.
During 1996, Cooper initiated a strategic review of most of its
businesses. As a result of those actions and certain legal matters, Cooper
incurred nonrecurring charges totaling $15.9 million before income taxes during
1996. A total of $3.0 million was incurred in the Electrical Products segment
primarily related to a write-down of property and equipment at a facility; $2.0
million in the Tools & Hardware segment for legal and other costs related to
sales of imported mini blinds containing lead paint; and $10.9 million of
corporate costs primarily related to environmental litigation. The nonrecurring
charges of $15.9 million have an insignificant effect on future earnings and
expenditures beyond 1996 are insignificant. During 1996, Cooper realized $150.4
million before income taxes in gains on the sale of marketable equity securities
(See Note 7). These gains combined with nonrecurring charges resulted in a net
nonrecurring gain of $134.5 million before income taxes ($83.4 million after
income taxes) and a net $.67 per share of nonrecurring income being recognized
in 1996. In 1995, Cooper realized a gain of $.05 per share from the sale of
marketable equity securities (See Note 7).
NOTE 4: ACQUISITIONS AND DIVESTITURES
In 1997, Cooper completed one large acquisition, five small
product-line acquisitions and the divestiture of Kirsch. In December 1997,
Cooper acquired Menvier-Swain Group plc ("Menvier") for a total cost of
approximately $274.5 million. Menvier manufactures and markets emergency
lighting, fire detection and security systems primarily in Europe. The five
small product line acquisitions had an aggregate cost of $164.1 million. A total
of $335.3 million of goodwill was recorded, on a preliminary basis, with respect
to the acquisitions. All acquisitions were in the Electrical Products segment.
On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division for $216 million. For the five months ended May 30, 1997, and the year
ended December 31, 1996, Kirsch had revenues of $97.4 million and $252.9
million, and operating earnings of $4.8 million and $20.0 million, respectively.
Kirsch was part of the Tools & Hardware segment.
A-23
<PAGE> 8
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 1996, Cooper completed five small product-line acquisitions and one
small divestiture. The total cost of the acquisitions was approximately $43.3
million. A total of $38.1 million of goodwill was recorded with respect to the
acquisitions. Three acquisitions and the divestiture were in the Electrical
Products segment and two acquisitions were in the Tools & Hardware segment.
In 1995, Cooper completed one large acquisition, one small product-line
acquisition, and the divestiture, through an exchange offer with shareholders,
of Cooper Cameron Corporation ("Cooper Cameron") (See Note 19). Effective
December 31, 1995, Cooper acquired CEAG Sicherheitstechnik GmbH ("CEAG") from
Asea Brown Boveri AG, Mannheim. The total cost of the acquisition, which was
paid on January 5, 1996, was approximately $164 million. CEAG manufactures and
markets explosion proof electrical products and business security and emergency
lighting products. The cost of the small product-line acquisition was $3.4
million. A total of $138.1 million of goodwill was recorded with respect to the
two acquisitions. Both acquisitions were in the Electrical Products segment.
The acquisitions have been accounted for as purchases and the results
of the acquisitions are included in Cooper's consolidated income statements
since the respective acquisition dates.
NOTE 5: INVENTORIES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
Raw materials........................................................................ $ 192.5 $ 202.1
Work-in-process...................................................................... 119.2 149.6
Finished goods....................................................................... 246.8 251.5
Perishable tooling and supplies...................................................... 18.6 19.5
----------- -----------
577.1 622.7
Excess of current standard costs over LIFO costs..................................... (92.3) (113.2)
----------- -----------
Net inventories............................................................. $ 484.8 $ 509.5
=========== ===========
</TABLE>
A-24
<PAGE> 9
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6: PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
Property, plant and equipment:
Land and land improvements....................................................... $ 49.9 $ 60.8
Buildings........................................................................ 348.5 380.4
Machinery and equipment.......................................................... 707.8 724.7
Tooling, dies and patterns....................................................... 131.4 123.5
All other........................................................................ 182.2 200.8
Construction in progress......................................................... 79.5 68.3
----------- -----------
1,499.3 1,558.5
Accumulated depreciation......................................................... (826.0) (850.5)
----------- -----------
$ 673.3 $ 708.0
=========== ===========
Intangibles:
Goodwill......................................................................... $ 1,589.3 $ 1,296.9
Other............................................................................ 11.4 14.7
----------- -----------
1,600.7 1,311.6
Accumulated amortization......................................................... (321.7) (295.8)
----------- -----------
$ 1,279.0 $ 1,015.8
=========== ===========
</TABLE>
NOTE 7: INVESTMENTS IN MARKETABLE EQUITY SECURITIES
At December 31, 1997 and 1996, Cooper's investment in marketable equity
securities consisted of its investment in Wyman-Gordon common stock. During
1996, Cooper sold its remaining common shares of Belden Inc. and all of the
shares of Cooper Cameron common stock (See Note 19). In December 1995, Cooper
issued 16.5 million DECS at $13.50 which, at maturity, are mandatorily
exchangeable into shares of Wyman-Gordon common stock or, at Cooper's option,
into cash in lieu of shares. The number of shares or the amount of cash will be
based on the average market value of Wyman-Gordon common stock on the 20 trading
days prior to maturity on January 1, 1999 (the "WGC Maturity Price"). If the WGC
Maturity Price is greater than or equal to $15.66 per share, each DECS will be
exchangeable at maturity into the equivalent of .862 shares of Wyman-Gordon
common stock. If the WGC Maturity Price is less than or equal to $13.50 per
share, each DECS will be exchangeable at maturity into one Wyman-Gordon share.
If the WGC Maturity Price is between $13.50 and $15.66 per share, each DECS will
be exchangeable into a fraction of shares of Wyman-Gordon common stock between
.862 and 1, based on an exchange ratio. If the DECS are redeemed for cash, the
amount of cash will be equal to the number of Wyman-Gordon shares exchangeable
under the terms of the DECS times the WGC Maturity Price.
The DECS are a hedge of Cooper's investment in Wyman-Gordon common
stock and will result in Cooper realizing a minimum after-tax gain of $85
million upon redemption of the DECS. This unrealized gain, plus any additional
appreciation of the investment in Wyman-Gordon common stock since the issuance
of the DECS, is included in shareholders' equity as an unrealized gain on
investments in marketable equity securities, net of tax. At December 31, 1997
and 1996, Cooper's long-term debt includes an increase in the market value of
Wyman-Gordon common stock related to the DECS of $47.9 million and $93.7
million, respectively.
A-25
<PAGE> 10
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The offset to the debt increase, net of tax, decreased the unrealized gain on
investments in marketable equity securities included in shareholders' equity.
During 1997, Cooper exchanged a portion of the DECS for Wyman-Gordon common
stock and realized a gain of $23.2 million ($14.4 million after income taxes).
The aggregate fair value of the marketable equity securities was $274.8
million and $367.1 million at December 31, 1997 and 1996, respectively. Gross
unrealized gains on investments in marketable equity securities were $218.5
million ($170.6 million, net of the increase in the fair market value of the
DECS) and $300.8 million ($207.1 million, net of the increase in the fair market
value of the DECS) at December 31, 1997 and 1996, respectively. During 1996 and
1995, marketable equity securities were sold for proceeds of $231.4 million and
$14.4 million, respectively, resulting in realized gains of $150.4 million and
$11.7 million, respectively. Cooper incurred nonrecurring charges during 1996
which, when combined with the gains from the sale of marketable equity
securities, resulted in Cooper realizing $.67 per share in 1996. In 1995, Cooper
realized $.05 per share from the sale of marketable equity securities.
NOTE 8: ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
Salaries, wages and employee benefit plans........................................... $ 188.2 $ 180.5
Product and environmental liability accruals......................................... 66.1 78.5
Commissions and customer incentives.................................................. 26.7 28.4
Facility integration of acquired businesses.......................................... 6.2 14.8
Other (individual items less than 5% of total current liabilities)................... 139.6 94.0
----------- -----------
$ 426.8 $ 396.2
=========== ===========
</TABLE>
At December 31, 1997, Cooper had accruals of $27.9 million with respect
to potential product liability claims and $80.1 million with respect to
potential environmental liabilities, including $41.9 million classified as a
long-term liability, based on Cooper's current estimate of the most likely
amount of losses that it believes will be incurred.
The product liability accrual consists of $7.9 million of known claims
with respect to ongoing operations, $12.6 million of known claims for previously
divested operations and $7.4 million which represents an estimate of claims that
have been incurred but not yet reported. While Cooper is generally self-insured
with respect to product liability claims, Cooper has insurance coverage for
individual 1997 claims above $3.0 million. Insurance levels have varied from
year to year.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$26.1 million related to sites owned by Cooper and $54.0 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a contributor. Third-party sites usually
involve multiple contributors where Cooper's liability will be determined based
on an estimate of Cooper's proportionate responsibility for the total cleanup.
The amount actually accrued for such sites is based on these estimates as well
as an assessment of the financial capacity of the other potentially responsible
parties.
A-26
<PAGE> 11
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
It has been Cooper's consistent practice to include the entire product
liability accrual and a significant portion of the environmental liability
accrual as current liabilities, although only approximately 10-20% of the
balance classified as current will be spent on an annual basis. The annual
effect on earnings for product liability is essentially equal to the amounts
disbursed. In the case of environmental liability, the annual expense is
considerably smaller than the disbursements, since the vast majority of Cooper's
environmental liability has been recorded in connection with acquired companies.
The change in the accrual balances from year to year reflects the effect of
acquisitions and divestitures as well as normal expensing and funding.
Cooper has not utilized any form of discounting in establishing its
product or environmental liability accruals. While both product liability and
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Cooper has taken a proactive approach and has managed the
costs in both of these areas over the years. Cooper does not believe that the
nature of its products, its production processes, or the materials or other
factors involved in the manufacturing process subject Cooper to unusual risks or
exposures for product or environmental liability. Cooper's greatest exposure to
inaccuracy in its estimates is with respect to the constantly changing
definitions of what constitutes an environmental liability or an acceptable
level of cleanup.
In connection with acquisitions accounted for using the purchase method
of accounting, Cooper records, to the extent appropriate, accruals for the costs
of closing duplicate facilities, severing redundant personnel and integrating
the acquired business into existing Cooper operations. Significant accruals
include plant shut-down and realignment costs, and facility relocations. The
following table summarizes the accrual balances and activity during each of the
last three years:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(in millions)
<S> <C> <C> <C>
ACTIVITY DURING EACH YEAR:
Balance, beginning of year............................................ $ 14.8 $ 8.8 $ 9.8
Spending.............................................................. (4.9) (3.4) (7.0)
Kirsch disposition.................................................... (0.4) - -
Reclassifications..................................................... (4.0) 0.1 2.8
Acquisitions - initial allocation..................................... 1.4 4.1 0.1
Acquisitions - final allocation adjustment............................ (0.1) 4.9 2.8
Translation........................................................... (0.6) 0.3 0.3
----------- ----------- -----------
Balance, end of year.................................................. $ 6.2 $ 14.8 $ 8.8
=========== =========== ===========
BALANCE BY CATEGORY OF ACCRUAL:
Plant shut-down and realignment....................................... $ 5.8 $ 12.0 $ 5.0
Facility relocations and severance.................................... 0.4 0.1 0.5
Other realignment and integration..................................... - 2.7 3.3
----------- ----------- -----------
$ 6.2 $ 14.8 $ 8.8
=========== =========== ===========
</TABLE>
Plant shut-down and realignment includes the costs to terminate
personnel, shut down the facilities, terminate leases and similar costs. The
spending related primarily to downsizing and consolidating facilities. Facility
relocations and severance includes costs to consolidate sales and marketing
operations of the acquired companies into Cooper operations, termination costs
of redundant personnel and shut-down costs of redundant warehouses and the
acquired companies' headquarters. Other realignment and integration costs
includes costs to liquidate joint ventures, exit product lines and miscellaneous
costs.
A-27
<PAGE> 12
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the three years ended December 31, 1997, accruals reversed to
income were insignificant. Reclassifications in 1997 were substantially related
to lease obligations on closed facilities reclassified to other accrued
liabilities. Acquisitions-final allocation adjustment represents adjustments to
goodwill for finalization of the purchase price allocations recorded in the
previous year. Substantially all spending related to these accruals represented
cash outlays by Cooper. The 1996 acquisitions - final allocation adjustment is
related to the acquisition of CEAG on the last business day of 1995. The CEAG
acquisition had insignificant accruals for terminations and no significant
individual exit plan costs were accrued.
NOTE 9: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
3.98% - 6.47%* commercial paper and Deutschemark denominated
bank loans maturing at various dates through January 1998.......................... $ 528.3 $ 151.3
7.05% convertible subordinated debentures, due 2015.................................... -- 690.4
6.41% - 7.99% second series medium-term notes, due through 2010........................ 357.6 429.6
6.0% exchangeable notes, due 1999...................................................... 235.2 316.5
7.19% - 7.74%* Pound Sterling bank loans and notes payable
maturing at various dates through 2005............................................. 88.2 94.2
5.74% third series medium-term notes, due 2001......................................... 50.0 50.0
5.52%* floating-rate ESOP notes, due through 1999...................................... 16.0 40.5
Other.................................................................................. 55.2 43.0
----------- -----------
1,330.5 1,815.5
Current maturities..................................................................... (58.3) (77.8)
----------- -----------
Long-term portion...................................................................... $ 1,272.2 $ 1,737.7
=========== ===========
</TABLE>
* Weighted average interest rates at December 31, 1997. The weighted average
interest rates on commercial paper and bank loans, Pounds Sterling bank
loans and notes and ESOP notes were, 3.35%, 6.42% and 5.12%, respectively at
December 31, 1996.
Cooper has U.S. committed credit facilities of $835 million that expire
in 2000, and $315 million that expire in 1998. At December 31, 1997, Cooper had
an effective "shelf" registration statement, which may be used to issue an
additional $250 million of medium-term notes from time to time.
At December 31, 1997, Cooper had $551.7 million of its $1.15 billion
U.S. committed credit facilities available, after considering commercial paper
backup. At December 31, 1996, $1.02 billion of its total $1.22 billion U.S.
committed credit facilities was available after considering commercial paper
backup, and none of its 30 million Pound Sterling credit facility was available.
The 30 million Pound Sterling credit facility expired in 1997 and was not
re-established. The agreements for the credit facilities require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization. Retained earnings are unrestricted as to the
payment of dividends, except to the extent that payment would cause a violation
of the prescribed limit on the debt to total capitalization ratio.
A-28
<PAGE> 13
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Interest rates on Cooper's commercial paper and U.S. bank loans were
generally 2.8% below the U.S. prime rate during 1997 and 1996. Total interest
paid during 1997, 1996 and 1995 was $107 million, $141 million and $134 million,
respectively.
Commercial paper of $400 million and bank loans of $202.7 million were
reclassified to long-term debt at December 31, 1997 and 1996, respectively,
reflecting Cooper's intention to refinance these amounts during the twelve-
month period following the balance sheet date through either continued
short-term borrowing or utilization of available credit facilities. No debt or
interest expense has been allocated to discontinued operations.
Effective January 1, 1995, Cooper exchanged all of the outstanding
$1.60 Convertible Exchangeable Preferred Stock for $691.2 million of 7.05%
Convertible Subordinated Debentures due 2015 and $3.8 million in cash related to
fractional shares. During 1997, Cooper called for redemption the outstanding
debentures with a total of $610 million converting to approximately 14.8 million
shares of Cooper Common stock and approximately $80 million being redeemed for
cash.
In December 1995, Cooper issued $222.8 million in 6% Exchangeable Notes
(DECS) due January 1, 1999. At maturity, the notes are mandatorily exchangeable
into shares of Wyman-Gordon common stock owned by Cooper or, at Cooper's option,
into cash in lieu of shares. During 1997, Cooper exchanged a portion of the DECS
($33.8 million) for Wyman-Gordon common stock (See Note 7). At December 31, 1997
and 1996, Cooper's long-term debt includes $47.9 million and $93.7 million,
respectively, which represents the increase in the market value of the
Wyman-Gordon common stock exchangeable into the DECS. The offset to the debt
increase, net of tax, decreased the unrealized gain on investments in marketable
equity securities, both of which are included in shareholders' equity.
The floating-rate ESOP notes are indebtedness of Cooper's ESOP. Cooper
has guaranteed the payment of the ESOP notes; accordingly, the notes are
reported as Cooper's debt (See Note 15).
Maturities of long-term debt for the five years subsequent to December
31, 1997 are $58.3 million, $294.1 million, $545.9 million, $50.9 million and
$60.8 million, respectively. Cooper anticipates delivering Wyman-Gordon common
stock in settlement of the DECS, which represents $235.2 million of the 1999
maturities. The future net minimum lease payments under capital leases and
obligations under operating leases are not significant.
NOTE 10: COMMON AND PREFERRED STOCK
COMMON STOCK
At December 31, 1997, 1996 and 1995, 250,000,000 shares of Common stock
were authorized of which 120,161,446 and 108,038,851 and 107,876,821 shares were
issued and outstanding at December 31, 1997, 1996 and 1995, respectively. During
1997, Cooper issued 14,785,831 shares in exchange for the redemption of the
7.05% Convertible Subordinated Debentures (See Note 9). During the year ended
December 31, 1997, Cooper purchased 3,645,017 shares as treasury stock at an
average price of $52.54 per share and 813,387 of these shares were reissued in
connection with employee stock plans. During 1995, Cooper exchanged 9,500,000
shares of Cooper Common stock for Cooper Cameron common stock (See Note 19). At
December 31, 1997, Cooper had 12,818,206 shares reserved for the Dividend
Reinvestment Plan, grants and exercises of stock options, performance-based
stock awards and subscriptions under the Employee Stock Purchase Plan and other
plans.
Under the terms of the Dividend Reinvestment Plan, any holder of Common
stock may elect to have cash dividends and up to $24,000 per year in cash
payments invested in Common stock without incurring any brokerage commissions or
service charges.
A-29
<PAGE> 14
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under a Shareholder Rights Plan adopted by the Board of Directors in
1997, share purchase Rights were declared as a dividend at the rate of one Right
for each share of Common stock. Each Right entitles the holder to buy one
one-hundredth of a share of Series A Participating Preferred Stock at a purchase
price of $225 per one one-hundredth of a share or, in certain circumstances
Common stock having a value of twice the purchase price. Each Right becomes
exercisable only in certain circumstances constituting a potential change of
control on a basis considered inadequate by the Board of Directors. The Rights
expire August 5, 2007 and, at Cooper's option, may be redeemed prior to
expiration for $.01 per Right.
PREFERRED STOCK
At December 31, 1997 and 1996, Cooper was authorized to issue 1,340,750
shares of Preferred stock with no par value, 10,000,000 shares of $2.00 par
value Preferred stock and 2,821,079 shares of $1.00 par value Preferred stock.
At December 31, 1997 and 1996, no Preferred shares were issued or outstanding.
NOTE 11: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Under Cooper stock option plans, officers, directors and key employees
may be granted options to purchase Cooper's Common stock at no less than 100% of
the market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the date
of grant and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards to certain key executives.
Cooper follows the intrinsic value method of accounting for stock
options and performance-based stock awards as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no compensation expense is recognized
under Cooper's fixed stock option plans or Employee Stock Purchase Plan.
Compensation expense of $8.2 million, $7.1 million and $3.8 million was
recognized in the consolidated income statements during 1997, 1996 and 1995,
respectively for the performance-based stock awards. If compensation expense for
stock options and performance-based stock awards granted under Cooper's stock
based compensation plans during 1997 and 1996 was recognized using the
alternative fair value method of accounting under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, net
income and earnings per share would have decreased by approximately 1.2% in both
1997 and 1996. The fair value was estimated on the date of grant, using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
2.8% and 3.2%, expected volatility of 20.1% and 20.3%, risk free interest rates
of 6.4% and 6.1% and expected lives of 7 years and 6 years.
A-30
<PAGE> 15
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of Cooper's fixed stock option plans for
officers and employees as of December 31, 1997 and activity during the three
years ended December 31, 1997 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 3,189,083 $ 44.05 2,748,219 $ 46.48 2,951,660 $ 49.19
Granted.......................................... 974,900 $ 45.06 1,044,000 $ 39.06 903,700 $ 39.06
Exercised........................................ (491,165) $ 41.67 (12,679) $ 39.06 (125,500) $ 37.75
Canceled......................................... (559,741) $ 50.68 (590,457) $ 46.68 (981,641) $ 48.91
---------- ----------- ----------
Outstanding at end of year....................... 3,113,077 $ 43.55 3,189,083 $ 44.05 2,748,219 $ 46.48
========== =========== ==========
Options exercisable at end of year............... 1,361,573 1,571,842 1,416,896
Options available for grant at end of year....... 4,706,406 5,760,467 1,676,054
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- -------------------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of At Contractual Exercise At Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- ------------------------ ----------------- --------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$39.06 1,531,406 5.9 $39.06 681,902 $39.06
$45.06 902,000 9.1 $45.06 -- --
$50.13 - $52.81 679,671 .6 $51.64 679,671 $51.64
-------------- --------------
3,113,077 5.6 1,361,573
============== ==============
</TABLE>
During 1997, options to purchase 9,000 shares of Common stock were
granted to nonemployee directors at an exercise price of $45.44 and options for
6,000 shares were exercised at $27.13 per share. During 1996, options to
purchase 9,000 shares of Common stock were granted to nonemployee directors at
an exercise price of $42.13 and options for 8,000 shares were exercised at
$27.00 per share. During 1995, options for 4,000 shares were granted, net of the
annual retainer fee, at $17.31 per share and options for 6,000 shares were
exercised at $25.44 per share. At December 31, 1997, options under the director
plans for 12,000 Common shares were exercisable at $14.69 to $24.00 per share,
and 174,800 shares were reserved for future grants.
EMPLOYEE STOCK PURCHASE PLAN
Participants in the Employee Stock Purchase Plan receive an option to
purchase Common stock at a price that is the lesser of 90% of the market value
on the offering date or 100% of the market value on the purchase date. On
September 8, 1997, a total of 575,135 shares were sold to employees at $35.33
per share. At December 31, 1997, subscriptions for 711,332 shares of Common
stock were outstanding at $45.68 per share or, if lower, the average market
price on September 10, 1999, which is the purchase date. At December 31, 1997,
an aggregate of 3,042,973 shares of Common stock were reserved for future
issuance.
A-31
<PAGE> 16
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12: INCOME TAXES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(in millions, except for percentages)
<S> <C> <C> <C>
Components of income from continuing operations before income taxes:
U.S. operations.................................................. $ 405.5 $ 382.0 $ 235.8
Foreign operations............................................... 77.7 88.7 61.5
---------- ---------- ----------
Income from continuing operations before income taxes.......... $ 483.2 $ 470.7 $ 297.3
========== ========== ==========
Components of income tax expense:
Current:
U.S. Federal..................................................... $ 131.0 $ 181.3 $ 124.8
U.S. state and local............................................. 16.0 37.2 27.7
Foreign.......................................................... 32.8 26.9 16.5
---------- ---------- ----------
179.8 245.4 169.0
---------- ---------- ----------
Deferred:
U.S. Federal..................................................... (4.5) (54.2) (45.2)
U.S. state and local............................................. (0.6) (14.0) (10.8)
Foreign.......................................................... (1.5) 8.4 5.7
---------- ---------- ----------
(6.6) (59.8) (50.3)
---------- ---------- ----------
Income tax expense............................................. $ 173.2 $ 185.6 $ 118.7
========== ========== ==========
Total income taxes paid............................................... $ 211.4 $ 155.0 $ 91.2
========== ========== ==========
Effective tax rate reconciliation:
U.S. Federal statutory rate...................................... 35.0% 35.0% 35.0%
State and local income taxes..................................... 1.8 2.9 3.2
Foreign statutory rate differential.............................. (1.0) -- --
Nondeductible goodwill........................................... 2.3 2.4 3.7
State tax settlements (1)........................................ (1.3) -- --
Foreign Sales Corporation........................................ (0.8) (0.3) (0.6)
Tax credits...................................................... (1.0) (0.2) (0.1)
Other ........................................................... 0.8 (0.4) (1.3)
---------- ---------- ----------
Effective tax rate attributable to continuing operations....... 35.8% 39.4% 39.9%
========== ========== ==========
</TABLE>
(1) During 1997, Cooper settled several state income tax matters and recognized
a $6.1 million benefit in its income tax provision.
A-32
<PAGE> 17
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---------- ----------
(in millions)
<S> <C> <C>
Components of deferred tax liabilities and assets:
Deferred tax liabilities:
Property, plant and equipment and intangibles................................... $ (65.4) $ (70.2)
Unrealized net gain on investments in marketable equity
securities and DECS......................................................... (56.4) (68.6)
Inventories..................................................................... (36.6) (37.7)
Employee medical program funding................................................ (4.6) (1.0)
Employee stock ownership plan................................................... (16.4) (15.6)
Pension plans................................................................... (22.3) (22.2)
Other........................................................................... (64.5) (66.9)
---------- ----------
Total deferred tax liabilities.............................................. (266.2) (282.2)
---------- ----------
Deferred tax assets:
Postretirement benefits other than pensions..................................... 96.8 95.6
Accrued liabilities............................................................. 119.8 125.1
Minimum pension liability....................................................... 1.9 17.7
Other........................................................................... 11.5 9.0
---------- ----------
Total deferred tax assets................................................... 230.0 247.4
---------- ----------
Net deferred tax liability.................................................. $ (36.2) $ (34.8)
========== ==========
</TABLE>
The U.S. Federal portion of the above provision includes U.S. tax
expected to be payable on the foreign portion of Cooper's income before income
taxes when such earnings are remitted. Cooper's liabilities for continuing
operations at December 31, 1997 and 1996 include the additional U.S. tax
estimated to be payable on all unremitted earnings of foreign subsidiaries.
NOTE 13: PENSION PLANS
Cooper and its subsidiaries have numerous pension plans covering
substantially all domestic employees and pension and similar arrangements in
accordance with local customs covering employees at foreign locations. The
assets of the various domestic and foreign plans are maintained in various
trusts and consist primarily of equity and fixed-income securities. Funding
policies range from five to thirty years. Pension benefits for salaried
employees are generally based upon career earnings. Benefits for hourly
employees are generally based on a dollar unit, multiplied by years of service.
Aggregate continuing operations pension expense amounted to $24.0 million, $27.3
million and $25.8 million during 1997, 1996 and 1995, respectively. The amount
of expense with respect to Cooper's various defined benefit pension plans is set
forth in the table below. During 1997, 1996 and 1995, continuing operations
expense with respect to domestic and foreign defined contribution plans
(primarily related to various groups of hourly employees) amounted to $13.3
million, $14.5 million and $12.2 million, respectively. Also included in pension
expense are gains and losses on curtailments and settlements and other matters.
Cooper partially or completely settled or curtailed one salaried plan in 1997
resulting in a net loss of $.5 million and three defined benefit plans for
hourly employees in 1995 resulting in a reversion to Cooper of surplus assets
totaling $1.0 million during 1995.
A-33
<PAGE> 18
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(in millions)
<S> <C> <C> <C>
Components of continuing operations defined
benefit plan net pension expense:
Service cost - benefits earned during the year........................ $ 13.8 $ 14.4 $ 13.0
Interest cost on projected benefit obligation......................... 40.0 40.7 40.0
Actual return on assets............................................... (52.6) (47.7) (36.7)
Net amortization and deferral......................................... 9.0 5.4 (2.7)
----------- ----------- -----------
Net pension expense................................................... $ 10.2 $ 12.8 $ 13.6
=========== =========== ===========
</TABLE>
The funded status of the plans at December 31 was as follows:
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation............................. $ (443.0) $ (305.3) $ (65.5) $ (234.4)
========== ========== ========== ==========
Accumulated benefit obligation........................ $ (466.2) $ (328.5) $ (67.1) $ (239.4)
========== ========== ========== ==========
Projected benefit obligation.......................... $ (473.9) $ (338.0) $ (73.1) $ (246.3)
Plan assets at fair value.................................. 603.5 432.4 -- 157.7
---------- ---------- ---------- ----------
Projected benefit obligation less than
(in excess of) plan assets............................ 129.6 94.4 (73.1) (88.6)
Unrecognized net (gain) loss............................... (60.1) (65.1) 3.8 39.7
Unrecognized net (asset) obligation
from adoption date.................................... (4.0) (5.4) 2.2 4.4
Unrecognized prior service cost............................ (2.4) (3.2) 2.2 2.8
Adjustment required to recognize
minimum liability..................................... -- -- (7.4) (49.0)
---------- ---------- ---------- ----------
Pension asset (liability) at end of year................... $ 63.1 $ 20.7 $ (72.3) $ (90.7)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
--------------------------- ------------------------------
Domestic International Domestic International
----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Actuarial assumptions used:
Discount rate............................................... 7(1/2)% 6 - 7(1/4)% 7(1/2)% 6(1/2) - 8(1/4)%
Rate of compensation increase............................... 4(3/4)% 4 - 6 % 4(3/4)% 4 - 6%
Expected long-term rate of return on assets................. 8(1/2)% 9(3/4)% 8(1/2)% 10%
</TABLE>
A-34
<PAGE> 19
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The benefits provided under Cooper's various postretirement plans other
than pensions, all of which are unfunded, include retiree medical care, dental
care, prescriptions and life insurance, with medical care accounting for
approximately 90% of the total. While Cooper has numerous plans, primarily
resulting from Cooper's extensive acquisition activity, the vast majority of the
annual expense is related to employees who are already retired. In fact, as a
result of actions taken by Cooper starting in 1989, virtually no active salaried
employees continue to earn retiree medical benefits, and the number of active
hourly employees earning such benefits has been greatly diminished.
Additionally, Cooper continues to amend its various plans to provide for
appropriate levels of cost sharing and other cost-control measures.
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year....................... $ 0.5 $ 0.5 $ 0.4
Interest cost on accumulated postretirement benefit obligation....... 12.5 13.3 16.3
Net amortization and deferral........................................ (7.3) (6.6) (11.3)
----------- ----------- -----------
Continuing operations postretirement benefit cost.................... $ 5.7 $ 7.2 $ 5.4
=========== =========== ===========
</TABLE>
Amounts recognized in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
----------- -----------
(in millions)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................................... $ 143.6 $ 192.3
Employees eligible to retire...................................................... 10.8 2.5
Other employees................................................................... 1.7 9.6
----------- -----------
156.1 204.4
Unrecognized prior service costs....................................................... 6.1 12.2
Unrecognized net gain.................................................................. 79.7 70.8
----------- -----------
Accrued postretirement benefit cost.................................................... $ 241.9 $ 287.4
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Actuarial assumptions:
Discount rate.................................................... 6.75% 7.23%
Ensuing year to 2002 health care cost trend rate................. 11% ratable to 5.5% 11.5% ratable to 5.5%
Effect of 1% change in health care cost trend rate:
Increase in APBO................................................. $ 14.9 $ 17.6
Increase in expense.............................................. $ 1.1 $ 1.2
</TABLE>
A-35
<PAGE> 20
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS
All full-time domestic employees, except for certain bargaining unit
employees, are eligible to participate in the Cooper Savings Plan ("CO-SAV").
Under the terms of the Plan, employee savings deferrals are partially matched
with contributions by Cooper of Common stock consisting of either an allocation
of shares in Cooper's Employee Stock Ownership Plan ("ESOP") or new shares
issued to the ESOP.
Cooper makes annual contributions to the ESOP to fund the payment of
principal and interest on ESOP debt (See Note 9). All dividends received by the
ESOP are used to pay debt service. As the debt is repaid, unallocated shares are
allocated to participants to satisfy Cooper's matching obligation or to replace
dividends on allocated shares with Cooper Common shares.
For shares purchased by the ESOP prior to 1994, compensation expense is
equal to Cooper's matching obligation, adjusted for the difference between the
fair market value and cost of the shares released. Compensation expense is
reduced by the amount of dividends paid on unallocated ESOP shares available for
future matching. In addition, all shares issued to the ESOP are considered
outstanding for purposes of computing earnings per share. For shares purchased
by the ESOP in 1994, compensation expense is recorded equal to the amount of
Cooper's CO-SAV matching obligation, with the difference between the fair market
value and cost of shares released recorded as an adjustment to capital in excess
of par value. Dividends paid on unallocated shares are recorded as a reduction
of ESOP debt and accrued interest. Unallocated shares are not treated as
outstanding in the earnings per share computation.
Dividends paid on unallocated shares purchased prior to 1994 of $1.6
million and $2.3 million during 1997 and 1996, respectively, were used to reduce
the amount of cash required to fund principal and interest payments on ESOP
debt. Dividends paid on allocated ESOP shares purchased prior to 1994 of $4.7
million and $4.3 million during 1997 and 1996, respectively, were used to pay
additional principal and interest payments in order to release shares equivalent
to the dividend amount to participants in the savings plan. Cooper contributed
an additional $21.6 million and $26.6 million in cash to the ESOP during 1997
and 1996, respectively, to fund principal and interest payments on debt
associated with shares purchased prior to 1994.
During 1994, Cooper sold 1.6 million shares to the ESOP for $82.3
million in cash. The 1994 sales were funded by loans between the ESOP and
Cooper, which for financial statement purposes are treated as eliminated
intercompany loans. The fair value of the remaining unallocated ESOP shares
purchased during 1994 was $34.0 million at December 31, 1997. The number of
allocated, committed to be released, and unallocated ESOP shares held at
December 31, 1997 and 1996 is summarized below.
<TABLE>
<CAPTION>
Shares Purchased Shares Purchased
In 1994 Prior to 1994
--------------------------- ------------------------------
1997 1996 1997 1996
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Allocated................................................... 619,320 668,146 3,638,849 3,532,167
Committed to be released.................................... 8,156 11,271 60,510 130,275
Unallocated................................................. 692,942 740,880 725,412 1,327,446
</TABLE>
Compensation expense for continuing operations from the CO-SAV plan and
the ESOP was $13.1 million, $16.6 million and $15.1 million and interest expense
on ESOP debt was $1.4 million, $2.7 million and $4.2 million in 1997, 1996 and
1995, respectively.
A-36
<PAGE> 21
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 16: INDUSTRY SEGMENTS, DOMESTIC AND INTERNATIONAL OPERATIONS
INDUSTRY SEGMENTS
Cooper's continuing operations consist of two segments: Electrical
Products and Tools & Hardware. Markets for Cooper's products and services are
worldwide, with the United States being the largest market.
The Electrical Products segment manufactures and markets electrical and
electronic distribution and circuit protection products and lighting fixtures
for use in residential, commercial and industrial construction, maintenance and
repair and products for use by utilities and industries for primary power
distribution and control.
The Tools & Hardware segment produces and markets tools and hardware
items for use in residential, commercial and industrial construction,
maintenance and repair and for general industrial and consumer use. This segment
manufactured and marketed window treatments through May 30, 1997.
Intersegment sales and related receivables for each of the years
presented were immaterial.
Financial information by industry segment was as follows:
<TABLE>
<CAPTION>
Revenues Operating Earnings Identifiable Assets
------------------------------- ---------------------------- --------------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------------- ---------------------------- --------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- ------- ------- ------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electrical Products (1).......... $ 2,568.3 $ 2,407.5 $ 2,089.7 $ 445.7 $ 405.3 $ 355.5 $ 2,484.5 $ 1,993.8 $ 2,000.4
Tools & Hardware(1) (2).......... 847.3 973.0 962.4 151.7 111.4 111.2 569.3 792.1 768.5
--------- --------- --------- ------- ------- ------- --------- --------- ---------
$ 3,415.6 $ 3,380.5 $ 3,052.1 597.4 516.7 466.7 3,053.8 2,785.9 2,768.9
========= ========= =========
Nonrecurring gains (3)........... 23.2 150.4 11.7
General corporate and other(1)... (47.0) (54.3) (30.1) 477.4 547.0 627.1
Interest expense................. (90.4) (142.1) (151.0)
------- ------- -------
Consolidated income from
continuing operations
before income taxes.......... $ 483.2 $ 470.7 $ 297.3
======= ======= =======
Discontinued operations.......... 1,973.7 1,963.3 2,041.2
Investment in
unconsolidated affiliates.... 2.4 22.7 24.0
--------- --------- ---------
Consolidated assets.............. $ 5,507.3 $ 5,318.9 $ 5,461.2
========= ========= =========
</TABLE>
(1) The respective 1997 and 1996 operating earnings amount includes nonrecurring
expenses of $15.9 million and $3.0 million for Electrical Products and $22.5
million and $2.0 million for Tools & Hardware and $2.1 million and $10.9
million for general corporate and other (See Note 3).
(2) The Tools & Hardware segment includes revenues and operating earnings for
the Kirsch division through May 30, 1997. Operating earnings include a gain
on the sale of Kirsch of $69.8 million in 1997.
(3) Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
the sale of investments in marketable equity securities of $150.4 million
and $11.7 million in 1996 and 1995, respectively (See Note 7).
<TABLE>
<CAPTION>
Depreciation Goodwill Amortization Capital Expenditures
---------------------------- ---------------------------- ----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
---------------------------- ---------------------------- ----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electrical Products......... $ 61.2 $ 63.4 $ 52.6 $ 27.9 $ 26.9 $ 23.1 $ 79.2 $ 79.1 $ 62.4
Tools & Hardware............ 26.5 35.2 36.1 4.5 4.6 4.8 37.0 32.7 31.6
Corporate................... 1.9 2.6 3.1 - - - 1.1 3.0 8.7
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 89.6 $ 101.2 $ 91.8 $ 32.4 $ 31.5 $ 27.9 $ 117.3 $ 114.8 $ 102.7
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
A-37
<PAGE> 22
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DOMESTIC AND INTERNATIONAL OPERATIONS
Transfers between domestic and international operations, principally
inventory transfers, are designed to charge the receiving organization at
third-party arms-length prices that are generally sufficient to recover
manufacturing costs and provide a reasonable return. Export sales to
unaffiliated customers included in domestic sales were $253.7 million, $211.9
million and $183.3 million in 1997, 1996 and 1995, respectively. Of total export
sales, approximately 49% in 1997, 48% in 1996 and 46% in 1995 were to Asia,
Africa, Australia and the Middle East; 20% in 1997, 22% in 1996 and 23% in 1995
were to Canada and Europe; 31% in 1997, and 30% in 1996 and 31% in 1995 were to
Latin America. Domestic and international financial information was as follows:
<TABLE>
<CAPTION>
Revenues Operating Earnings Identifiable Assets
----------------------------- ---------------------------- -----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ---------------------------- -----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- ------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic(1)................. $2,833.7 $2,763.9 $2,627.9 $ 500.5 $ 408.7 $ 384.7 $2,233.1 $2,175.5 $2,169.9
-------- -------- -------- ------- ------- ------- -------- -------- --------
International: (1)
Europe.................. $ 404.2 $ 460.7 $ 280.0 $ 55.7 $ 73.9 $ 43.0 $ 693.3 $ 523.3 $ 504.0
Canada.................. 137.0 134.2 137.1 10.0 7.3 10.4 54.1 67.9 56.1
Other................... 193.1 163.7 136.1 30.6 27.7 28.2 164.1 154.6 118.0
-------- -------- -------- ------- ------- ------- -------- -------- --------
Subtotal International.. 734.3 758.6 553.2 96.3 108.9 81.6 911.5 745.8 678.1
Eliminations:
Transfers to
International......... (112.4) (102.1) (99.1) -- -- -- (25.1) (33.5) (35.3)
Transfers to Domestic... (40.0) (39.9) (29.9) -- -- -- (58.4) (92.9) (35.8)
Other................... -- -- -- .6 (.9) .4 (7.3) (9.0) (8.0)
-------- -------- -------- ------- ------- ------- -------- -------- --------
$3,415.6 $3,380.5 $3,052.1 597.4 516.7 466.7 3,053.8 2,785.9 2,768.9
======== ======== ========
Nonrecurring gains(2)....... 23.2 150.4 11.7
General corporate
and other(3).............. (47.0) (54.3) (30.1) 477.4 547.0 627.1
Interest expense............ (90.4) (142.1) (151.0)
------- ------- -------
Consolidated income from
continuing operations
before income taxes..... $ 483.2 $ 470.7 $ 297.3
======= ======= =======
Discontinued operations..... 1,973.7 1,963.3 2,041.2
Investment in Unconsolidated
affiliates................ 2.4 22.7 24.0
-------- -------- --------
Consolidated assets......... $5,507.3 $5,318.9 $5,461.2
======== ======== ========
</TABLE>
(1) The 1997 domestic, Europe and other operating earnings amount includes
nonrecurring expenses of $27.0 million, $7.6 million and $3.8 million,
respectively. The 1996 domestic operating earnings includes nonrecurring
expenses of $5.0 million. The 1997 domestic operating earnings also include
a gain on the sale of Kirsch of $69.8 million.
(2) Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
the sale of investments in marketable equity securities of $150.4 million
and $11.7 million in 1996 and 1995, respectively (See Note 7).
(3) Includes nonrecurring expenses of $2.1 million and $10.9 million in 1997 and
1996, respectively.
International revenues by destination, based on the location products
were delivered, were as follows by segment:
<TABLE>
<CAPTION>
International Revenues
----------------------------------------------------------------
1997 1996 1995
----------- ----------- ------------
(in millions)
<S> <C> <C> <C>
Electrical Products.............................. $ 612.7 $ 578.6 $ 355.2
Tools & Hardware (1)............................. 319.6 357.2 354.8
----------- ----------- ------------
$ 932.3 $ 935.8 $ 710.0
=========== =========== ============
</TABLE>
(1) Includes $29.1 million in 1997, $83.3 million in 1996 and $90.0 in 1995 of
Kirsch revenues.
A-38
<PAGE> 23
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17: OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF
FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
As a result of having sales and purchases and other transactions
denominated in currencies other than the functional currencies used by Cooper's
businesses, Cooper is exposed to the effect of foreign exchange rate
fluctuations on its cash flows and earnings. To the extent possible, Cooper
utilizes natural hedges to minimize the effect on cash flows of fluctuating
foreign currencies. When natural hedges are not sufficient, it is Cooper's
policy to enter into forward foreign exchange contracts to hedge all significant
transactions for periods consistent with the terms of the underlying
transactions. Cooper does not engage in speculative transactions. While forward
contracts affect Cooper's results of operations, they do so only in connection
with the underlying transactions. Gains and losses on these contracts offset
losses and gains on the transactions being hedged. The volume of forward
activity engaged in by Cooper from year to year fluctuates in proportion to the
level of worldwide cross-border transactions, and contracts generally have
maturities that do not exceed one year. The table below summarizes, by currency,
the contractual amounts of Cooper's forward exchange contracts at December 31,
1997 and 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---------- ----------
(in millions)
<S> <C> <C>
British Pound Sterling (1)............................................................. $ 175.3 $ 4.5
Canadian Dollar........................................................................ - 20.4
German Deutschemark.................................................................... 4.0 26.4
Italian Lira........................................................................... 5.4 16.9
Spanish Peseta......................................................................... 1.3 10.6
Australian Dollar...................................................................... 7.2 6.9
Japanese Yen........................................................................... 0.8 4.2
Dutch Guilder.......................................................................... 2.5 1.8
Other.................................................................................. 7.8 11.4
---------- ----------
$ 204.3 $ 103.1
========== ==========
</TABLE>
(1) Substantially all of the British Pound Sterling forward contracts were
entered into in December 1997 and matured in January 1998.
In an effort to reduce interest expense on Cooper's fixed-rate
borrowings, Cooper entered into an interest rate swap in 1991, which matured in
February 1996, that converted a $50 million fixed rate borrowing into a
floating-rate borrowing resulting in an effective interest rate of 6.2% during
1995.
In the normal course of business, Cooper has letters of credit,
performance bonds and other guarantees which are not reflected in the
consolidated balance sheets. In the past, no significant claims have been made
against these financial instruments. Management believes the likelihood of
performance under these instruments is minimal and expects no material losses to
occur in connection with these instruments. Cooper's other off-balance-sheet
risks are not material.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are
limited due to the wide variety of customers and no one customer exceeding 3% of
accounts receivable. Credit risk is also limited by the world-wide markets into
which Cooper's products are sold, as well as their dispersion across many
different geographic areas.
A-39
<PAGE> 24
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cooper's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and foreign
currency forward contracts. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values. Cooper had approximately $1.5 billion and $1.9 billion
of debt instruments at December 31, 1997 and 1996, respectively. The book value
of these instruments was approximately equal to fair value at December 31, 1997
and 1996. Based on year-end exchange rates and the various maturity dates of the
foreign currency forward contracts, Cooper estimates that the contract value is
representative of the fair value of these items at December 31, 1997 and 1996.
NOTE 18: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following noncash transactions have been excluded from the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
---------- ----------- ---------
(in millions)
<S> <C> <C> <C>
Assets acquired and liabilities assumed or
incurred from the acquisition of businesses:
Fair value of assets acquired..................................... $ 505.1 $ 66.1 $ 234.8
Cash used to acquire businesses, net of cash acquired............. (366.4) (37.8) (167.0)(1)
---------- ----------- ---------
Liabilities assumed or incurred....................................... $ 138.7(2) $ 28.3 $ 67.8
========== =========== =========
Noncash increase (decrease) in net assets from:
Conversion of 7.05% Convertible Subordinated Debentures
into Cooper Common stock...................................... $ 610.0 $ -- $ --
Exchange of DECS for Wyman-Gordon common stock.................... 33.8 -- --
Retirement of Cooper Common shares exchanged for
Cooper Cameron common shares.................................. -- -- 427.5
Exchange of $1.60 Convertible Exchangeable Preferred
Stock into 7.05% Convertible Subordinated Debentures.......... -- -- 691.2
</TABLE>
(1) Includes approximately $164 million at December 31, 1995 for the acquisition
of CEAG that was paid on January 5, 1996 (See Note 4).
(2) Includes $46.2 million of notes exchanged for Menvier-Swain common stock.
NOTE 19: DISCONTINUED OPERATIONS - PETROLEUM & INDUSTRIAL EQUIPMENT
In September 1994, Cooper announced its decision to establish its
Petroleum & Industrial Equipment segment as an independent publicly traded
company, Cooper Cameron, through an exchange offer with Cooper's common
shareholders. The exchange offer was completed on June 30, 1995, at which time
9.5 million shares of Cooper Common stock were exchanged for 85.5% of Cooper
Cameron common stock. The Petroleum & Industrial Equipment segment split-off has
been accounted for as a discontinued operation.
A-40
<PAGE> 25
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the second quarter of 1995, Cooper recorded an additional charge
of $186.6 million, with no tax benefit, to reflect the actual loss on the
split-off of Cooper Cameron. This additional charge was composed of the
difference between the historical cost of Cooper's investment in Cooper Cameron
remaining after the initial September 1994 estimated charge and the market value
of Cooper Cameron common stock during the first few days the common stock traded
on a national exchange ($162.8 million), additional Cooper Cameron operating
losses during the period October 1, 1994 through June 30, 1995 ($20.3 million)
and additional transaction costs ($3.5 million). The additional operating losses
and transaction costs resulted primarily from the delay in completing the
exchange transaction and the recording by Cooper Cameron of a $17 million pretax
charge in the second quarter of 1995 for the write-down of receivables due from
customers in Iran.
Cooper retained a 14.5% interest in Cooper Cameron, which was accounted
for as a marketable equity security. Cooper sold its entire investment in Cooper
Cameron common stock during 1996 (See Note 7). See Note 1 for information on the
Automotive Products segment discontinued operations.
NOTE 20: NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Basic Diluted
-------------------------------- --------------------------------
Year Ended December 31, Year Ended December 31,
-------------------------------- --------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
($ in millions, shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations................ $ 310.0 $ 285.1 $ 178.6 $ 310.0 $ 285.1 $ 178.6
Income from discontinued operations
(Automotive Products)........................ 84.6 30.3 102.0 84.6 30.3 102.0
Charge for discontinued operations
(Petroleum & Industrial Equipment)........... -- -- (186.6) -- (186.6)
Interest expense on 7.05% Convertible
Subordinated Debentures,
net of income taxes (1)...................... -- -- -- 5.8 29.2 --
-------- -------- -------- -------- -------- --------
Net income applicable to Common stock............ $ 394.6 $ 315.4 $ 94.0 $ 400.4 $ 344.6 $ 94.0
======== ======== ======== ======== ======== ========
Weighted average Common shares outstanding....... 117,459 107,284 111,510 117,459 107,284 111,510
======== ======== ========
Incremental shares from assumed conversions:
Options, performance-based stock awards
and other employee awards................ 1,201 613 442
7.05% Convertible Subordinated
Debentures (1)........................... 4,270 16,731 --
-------- -------- --------
Weighted average Common shares and
Common Share equivalents..................... 122,930 124,628 111,952
======== ======== ========
</TABLE>
(1) Based on income from continuing operations, the 7.05% Convertible
Subordinated Debentures are antidilutive in 1995.
A-41
<PAGE> 26
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 21: UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
1997 (by quarter)
--------------------------------------------------------
1 2 3 4
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Revenues..................................................... $ 848.4 $ 898.2 $ 830.3 $ 838.7
Cost of sales................................................ 577.7 601.6 554.4 547.9
Selling and administrative expenses.......................... 153.8 151.1 138.0 137.6
Goodwill amortization........................................ 7.9 7.9 8.1 8.5
Nonrecurring gains........................................... - (69.8) (23.2) -
Nonrecurring charges......................................... - 36.7 3.8 -
Interest expense............................................. 29.6 21.3 19.4 20.1
--------- --------- --------- ---------
Income from continuing operations before income taxes........ 79.4 149.4 129.8 124.6
Income taxes(1).............................................. 29.4 55.6 48.2 40.0
--------- --------- --------- ---------
Income from continuing operations............................ 50.0 93.8 81.6 84.6
Income from discontinued operations, net of taxes............ 27.7 11.7 20.9 24.3
--------- --------- --------- ---------
Net income................................................... $ 77.7 $ 105.5 $ 102.5 $ 108.9
========= ========= ========= =========
Income per Common share......................................
Basic: (2)
Income from continuing operations........................ $ 0.46 $ 0.79 $ 0.68 $ 0.71
Income from discontinued operations...................... 0.25 0.10 0.17 0.20
--------- --------- --------- ---------
Net income............................................... $ 0.71 $ 0.89 $ 0.85 $ 0.91
========= ========= ========= =========
Diluted: (3)
Income from continuing operations........................ $ 0.45 $ 0.76 $ 0.67 $ 0.70
Income from discontinued operations...................... 0.22 0.10 0.17 0.20
--------- --------- --------- ---------
Net income............................................... $ 0.67 $ 0.86 $ 0.84 $ 0.90
========= ========= ========= =========
</TABLE>
(1) Includes $6.1 million related to the favorable settlements of state income
tax issues in the fourth quarter.
(2) Adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share increased the second and third quarter 1997 Basic Income per
Common Share $.01.
(3) Includes gains, net of nonrecurring expenses, on the sale of Kirsch of $.17
in the second quarter, the exchange of the DECS of $.10 in the third quarter
and $.05 related to the favorable settlements of state tax issues in the
fourth quarter.
A-42
<PAGE> 27
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1996 (by quarter)
--------------------------------------------------------
1 2 3 4
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Revenues..................................................... $ 810.8 $ 856.4 $ 850.4 $ 862.9
Cost of sales................................................ 560.0 576.5 568.9 570.1
Selling and administrative expenses.......................... 147.2 146.1 148.3 153.6
Goodwill amortization........................................ 7.8 7.8 7.9 8.0
Nonrecurring gains........................................... (10.9) (9.5) (107.2) (22.8)
Nonrecurring charges......................................... 10.9 2.0 -- 3.0
Interest expense............................................. 37.6 36.8 35.4 32.3
--------- --------- --------- ---------
Income from continuing operations before income taxes........ 58.2 96.7 197.1 118.7
Income taxes................................................. 23.3 38.5 76.7 47.1
--------- --------- --------- ---------
Income from continuing operations............................ 34.9 58.2 120.4 71.6
Income (loss) from discontinued operations, net of taxes..... 27.2 30.1 (43.1) 16.1
--------- --------- --------- ---------
Net income................................................... $ 62.1 $ 88.3 $ 77.3 $ 87.7
========= ========= ========= =========
Income per Common share......................................
Basic: (1)
Income from continuing operations........................ $ 0.33 $ 0.54 $ 1.12 $ 0.67
Income (loss) from discontinued operations............... 0.25 0.28 (0.40) 0.15
--------- --------- --------- ---------
Net income............................................... $ 0.58 $ 0.82 $ 0.72 $ 0.82
========= ========= ========= =========
Diluted: (2)
Income from continuing operations........................ $ 0.34 $ 0.53 $ 1.03 $ 0.63
Income (loss) from discontinued operations............... 0.22 0.24 (0.35) 0.13
--------- --------- --------- ---------
Net income............................................... $ 0.56 $ 0.77 $ 0.68 $ 0.76
========= ========= ========= =========
</TABLE>
(1) Adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share increased the fourth quarter of 1996 Basic Income per Common Share
$.01.
(2) Includes gains from the sale of marketable equity securities, net of
nonrecurring expense, of $.04, $.53 and $.10 in the second, third and fourth
quarters, respectively.
A-43
