<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 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
----------------------------------------------------------
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 July 31, 1999 was
94,475,934.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Revenues ................................................ $ 957.5 $ 951.2 $ 1,882.2 $ 1,845.3
Cost of sales ........................................... 639.8 639.8 1,261.8 1,241.7
Selling and administrative expenses ..................... 156.6 156.7 312.9 311.5
Goodwill amortization ................................... 11.5 11.1 22.8 21.2
Nonrecurring charges .................................... -- -- 3.7 --
Interest expense, net ................................... 12.2 27.4 25.4 52.7
--------- --------- --------- ---------
Income from continuing operations
before income taxes ............................... 137.4 116.2 255.6 218.2
Income taxes ............................................ 49.4 41.8 92.0 78.5
--------- --------- --------- ---------
Income from continuing operations ....................... 88.0 74.4 163.6 139.7
Income from discontinued operations,
net of income taxes ................................. -- 31.6 -- 58.3
--------- --------- --------- ---------
Net Income .......................................... $ 88.0 $ 106.0 $ 163.6 $ 198.0
========= ========= ========= =========
Income Per Common Share:
Basic:
Income from continuing operations ................... $ .93 $ .62 $ 1.74 $ 1.17
Income from discontinued operations ................. -- .27 -- .49
--------- --------- --------- ---------
Net Income .......................................... $ .93 $ .89 $ 1.74 $ 1.66
========= ========= ========= =========
Diluted:
Income from continuing operations ................... $ .92 $ .62 $ 1.72 $ 1.16
Income from discontinued operations ................. -- .26 -- .48
--------- --------- --------- ---------
Net Income .......................................... $ .92 $ .88 $ 1.72 $ 1.64
========= ========= ========= =========
Cash Dividends Per Common Share ......................... $ .33 $ .33 $ .66 $ .66
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 3
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ----------
ASSETS (in millions)
<S> <C> <C>
Cash and cash equivalents ....................................... $ 14.7 $ 20.4
Receivables ..................................................... 692.9 626.4
Inventories ..................................................... 534.6 533.3
Deferred income taxes and other current assets .................. 264.9 237.2
-------- --------
Total current assets ................................... 1,507.1 1,417.3
-------- --------
Property, plant and equipment, less accumulated depreciation .... 709.2 710.5
Intangibles, less accumulated amortization ...................... 1,462.7 1,478.0
Deferred income taxes and other noncurrent assets ............... 177.5 173.3
-------- --------
Total assets ........................................... $3,856.5 $3,779.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt ................................................. $ 184.4 $ 118.1
Accounts payable ................................................ 350.6 378.7
Accrued liabilities ............................................. 475.7 467.6
Accrued income taxes ............................................ 31.6 --
Current maturities of long-term debt ............................ 3.8 6.3
-------- --------
Total current liabilities .............................. 1,046.1 970.7
-------- --------
Long-term debt .................................................. 713.4 774.5
Postretirement benefits other than pensions ..................... 230.8 237.3
Other long-term liabilities ..................................... 214.1 233.0
-------- --------
Total liabilities ...................................... 2,204.4 2,215.5
-------- --------
Common stock, $5.00 par value ................................... 615.0 615.0
Capital in excess of par value .................................. 670.9 674.0
Retained earnings ............................................... 1,891.6 1,790.0
Common stock held in treasury, at cost .......................... (1,433.9) (1,444.8)
Unearned employee stock ownership plan compensation ............. (28.8) (40.6)
Accumulated other non-owner changes in equity ................... (62.7) (30.0)
-------- --------
Total shareholders' equity ............................. 1,652.1 1,563.6
-------- --------
Total liabilities and shareholders' equity ............. $3,856.5 $3,779.1
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 4
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 163.6 $ 198.0
Less income from discontinued operations ................................. -- (58.3)
------- -------
Income from continuing operations ........................................ 163.6 139.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization ............................................ 71.8 66.2
Deferred income taxes .................................................... 1.4 6.2
Changes in assets and liabilities: (1)
Receivables .......................................................... (67.1) (93.5)
Inventories .......................................................... (33.4) (9.1)
Accounts payable and accrued liabilities ............................. (22.6) (34.2)
Accrued income taxes ................................................. 31.5 (1.6)
Other assets and liabilities, net .................................... (10.2) (1.2)
------- -------
Net cash provided by operating activities ...................... 135.0 72.5
Cash flows from investing activities:
Cash paid for acquired businesses ........................................ (44.8) (251.5)
Capital expenditures ..................................................... (76.0) (69.8)
Proceeds from disposition of business .................................... 29.1 --
Proceeds from sales of property, plant and equipment ..................... 6.5 2.3
------- -------
Net cash used in investing activities .......................... (85.2) (319.0)
Cash flows from financing activities:
Proceeds from issuances of debt .......................................... 6.3 582.2
Repayments of debt ....................................................... (4.1) (113.6)
Dividends ................................................................ (62.3) (78.7)
Acquisition of treasury shares ........................................... -- (214.2)
Activity under employee stock plans ...................................... 6.6 37.6
------- -------
Net cash provided by (used in) financing activities ............ (53.5) 213.3
Cash provided by discontinued operations ..................................... -- 21.5
Effect of exchange rate changes on cash and cash equivalents ................. (2.0) (2.0)
------- -------
Decrease in cash and cash equivalents ........................................ (5.7) (13.7)
Cash and cash equivalents, beginning of period ............................... 20.4 30.3
------- -------
Cash and cash equivalents, end of period ..................................... $ 14.7 $ 16.6
======= =======
</TABLE>
(1) Net of the effects of acquisitions, divestitures and translation.
The accompanying notes are an integral part of these statements.
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<PAGE> 5
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation - The financial information presented as of any
date other than December 31 has been prepared from the books and records without
audit. Financial information as of December 31 has been derived from 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, 2000 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 first
quarter of 1999. The additional accruals during the first quarter of 1999
totaled $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). No additional nonrecurring items occurred in
the second quarter of 1999. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
-5-
<PAGE> 6
NOTE 3. ACQUISITIONS
During the second quarter of 1999, Cooper completed two acquisitions in
its Electrical Products segment. The acquisitions include a small business in
France that expands the product offerings of the Cooper Menvier division and a
small domestic lighting business.
During the first six months of 1998, Cooper completed three
acquisitions in its Tools & Hardware segment and two small acquisitions 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 acquisitions included two small businesses in France and
Germany that extended the global product lines of Cooper's Power Tools division
and two small Electrical Products businesses in Mexico.
The acquisitions have been accounted for as purchase transactions and
the results of the acquisitions are included in Cooper's consolidated income
statements from the date of acquisition.
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------- -----------
(in millions)
<S> <C> <C>
Raw materials ................................................ $ 199.7 $ 213.4
Work-in-process .............................................. 134.9 114.7
Finished goods ............................................... 263.8 275.6
Perishable tooling and supplies .............................. 20.8 21.0
------- -------
619.2 624.7
Excess of current standard costs over LIFO costs ............. (84.6) (91.4)
------- -------
Net inventories ................................... $ 534.6 $ 533.3
======= =======
</TABLE>
NOTE 5. LONG-TERM DEBT
During the second quarter of 1999, Cooper completed a shelf
registration statement to issue up to $500 million of debt securities. At June
30, 1999, all $500 million of the shelf registration was available to be issued.
-6-
<PAGE> 7
NOTE 6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
REVENUES
-----------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Electrical Products ........................... $ 751.1 $ 723.9 $1,479.6 $1,429.9
Tools & Hardware .............................. 206.4 227.3 402.6 415.4
-------- -------- -------- --------
Total revenues ............................. $ 957.5 $ 951.2 $1,882.2 $1,845.3
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OPERATING EARNINGS
--------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Electrical Products ........................... $ 130.9 $ 122.9 $ 252.3 $ 239.5
Tools & Hardware .............................. 29.1 34.5 52.4 59.7
------- ------- ------- -------
Total management reporting ................. 160.0 157.4 304.7 299.2
Segment nonrecurring and unusual items:
Electrical Products ........................ -- -- 3.0 --
Tools & Hardware ........................... -- -- 1.5 --
------- ------- ------- -------
-- -- 4.5 --
Net segment operating earnings:
Electrical Products ........................ 130.9 122.9 249.3 239.5
Tools & Hardware ........................... 29.1 34.5 50.9 59.7
------- ------- ------- -------
160.0 157.4 300.2 299.2
General corporate expenses .................... 10.4 13.8 20.0 28.3
General corporate nonrecurring items .......... -- -- (0.8) --
Interest expense, net ......................... 12.2 27.4 25.4 52.7
------- ------- ------- -------
Consolidated income from continuing
operations before income taxes ............. $ 137.4 $ 116.2 $ 255.6 $ 218.2
======= ======= ======= =======
</TABLE>
-7-
<PAGE> 8
NOTE 7. NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
BASIC: (in millions)
<S> <C> <C> <C> <C>
Income from continuing operations ................ $ 88.0 $ 74.4 $ 163.6 $ 139.7
Income from discontinued operations .............. -- 31.6 -- 58.3
------------- ------------- ------------- -------------
Net income applicable to Common stock ............ $ 88.0 $ 106.0 $ 163.6 $ 198.0
============= ============= ============= =============
Weighted average Common shares outstanding ....... 94.2 118.6 94.1 119.1
============= ============= ============= =============
DILUTED:
Income from continuing operations ................ $ 88.0 $ 74.4 $ 163.6 $ 139.7
Income from discontinued operations .............. -- 31.6 -- 58.3
------------- ------------- ------------- -------------
Net income applicable to Common stock ............ $ 88.0 $ 106.0 $ 163.6 $ 198.0
============= ============= ============= =============
Weighted average Common shares outstanding ....... 94.2 118.6 94.1 119.1
Incremental shares from assumed conversions:
Options, performance-based stock
awards and other employee awards .......... 1.1 1.9 0.9 1.8
------------- ------------- ------------- -------------
Weighted average Common shares
and Common share equivalents ................. 95.3 120.5 95.0 120.9
============= ============= ============= =============
</TABLE>
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 a partial reimbursement of
Cooper's cash funding of international automotive operations prior to the
separation from Cooper. Subsequent to June 30, 1999, Cooper received the
remaining balances due from the purchaser of the Automotive Products segment.
Cooper received $119.9 million representing the remaining reimbursement for
Cooper's pre-closing cash funding of international operations and the earnings
and additional cash invested in the Automotive Products segment between March
31, 1998 and October 9, 1998. In addition, Cooper received $5.8 million
representing interest at 6% from October 9, 1998 on the unpaid balances and $3.7
million representing reimbursement for cash expenditures Cooper made on behalf
of the purchaser subsequent to October 9, 1998 related to the Automotive
Products segment.
Cooper's results of operations and the related footnote information for
the three months and six months ended June 30, 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 $478.1 million and $927.1 million, respectively for the three months and
six months ended June 30, 1998. Income from the discontinued Automotive Products
segment was $31.6 million (net of $20.4 million of income taxes) for the three
months ended June 30, 1998 and $58.3 million (net of $37.6 million of income
taxes) for the six months ended June 30, 1998.
-8-
<PAGE> 9
The Consolidated Statements of Cash Flows for the six months ended June
30, 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
Net income and other non-owner changes in equity were $81.2 million and
$97.4 million, respectively during the three months ended June 30, 1999 and 1998
and $130.9 million and $187.4 million, respectively during the six months ended
June 30, 1999 and 1998. The components of net income and other non-owner changes
in equity, net of related taxes, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Income from continuing operations ........... $ 88.0 $ 74.4 $163.6 $139.7
Income from discontinued operations ......... -- 31.6 -- 58.3
------ ------ ------ ------
Net income .................................. 88.0 106.0 163.6 198.0
Foreign currency translation losses ......... (6.8) (4.8) (32.7) (10.9)
Unrealized gains (losses) on investments .... -- (3.8) -- 0.3
------ ------ ------ ------
Net income and other non-owner
changes in equity ....................... $ 81.2 $ 97.4 $130.9 $187.4
====== ====== ====== ======
</TABLE>
NOTE 10. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following noncash transactions have been excluded from the
consolidated statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Assets acquired and liabilities assumed or incurred from the
acquisition of businesses:
Fair value of assets acquired ........................................... $ 59.9 $ 288.0
Cash used to acquire businesses ......................................... (44.8) (251.5)
------- -------
Liabilities assumed or incurred .................................... $ 15.1 $ 36.5
======= =======
</TABLE>
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
DISCONTINUED OPERATION
The Consolidated Income Statement and the Consolidated Statements of
Cash Flows for the three and six months ended June 30, 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 six months
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 and six months ended June 30, 1999 and 1998 are not comparable.
Cooper estimates that the Automotive Products segment earnings per share of $.22
in the first quarter of 1998 were approximately replaced in the three month
period ended March 31, 1999 by the effects of the utilization of the proceeds
and lower corporate expenses resulting from the divestiture. In the second
quarter of 1998, the Automotive Products segment earnings per share were $.26
and the effects of the utilization of the proceeds and lower corporate expenses
resulting from the divestiture were not adequate in the three month period ended
June 30, 1999 to totally replace the earnings.
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 first
quarter of 1999. The additional accruals during the first quarter of 1999
totaled $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
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<PAGE> 11
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).
The following table reflects the activity during the first six months
of 1999 related to the 1998 fourth quarter employee reduction and facility
consolidation plan.
<TABLE>
<CAPTION>
No. of Accrued Facility
Employees Severance Consolidation
--------- ------------------------
(in millions)
<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 ......................................... (383) -- --
Cash expenditures ............................................ -- (6.1) (2.0)
------ ------ ------
Balance June 30, 1999 ........................................ 1,501 $ 26.3 $ 6.1
====== ====== ======
</TABLE>
Cooper anticipates incurring in excess of $13 million during the
remainder of 1999 related to severance costs, facility exit costs and
disruptions to operations that could not be accrued as of June 30, 1999. A
majority of the $13 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 JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Income from continuing operations for the second quarter of 1999 was
$88.0 million on revenues of $957.5 million compared with 1998 second quarter
income from continuing operations of $74.4 million on revenues of $951.2
million. Net income declined to $88.0 million in the second quarter of 1999 from
$106.0 million in 1998 due to the absence of the discontinued Automotive
Products segment earnings. Second quarter diluted earnings per share increased
5% to $.92 from $.88 in 1998.
REVENUES:
Revenues for the second quarter of 1999 increased 1% compared to the
second quarter of 1998. After excluding the effects of acquisitions, revenues
declined 2% when compared to the second quarter of last year.
Second quarter 1999 Electrical Products segment revenues increased 4%
from the same period last year. Excluding recent acquisitions, segment revenues
were up 1% compared to last year. Leading the year-over-year improvement were
domestic sales of lighting fixtures due to strong residential and
non-residential construction markets. Shipment of electrical distribution
equipment continued to improve as progress was made in gaining efficiencies
following the implementation of a business system in the fourth quarter of 1998.
The weakness in the demand for electrical construction materials utilized in
projects, which was experienced during the second half of 1998, continued
through the second quarter of 1999. The unfavorable impact of foreign currency
translation reduced reported revenues during the quarter by approximately 1%.
-11-
<PAGE> 12
Tools & Hardware segment revenues for the quarter were down 9% from the
second quarter of 1998. Excluding acquisitions, revenues were down 12%. Domestic
aerospace and general industrial tool markets remained weak. A strong US Dollar
resulted in a negative impact on revenues of approximately 2%. Unfavorable
timing of assembly equipment shipments to international customers also
contributed to the lower revenues. Additionally, the prior year included
shipments accelerated into the second quarter prior to the implementation of the
integrated business system.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues was 66.8% for the second
quarter of 1999 compared to 67.3% for the comparable 1998 quarter. Cost
reductions across all businesses in the Electrical Products segment contributed
to the improvement in margins. Selling and administrative expenses, as a
percentage of sales, were lower than the prior year period by one tenth 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 several acquisitions
completed since June 30, 1998. Interest expense, net for the second quarter of
1999 decreased $15.2 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 second quarter 1999 earnings increased
7% to $130.9 million from $122.9 million for the same quarter of last year.
Acquisitions contributed 2% towards the improvement in the quarter. The increase
in earnings was driven by the increase in sales, primarily of lighting products,
cost improvements and lower selling and administrative spending.
Tools & Hardware segment operating earnings for the quarter reflect a
16% decrease from the prior year, primarily the result of reduced sales and
negative product mix. Excluding the impact of acquisitions, segment operating
earnings were 19% below the second quarter of 1998. Operating inefficiencies
resulting from lower volumes were somewhat offset by lower spending on selling
and administrative activities.
INCOME TAXES:
The continuing effective tax rate was 36.0% for each of the quarters
ended June 30, 1999 and 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Income from continuing operations for the first six months of 1999 was
$163.6 million on revenues of $1,882.2 million compared with 1998 six month
income from continuing operations of $139.7 million on revenues of $1,845.3
million. Net income declined to $163.6 million in the first six months of 1999
from $198.0 million in 1998 due to the absence of the discontinued Automotive
Products segment earnings. Diluted earnings per share increased 5% to $1.72 from
$1.64 in 1998. The 1999 first half net income included a first quarter
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 six months by $.02.
-12-
<PAGE> 13
REVENUES:
Revenues for the first six months of 1999 increased 2% compared to the
first six months of 1998. After excluding the effects of acquisitions, revenues
declined 1% when compared to the prior year period.
Year-to-date revenues for the Electrical Products segment increased 4%
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 half of 1999. All other
Electrical Products' businesses improved revenues during the first half of 1999
over the comparable period of 1998. This was due primarily to increased sales of
lighting fixtures from a continued strong residential and non-residential
construction market. Increased shipments of electrical distribution equipment
following the fourth quarter 1998 implementation of a new business system, also
contributed to the year-over-year improvement.
For the first half of 1999, Tools & Hardware segment revenues decreased 3%
compared to the same period of 1998. Without the benefit of acquisitions,
revenues declined 11% from the prior year period. The shortfall was the result
of continued sluggish demand in the domestic aerospace market and in the
industrial markets of Europe and North America. Additionally, revenues declined
from the prior year due to the timing of shipments of assembly equipment to
international customers. The negative impact of translation reduced revenues for
the six months ended June 30, 1999 by approximately 2%.
COSTS AND EXPENSES:
Cost of sales, as a percentage of revenues, for the first six months of
1999 declined three tenths of a point from the comparable 1998 period. Cost
reductions in most businesses was the primary contributor to the increase in
margins. Selling and administrative expenses, as a percentage of sales, were
lower than the prior year period by three tenths of a point. This decrease in
selling and administrative expenses as a percentage of revenues for 1999 was due
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 and several other acquisitions completed since June 30,
1998. Nonrecurring expense in the first six months 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 first quarter of 1999. Interest expense, net for the first six months
of 1999 decreased $27.3 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:
Year-to-date earnings for the Electrical Products segment increased 5%
to $252.3 million, excluding nonrecurring charges, from $239.5 million for the
same period last year. Excluding recent acquisitions, segment earnings were up
4% compared to last year. The earnings increase was driven mainly by increased
sales of lighting products into the residential and non-residential construction
markets and the benefits of cost reduction programs.
Excluding nonrecurring charges, the Tools & Hardware segment operating
earnings reflected a 12% decline from the same period last year. Without the
benefit of acquisitions, operating earnings were 20% below the prior year.
Continued weak demand from the domestic aerospace market and industrial tool
market had a negative impact on product mix. Also impacting earnings were
manufacturing inefficiencies as operations adjusted to lower levels of
production.
-13-
<PAGE> 14
INCOME TAXES:
The continuing effective tax rate was 36.0% for each of the six month
periods ended June 30, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cooper's operating working capital (defined as receivables and
inventories less accounts payable) increased $96 million during the first six
months of 1999 compared to an increase of $193 million in the first half of
1998. Operating working capital turnover for the first six months of 1999 of 4.5
turns declined from the 1998 first six month level of 4.7 turns. The decline in
turnover was due to higher operating working capital levels to support
consolidation and cost reduction programs in several businesses and the impact
of the new business system implementation at one of the electrical product
businesses. Operating working capital increased in the first half of 1999
primarily due to an increase in accounts receivable and reduced accounts
payable. Receivables increased primarily due to higher revenues and information
systems conversions at one of the electrical product businesses.
Cash flows from operating activities in the first six months of 1999
totaled $135 million. 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 $76 million,
acquisitions of $45 million and dividends of $62 million. During the first six
months of 1998, cash provided by operating activities totaled $73 million. These
funds, along with an increase in debt of $469 million and cash provided by
discontinued operations of $22 million were used to fund acquisitions of $252
million, capital expenditures of $70 million, dividends of $79 million and share
repurchases of $214 million. As discussed in Note 8 of the Notes to Consolidated
Financial Statements, subsequent to June 30, 1999, Cooper received $129.4
million in final payments from the purchaser of the Automotive Products segment.
These funds together with the anticipated cash flows from operating
activities will more than fund the operating cash requirements for the balance
of the year. Cooper does not currently anticipate a negative trend in its
long-term ability to generate in excess of $200 million in cash flow before debt
repayment and acquisitions each year. The preceding two sentences contain
forward-looking information, and actual results may differ materially. The
statements are based on certain assumptions, including no significant change in
the composition of Cooper's business segments, no material change in the amount
of revenues and no significant adverse changes in the relationship of the U.S.
dollar to the currencies of countries in which Cooper does business.
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 was $.7
million and $1.2 million for the three months ended June 30, 1999 and 1998,
respectively and $1.2 million and $1.9 million for the six months ended June 30,
1999 and 1998, 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. Cooper's debt-to-total capitalization ratio was 35.3% at
June 30, 1999 and 36.5% at December 31, 1998.
-14-
<PAGE> 15
BACKLOG
Sales backlog represents the dollar amount of all firm open orders for
which all terms and conditions pertaining to the sale have been approved such
that a future sale is reasonably expected. Sales backlog by segment was as
follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Electrical Products ........................................... $ 325.8 $ 280.2
Tools & Hardware .............................................. 84.3 86.3
------- -------
$ 410.1 $ 366.5
======= =======
</TABLE>
YEAR 2000
As of June 30, 1999, Cooper estimates that it is over 95% complete
with its efforts to remediate current systems or implement new systems that are
year 2000 compliant. By the end of the third 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.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on April 27, 1999
in Houston, Texas. Two proposals, as described in the
Company's Proxy statement dated March 10, 1999, were voted
upon at the meeting. Following is a brief description of the
matters voted upon and the results of voting.
1. Proposal for the election of five directors for terms
expiring in 2002:
<TABLE>
<CAPTION>
Constantine S.
Warren L. Batts Robert M. Devlin Linda A. Hill Nicandros H. John Riley, Jr.
--------------- ---------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Votes For: 79,800,057 79,819,687 77,648,681 79,799,904 79,731,868
Votes Withheld: 994,381 974,751 3,145,757 994,534 1,062,570
</TABLE>
2. Proposal for a global set of corporate standards:
Votes For: 5,165,664
Votes Against: 62,096,615
Abstain: 6,667,811
Item 6. Exhibit 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 Six Months
Ended June 30, 1999 and 1998.
27. Financial Data Schedule
(b) Reports on Form 8-K
Cooper filed a report on Form 8-K dated April 22, 1999, which
included a copy of a press release containing Cooper's
financial results for the first quarter of 1999 and segment
information for each quarter of 1998.
-16-
<PAGE> 17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cooper Industries, Inc.
----------------------------------
(Registrant)
Date: August 9, 1999 /s/ D. Bradley McWilliams
- ------------------------------------- ----------------------------------
D. Bradley McWilliams
Senior Vice President and
Chief Financial Officer
Date: August 9, 1999 /s/ Terry A. Klebe
- ------------------------------------- ----------------------------------
Terry A. Klebe
Vice President and Controller
and Chief Accounting Officer
-17-
<PAGE> 18
Index to Exhibits
<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 Six Months Ended June
30, 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>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Expense $ 25,400 $ 52,700 $ 101,900 $ 90,400 $ 142,100 $ 151,000 $ 73,300
Estimated Interest Portion of
Rent Expense 7,092 5,810 12,352 10,864 10,035 10,064 10,321
--------- --------- --------- --------- --------- --------- ---------
Fixed Charges $ 32,492 $ 58,510 $ 114,252 $ 101,264 $ 152,135 $ 161,064 $ 83,621
========= ========= ========= ========= ========= ========= =========
Income From Continuing
Operations Before Income Taxes $ 255,600 $ 218,200 $ 523,600 $ 483,200 $ 470,700 $ 297,300 $ 314,600
Add: Fixed Charges 32,492 58,510 114,252 101,264 152,135 161,064 83,621
Dividends From Less Than
50% Owned Companies -- -- -- -- 287 968 549
Less: Equity in (Earnings) / Losses
of Less Than 50% Owned
Companies (46) 332 595 (320) (1,609) (996) (1,776)
--------- --------- --------- --------- --------- --------- ---------
Earnings Before Fixed Charges $ 288,046 $ 277,042 $ 638,447 $ 584,144 $ 621,513 $ 458,336 $ 396,994
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 8.9x 4.7x 5.6x 5.8x 4.1x 2.8x 4.7x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,700
<SECURITIES> 0
<RECEIVABLES> 692,900
<ALLOWANCES> 0
<INVENTORY> 534,600
<CURRENT-ASSETS> 1,507,100
<PP&E> 1,638,600
<DEPRECIATION> 929,400
<TOTAL-ASSETS> 3,856,500
<CURRENT-LIABILITIES> 1,046,100
<BONDS> 713,400
0
0
<COMMON> 615,000
<OTHER-SE> 1,037,100
<TOTAL-LIABILITY-AND-EQUITY> 3,856,500
<SALES> 1,882,200
<TOTAL-REVENUES> 1,882,200
<CGS> 1,261,800
<TOTAL-COSTS> 1,261,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,400
<INCOME-PRETAX> 255,600
<INCOME-TAX> 92,000
<INCOME-CONTINUING> 163,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,600
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.72
</TABLE>
