<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number 1-1175
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Cooper Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-4156620
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Travis, Suite 5800 Houston, Texas 77002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 209-8400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of issuer's common stock as of April 30, 1999 was
94,400,880.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
(in millions, where applicable)
<S> <C> <C>
Revenues .................................................... $ 924.7 $ 894.1
Cost of sales ............................................... 622.0 601.9
Selling and administrative expenses ......................... 156.3 154.8
Goodwill amortization ....................................... 11.3 10.1
Nonrecurring charges ........................................ 3.7 --
Interest expense ............................................ 13.2 25.3
------- -------
Income from continuing operations before income taxes ... 118.2 102.0
Income taxes ................................................ 42.6 36.7
------- -------
Income from continuing operations ........................... 75.6 65.3
Income from discontinued operations, net of income taxes .... -- 26.7
------- -------
Net income .............................................. $ 75.6 $ 92.0
======= =======
Income per Common Share:
Basic:
Income from continuing operations ....................... $ .80 $ .55
Income from discontinued operations ..................... -- .22
------- -------
Net income .............................................. $ .80 $ .77
======= =======
Diluted:
Income from continuing operations ....................... $ .80 $ .54
Income from discontinued operations ..................... -- .22
------- -------
Net income .............................................. $ .80 $ .76
======= =======
Cash dividends per Common Share ............................. $ .33 $ .33
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
ASSETS (in millions)
<S> <C> <C>
Cash and cash equivalents ...................................... $ 14.7 $ 20.4
Receivables .................................................... 668.9 626.4
Inventories .................................................... 552.0 533.3
Deferred income taxes and other current assets ................. 205.4 237.2
-------- --------
Total current assets .................................. 1,441.0 1,417.3
-------- --------
Property, plant and equipment, less accumulated depreciation ... 700.8 710.5
Intangibles, less accumulated amortization ..................... 1,453.9 1,478.0
Deferred income taxes and other noncurrent assets .............. 179.8 173.3
-------- --------
Total assets .......................................... $3,775.5 $3,779.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt ................................................ $ 168.1 $ 118.1
Accounts payable ............................................... 346.0 378.7
Accrued liabilities ............................................ 471.0 467.6
Accrued income taxes ........................................... 8.2 --
Current maturities of long-term debt ........................... 4.8 6.3
-------- --------
Total current liabilities ............................. 998.1 970.7
-------- --------
Long-term debt ................................................. 723.8 774.5
Postretirement benefits other than pensions .................... 234.4 237.3
Other long-term liabilities .................................... 227.3 233.0
-------- --------
Total liabilities ..................................... 2,183.6 2,215.5
-------- --------
Common stock, $5.00 par value .................................. 615.0 615.0
Capital in excess of par value ................................. 671.9 674.0
Retained earnings .............................................. 1,834.7 1,790.0
Common stock held in treasury, at cost ......................... (1,439.4) (1,444.8)
Unearned employee stock ownership plan compensation ............ (34.4) (40.6)
Accumulated other non-owner changes in equity .................. (55.9) (30.0)
-------- --------
Total shareholders' equity ............................ 1,591.9 1,563.6
-------- --------
Total liabilities and shareholders' equity ............ $3,775.5 $3,779.1
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 75.6 $ 92.0
Less income from discontinued operations ................... -- (26.7)
------- -------
Income from continuing operations .......................... 75.6 65.3
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization .............................. 35.9 31.7
Deferred income taxes ...................................... 10.5 3.1
Changes in assets and liabilities: (1)
Receivables ............................................ (50.5) (25.6)
Inventories ............................................ (28.5) (17.2)
Accounts payable and accrued liabilities ............... (15.1) (52.7)
Accrued income taxes ................................... 8.2 --
Other assets and liabilities, net ...................... (4.3) (36.5)
------- -------
Net cash provided by (used in) operating activities ... 31.8 (31.9)
Cash flows from investing activities:
Cash paid for acquired businesses .......................... -- (231.3)
Capital expenditures ....................................... (35.7) (30.0)
Proceeds from disposition of business ...................... 29.1 --
Proceeds from sales of property, plant and equipment ....... 2.8 0.7
------- -------
Net cash used in investing activities ................. (3.8) (260.6)
Cash flows from financing activities:
Proceeds from issuances of debt ............................ -- 287.9
Repayments of debt ......................................... (3.9) (22.7)
Dividends .................................................. (31.1) (39.8)
Acquisition of treasury shares ............................. -- (2.4)
Activity under employee stock plans ........................ 2.3 24.1
------- -------
Net cash provided by (used in) financing activities ... (32.7) 247.1
Cash provided by discontinued operations ....................... -- 31.5
Effect of exchange rate changes on cash and cash equivalents ... (1.0) (1.0)
------- -------
Decrease in cash and cash equivalents .......................... (5.7) (14.9)
Cash and cash equivalents, beginning of period ................. 20.4 30.3
------- -------
Cash and cash equivalents, end of period ....................... $ 14.7 $ 15.4
======= =======
</TABLE>
(1) Net of the effects of acquisitions, divestitures and translation.
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The financial information presented as of any date
other than December 31 has been prepared from the books and records without
audit. Financial information as of December 31 has been derived from Cooper's
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated, have
been included. For further information regarding Cooper's accounting policies,
refer to the Consolidated Financial Statements and related notes for the year
ended December 31, 1998 included as Appendix A to Cooper's Proxy Statement dated
March 10, 1999.
Derivative Financial Instruments and Hedging Activities - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 requires that all derivatives be recognized as
assets and liabilities and measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and early adoption is permitted. Cooper is currently
evaluating the effects of the new standard. Cooper does not anticipate that the
new standard will have an impact on net income. However, the new standard
requirement to mark to market certain of Cooper's financial instruments utilized
to hedge currency and commodity price risks will result in fluctuations in the
fair value being included in shareholders' equity, net of tax. Due to Cooper's
policies regarding financial instruments, it is not likely that the adoption of
the new standard will have a significant effect on Cooper's Consolidated Balance
Sheets.
NOTE 2. NONRECURRING CHARGES
During the fourth quarter of 1998, Cooper announced a voluntary and
involuntary severance program and committed to consolidate several facilities.
While both the voluntary and involuntary severance programs were announced in
1998, the amount that could be accrued in 1998 was limited to severance relating
to personnel actually severed in the fourth quarter and the severance provided
by Cooper's written formal policies. During the first quarter of 1999, Cooper
completed the voluntary program and accrued an additional $5.8 million primarily
representing the voluntary severance program premium over the severance provided
under Cooper's established policies. Cooper also accrued $1.5 million related to
severance and other costs for facility closures announced during the quarter.
The additional accruals during the first quarter of 1999 totalled $7.3 million.
In addition, during the first quarter of 1999, Cooper reduced legal accruals by
$2.8 million related to the favorable settlement of certain litigation
concerning lead in mini-blinds and reassessment of the required reserve. Cooper
also reached agreement and received $.8 million under an insurance policy
related to the unsuccessful offer to acquire TLG, plc in 1998. Since the
original charge related to the litigation was included as a nonrecurring item in
the Tools & Hardware segment and the costs related to TLG, plc were reflected as
a nonrecurring corporate item, the reversal of the accrual and the reimbursement
of the expenses were reflected as nonrecurring items. The net nonrecurring items
for the first quarter of 1999 resulted in a $3.7 million charge before income
taxes and resulted in an after tax charge of $2.4 million ($.02 per diluted
common share). See Management's Discussion and Analysis of Financial Condition
and Results of Operations.
5
<PAGE> 6
NOTE 3. ACQUISITIONS
During the first quarter of 1998, Cooper completed three acquisitions in
its Tools & Hardware segment and one small acquisition in its Electrical
Products segment. In March 1998, Cooper acquired Intool for a total cost of
$217.5 million. Intool manufactures and sells pneumatic and electric assembly
tools, precision-drilling equipment, fastening systems and portable and fixed
mounted tools used in industrial, automotive, aerospace and energy markets. The
other three acquisitions consisted of two small businesses in France and Germany
that extended the global product lines of Cooper's Power Tools division and a
small Electrical Products switch business in Mexico. The acquisitions have been
accounted for as purchase transactions and the results of the acquisitions are
included in Cooper's consolidated income statements from the date of
acquisition.
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- ------------
(in millions)
<S> <C> <C>
Raw materials ...................................... $ 205.9 $ 213.4
Work-in-process .................................... 127.1 114.7
Finished goods ..................................... 284.6 275.6
Perishable tooling and supplies .................... 21.2 21.0
------- -------
638.8 624.7
Excess of current standard costs over LIFO costs ... (86.8) (91.4)
------- -------
Net inventories ........................... $ 552.0 $ 533.3
======= =======
</TABLE>
NOTE 5. LONG-TERM DEBT
At March 31, 1999, commercial paper and bank loans totaling $50 million
were reclassified to long-term debt, reflecting Cooper's intention to refinance
this amount during the 12-month period following the balance sheet date through
either continued short-term borrowing or utilization of available revolving bank
credit facilities.
6
<PAGE> 7
NOTE 6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Revenues Operating Earnings
------------------- --------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Electrical Products ................................. $ 728.5 $ 706.0 $ 121.4 $ 116.6
Tools & Hardware .................................... 196.2 188.1 23.3 25.2
------- ------- ------- -------
Total management reporting ................. $ 924.7 $ 894.1 144.7 141.8
======= =======
Segment nonrecurring and unusual items:
Electrical Products ........................ 3.0 --
Tools & Hardware ........................... 1.5 --
------- -------
4.5 --
Net segment operating earnings:
Electrical Products ........................ 118.4 116.6
Tools & Hardware ........................... 21.8 25.2
------- -------
140.2 141.8
General corporate expenses .......................... 9.6 14.5
General corporate nonrecurring items ................ (0.8) --
Interest expense .................................... 13.2 25.3
------- -------
Consolidated income from continuing
operations before income taxes ............. $ 118.2 $ 102.0
======= =======
</TABLE>
NOTE 7. NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Basic Diluted
------------------- --------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- --------
(in millions)
<S> <C> <C> <C> <C>
Income from continuing operations ................... $ 75.6 $ 65.3 $ 75.6 $ 65.3
Income from discontinued operations ................. -- 26.7 -- 26.7
------- ------- ------- -------
Net income applicable to Common stock ............... $ 75.6 $ 92.0 $ 75.6 $ 92.0
======= ======= ======= =======
Weighted average Common shares outstanding .......... 94.0 119.7 94.0 119.7
======= =======
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards ........ 0.7 1.5
------- -------
Weighted average Common shares
and Common share equivalents ............... 94.7 121.2
======= =======
</TABLE>
7
<PAGE> 8
NOTE 8. DISCONTINUED OPERATION
On October 9, 1998, Cooper completed the sale of the Automotive Products
segment for cash proceeds of $1.9 billion. During the first quarter of 1999,
Cooper received an additional $29.1 million as reimbursement of Cooper's funding
of international automotive operations prior to the separation from Cooper.
Cooper's results of operations and the related footnote information for the
three months ended March 31, 1998 exclude the results of the Automotive Products
segment from continuing operations' revenues and other components of income and
expense. The discontinued segment's results are presented separately in a single
caption, "Income from discontinued operations, net of income taxes". Revenues
from the discontinued Automotive Products segment were $449 million for the
three months ended March 31, 1998. Income from the discontinued Automotive
Products segment was $26.7 million (net of $17.2 million of income taxes) for
the three months ended March 31, 1998.
The Consolidated Statements of Cash Flows for the three months ended March
31, 1998 has been restated to reflect the Automotive Products segment as a
discontinued operation. The cash flows 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.
NOTE 9. NET INCOME AND OTHER NON-OWNER CHANGES IN EQUITY
During the three months ended March 31, 1999 and 1998, net income and other
non-owner changes in equity were $49.7 million and $90.0 million, respectively.
The components of net income and other non-owner changes in equity, net of
related taxes, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Income from continuing operations .................. $ 75.6 $ 65.3
Income from discontinued operations ................ -- 26.7
------- -------
Net income ......................................... 75.6 92.0
Foreign currency translation losses ................ (25.9) (6.1)
Unrealized gains on investments .................... -- 4.1
------- -------
Net income and other non-owner changes in equity ... $ 49.7 $ 90.0
======= =======
</TABLE>
NOTE 10. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following noncash transactions have been excluded from the Consolidated
Statements of Cash Flows during the three months ended March 31, 1998 (in
millions):
<TABLE>
<CAPTION>
<S> <C>
Assets acquired and liabilities assumed or
incurred from the acquisition of businesses:
Fair value of assets acquired .................. $255.5
Cash used to acquire businesses ................ (231.3)
------
Liabilities assumed or incurred ........... $ 24.2
======
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
DISCONTINUED OPERATION
The Consolidated Income Statement and the Consolidated Statement of Cash
Flows for the three months ended March 31, 1998 and the related footnotes have
been restated to reflect Cooper's Automotive Products segment as a discontinued
operation. The Automotive Products segment was sold on October 9, 1998. The
discontinued segment's results are presented separately in a single caption,
"Income from discontinued operations, net of income taxes." The cash flows from
discontinued operations are summarized into a single line "Cash provided by
discontinued operations" in the Consolidated Statements of Cash Flows. No debt
was allocated to the discontinued operations and the income from discontinued
operations does not include an allocation of Cooper's interest expense. See Note
8 of the Notes to Consolidated Financial Statements regarding the financial
results of the discontinued operation during the first quarter of 1998.
IMPACT OF AUTOMOTIVE PRODUCTS SEGMENT DIVESTITURE
The Automotive Products segment represented approximately 25% of Cooper's
total annual segment operating earnings (excluding nonrecurring items) before
the restatement to reclassify the segment as a discontinued operation. The
proceeds from the sale of $1.9 billion were utilized to purchase 21.2 million
shares of Cooper Common stock at a cost of $1.0 billion and to repay $900
million of debt. The mix of debt repayment and Common stock purchases was
designed to approximately replace the loss of the Automotive Products segment
earnings per share through lower interest expense and lower average shares and
resulted in a debt to total capitalization ratio at the lower end of Cooper's
targeted range.
As a result of the use of the proceeds to repay debt and purchase shares of
Cooper Common stock, income from continuing operations and net income for the
three months ended March 31, 1999 and 1998 are not comparable. Cooper estimates
that the Automotive Products segment earnings per share of $.22 for the period
ended March 31, 1998 was approximately replaced by the effects of the
utilization of the proceeds and lower corporate expenses resulting from the
divestiture in the three month period ended March 31, 1999.
NONRECURRING INCOME AND EXPENSES
During the fourth quarter of 1998, Cooper announced a voluntary and
involuntary severance program and committed to consolidate several facilities.
While both the voluntary and involuntary severance programs were announced in
1998, the amount that could be accrued in 1998 was limited to severance relating
to personnel actually severed in the fourth quarter and the severance provided
by Cooper's written formal policies. During the first quarter of 1999, Cooper
completed the voluntary program and accrued an additional $5.8 million primarily
representing the voluntary severance program premium over the severance provided
under Cooper's established policies. Cooper also accrued $1.5 million related to
severance and other costs for facility closures announced during the quarter.
The additional accruals during the first quarter of 1999 totalled $7.3 million.
In addition, during the first quarter of 1999, Cooper reduced legal accruals by
$2.8 million related to the favorable settlement of certain litigation
concerning lead in mini-blinds and reassessment of the required reserve. Cooper
also reached agreement and received $.8 million under an insurance policy
related to the unsuccessful offer to acquire TLG, plc in 1998. Since the
original charge related to the litigation was included as a nonrecurring item in
the Tools & Hardware segment and the costs related to TLG, plc were reflected as
a nonrecurring corporate item, the reversal of the accrual and the reimbursement
of the expenses were reflected as nonrecurring items. The net nonrecurring items
for the first quarter of 1999 resulted in a $3.7 million charge before income
taxes and resulted in an after tax charge of $2.4 million ($.02 per diluted
common share).
9
<PAGE> 10
The following table reflects the activity during the first quarter of 1999
related to the fourth quarter of 1998 employee reduction and facility
consolidation plan.
<TABLE>
<CAPTION>
No. of Accrued Facility
Employees Severance Consolidation
--------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998 ................................ 1,635 $25.4 $ 7.8
Voluntary Severance Program premium over normal severance ... -- 5.8 --
Facility closings announced ................................. 249 1.2 .3
Employees terminated ........................................ (283) -- --
Cash expenditures ........................................... -- (2.8) (1.6)
------ ----- -----
Balance March 31, 1999 ...................................... 1,601 $29.6 $ 6.5
====== ===== =====
</TABLE>
Cooper anticipates incurring in excess of $18 million during the remainder
of 1999 related to severance costs, facility exit costs and disruptions to
operations that could not be accrued as of March 31, 1999. A majority of the $18
million relates to operating inefficiencies, training, personnel and inventory
relocation costs which are required to be expensed as incurred. These costs are
spread throughout the remainder of the year and are anticipated to be less than
the savings from the anticipated cost reductions. Cooper anticipates that most
of the accrued severance and facility consolidation accruals will be ratably
expended over the remainder of 1999 as severed employees are paid, additional
employees are severed and facility consolidations completed.
RESULTS OF CONTINUING OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Income from continuing operations for the first quarter of 1999 was $75.6
million on revenues of $924.7 million compared with 1998 first quarter income
from continuing operations of $65.3 million on revenues of $894.1 million. Net
income declined to $75.6 million in the first quarter of 1999 from $92.0 million
in 1998 due to the absence of the discontinued Automotive Products segment
earnings. First quarter diluted earnings per share increased 5% to $.80 from
$.76 in 1998. First quarter 1999 net income included a nonrecurring charge of
$2.4 million on an after-tax basis primarily resulting from the completion of
the early retirement plan and plant closings included in Cooper's cost control
and asset rationalization program announced in December 1998. The charge reduced
diluted earnings per share for the quarter by $.02.
REVENUES:
Revenues for the first quarter of 1999 increased 3% compared to the first
quarter of 1998. After excluding the effects of acquisitions, revenues were flat
when compared to the first quarter of last year.
First quarter 1999 Electrical Products segment revenues increased 3% from
the same period last year. Excluding recent acquisitions, segment revenues were
up 2% compared to last year. The weakness in the demand for electrical
construction materials utilized in projects, which was experienced during the
second half of 1998, continued through the first quarter of 1999. All other
Electrical Products' operations improved revenues during the first quarter of
1999 compared to a strong first quarter of 1998. Sales of lighting fixtures
remained strong and the weak demand for fuses experienced at the end of 1998 did
not continue into the first quarter of 1999. The disruptions in shipments of
electrical distribution equipment as a new enterprise-wide business system was
placed in service in the fourth quarter of 1998 diminished during the first
quarter of 1999, with revenues slightly exceeding the prior year. Demand for
several electrical distribution product lines during the first quarter of 1999
rebounded somewhat from the weakness experienced in the second half of 1998.
10
<PAGE> 11
First quarter 1999 Tools & Hardware segment revenues increased 4% compared
to the first quarter of 1998. Acquisitions provided the improvement over last
year. Without the impact of acquisitions, the segment's revenues were 10% behind
the same period of 1998. The strength of the U.S. dollar against functional
currencies in which international operations conduct business reduced revenues
measured in U.S. dollars by approximately 1% of revenues. The weak demand
experienced in the second half of 1998 from domestic aerospace customers and
industrial markets continued into the first quarter of 1999. Also contributing
to the lower revenues was unfavorable timing of international shipments of
assembly equipment.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, for the first quarter of 1999
remained unchanged from the comparable 1998 quarter. Cost reductions in lighting
products and at Menvier operations were offset by flat to slightly declining
margins for other product lines. Selling and administrative expenses, as a
percentage of sales, were lower than the prior year period by four tenths of a
point. This decrease in selling and administrative expenses as a percentage of
revenues for 1999 was due primarily to reduced corporate expenses following the
fourth quarter 1998 divestiture of the Automotive Products business.
Goodwill amortization increased due primarily to the acquisition of Intool
in March 1998. Nonrecurring expense in the first quarter of 1999 related
primarily to severance on completion of the voluntary severance program
announced in the fourth quarter of 1998 and severance obligations on plant
closings announced during the quarter. Interest expense for the first quarter of
1999 decreased $12.1 million from the same period of last year primarily as a
result of utilizing $900 million of the Automotive Products sale proceeds to
reduce debt.
Segment Operating Earnings
The Electrical Products segment's first quarter 1999 operating earnings,
excluding nonrecurring items, increased 4% to $121.4 million from $116.6 million
for the same quarter of last year. Acquisitions had an insignificant impact on
segment operating earnings. The increase in lighting product sales and reduced
costs at the Menvier operations were partially offset by the earnings decline
from lower sales of electrical construction materials and cost inefficiencies
early in the first quarter of 1999 at the electrical distribution equipment
operations.
Excluding 1999 nonrecurring items, the Tools & Hardware segment's earnings
for the first quarter of 1999 were $23.3 million or 8% below the same period
last year and without acquisitions, earnings were 22% lower than 1998. Continued
weak demand from domestic aerospace markets and soft electronic and industrial
tool markets had a negative impact on product mix. Also affecting margins were
manufacturing inefficiencies as operations adjusted to lower levels of
production.
INCOME TAXES:
The continuing effective tax rate was 36.0% for each of the quarters ended
March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Cooper's operating working capital (defined as receivables and inventories
less accounts payable) increased $94 million during the first quarter of 1999
compared to an increase of $137 million in the first quarter of 1998. Operating
working capital turnover for the quarter of 4.5 turns declined from the 1998
first quarter level of 4.8 turns. Operating working capital increased in the
first quarter of 1999 primarily due to an increase in accounts receivable and
inventory. Receivables increased primarily due to higher revenues and
information systems conversions at the electrical distribution equipment
operations. Inventories increased due to the inefficiencies at the electrical
distribution equipment operations and the building of safety stocks in
connection with facility closures.
11
<PAGE> 12
Cash flows from operating activities in the first quarter of 1999 totaled
$32 million as cash generated from earnings was sufficient to offset increases
in operating working capital. These funds, along with the reimbursement of $29
million related to the funding of international automotive operations prior to
the separation from Cooper, were used to fund capital expenditures of $36
million and dividends of $31 million. During the first quarter of 1998, cash
used in operating activities totaled $32 million. Proceeds from debt issuance of
$265 million and cash provided by discontinued operations of $32 million were
used to fund this operating shortfall, acquisitions of $231 million, capital
expenditures of $30 million and dividends of $40 million. Cooper anticipates
continued generation of adequate cash flows to fund its operations over the
foreseeable future.
In connection with acquisitions accounted for as purchases, Cooper records,
to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired businesses
into existing Cooper operations. Cash flows from operating activities are
reduced by the amounts expended against the various accruals established in
connection with each acquisition. Spending against these accruals for the three
months ended March 31, 1999 and March 31, 1998 was $.5 million and $.7 million,
respectively.
In the fourth quarter of 1998, Cooper reshaped its capital structure to
offset the discontinued Automotive Products segment's contribution to earnings
per share and to maintain a strong balance sheet that provides capacity for
future growth. Cooper has targeted a 35% to 45% debt-to-capitalization ratio,
with excess cash being utilized to fund acquisitions or to purchase shares of
Cooper Common stock. At March 31, 1999, Cooper's debt-to-total capitalization
ratio was 36.0% compared to 39.0% at March 31, 1998 and 36.5% at December 31,
1998.
BACKLOG:
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
<TABLE>
<CAPTION>
March 31
-------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Electrical Products .... $ 334.2 $ 297.8
Tools & Hardware ....... 79.5 88.2
------- -------
$ 413.7 $ 386.0
======= =======
</TABLE>
YEAR 2000:
As of March 31, 1999, Cooper estimates that it is over 93% complete with
its efforts to remediate current systems or implement new systems that are year
2000 compliant. By the end of the second quarter of 1999, Cooper estimates that
it will be substantially complete with the majority of the remaining projects.
Cooper's current review of the risk to its operations because a key third party
may not be year 2000 compliant, has not resulted in the identification of risks
that require significant contingency plans. The review will continue throughout
1999 and if a significant risk is identified, Cooper will develop contingency
plans to address the risk.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of Ratios of Earnings to Fixed Charges for the
Calendar Years 1998 through 1994 and the Three Months Ended
March 31, 1999 and 1998.
27. Financial Data Schedule
(b) Reports on Form 8-K
Cooper filed a report on Form 8-K dated January 28, 1999, which
included a copy of a press release containing Cooper's financial
results for the quarter and year ended December 31, 1998.
Cooper filed a report on Form 8-K dated February 16, 1999, which
included the business outlook for 1999 and restated financial
information for the first and second quarters of 1998 reflecting the
Automotive Products segment as a discontinued operation.
13
<PAGE> 14
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: May 12, 1999 /s/ D. Bradley McWilliams
------------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
Date: May 12, 1999 /s/ Terry A. Klebe
------------------------------------
Terry A. Klebe
Vice President and Controller
and Chief Accounting Officer
14
<PAGE> 15
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
12. Computation of Ratios of Earnings to Fixed Charges for the Calendar
Years 1998 through 1994 and the Three Months Ended March 31, 1999 and
1998.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12
COOPER INDUSTRIES, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Expense $ 13,200 $ 25,300 $ 101,900 $ 90,400 $ 142,100 $ 151,000 $ 73,300
Estimated Interest Portion of
Rent Expense 3,755 2,848 12,352 10,864 10,035 10,064 10,321
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges $ 16,955 $ 28,148 $ 114,252 $ 101,264 $ 152,135 $ 161,064 $ 83,621
========= ========= ========= ========= ========= ========= =========
Income From Continuing
Operations Before Income Taxes $ 118,200 $ 102,000 $ 523,600 $ 483,200 $ 470,700 $ 297,300 $ 314,600
Add: Fixed Charges 16,955 28,148 114,252 101,264 152,135 161,064 83,621
Dividends From Less Than
50% Owned Companies -- -- -- -- 287 968 549
Less: Equity in (Earnings)/Losses
of Less Than 50% Owned
Companies 245 324 595 (320) (1,609) (996) (1,776)
--------- --------- --------- --------- --------- --------- ---------
Earnings Before Fixed Charges $ 135,400 $ 130,472 $ 638,447 $ 584,144 $ 621,513 $ 458,336 $ 396,994
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 8.0x 4.6x 5.6x 5.8x 4.1x 2.8x 4.7x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,700
<SECURITIES> 0
<RECEIVABLES> 668,900
<ALLOWANCES> 0
<INVENTORY> 552,000
<CURRENT-ASSETS> 1,441,000
<PP&E> 1,626,600
<DEPRECIATION> 925,800
<TOTAL-ASSETS> 3,775,500
<CURRENT-LIABILITIES> 998,100
<BONDS> 723,800
0
0
<COMMON> 615,000
<OTHER-SE> 976,900
<TOTAL-LIABILITY-AND-EQUITY> 3,775,500
<SALES> 924,700
<TOTAL-REVENUES> 924,700
<CGS> 622,000
<TOTAL-COSTS> 622,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,200
<INCOME-PRETAX> 118,200
<INCOME-TAX> 42,600
<INCOME-CONTINUING> 75,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,600
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
</TABLE>
