-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CmZA8TimQ8iK0gKFpVbjgqX52D2pIC3iRlRJqAanlzxbFfMt+KqPgcNQsNCYa6Vs e7X87g64mC6jhU6+NsYrFg== 0000950129-99-001221.txt : 19990331 0000950129-99-001221.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950129-99-001221 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COOPER INDUSTRIES INC CENTRAL INDEX KEY: 0000024454 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 314156620 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-01175 FILM NUMBER: 99577534 BUSINESS ADDRESS: STREET 1: 600 TRAVIS, SUITE 5800 STREET 2: FIRST CITY TWR CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7132098400 MAIL ADDRESS: STREET 1: P.O. BOX 4446 CITY: HOUSTON STATE: TX ZIP: 77210 FORMER COMPANY: FORMER CONFORMED NAME: COOPER BESSEMER CORP DATE OF NAME CHANGE: 19710505 10-K405 1 COOPER INDUSTRIES, INC. - DATED 12/31/1998 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-1175 Cooper Industries, Inc. (Exact Name of Registrant as Specified in Its Charter) Ohio 31-4156620 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 600 Travis, Suite 5800, Houston, Texas 77002 (Address of Principal Executive Offices) (Zip Code) 713/209-8400 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $5 par value The New York Stock Exchange Pacific Exchange Rights to Purchase Preferred Stock The New York Stock Exchange Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 [ ] 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate value of the registrant's voting stock held by non-affiliates of the registrant as of March 1, 1999 was $4,061,138,074. Number of shares outstanding of registrant's Common Stock as of March 1, 1999 - 94,337,288 DOCUMENTS INCORPORATED BY REFERENCE Cooper Industries, Inc. Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 1999 (Part I - Item 1, Part II - Items 6, 7, 7A and 8, Part III - Items 10, 11 and 12 and Part IV - Item 14(a)(1)) Continuation of Page 1 3 PART I ITEM 1. BUSINESS; ITEM 2. PROPERTIES GENERAL The terms "Cooper" or "Company" refer to the registrant, Cooper Industries, Inc. Cooper was incorporated under the laws of the State of Ohio on January 8, 1919. The Company's continuing businesses operate in two business segments: Electrical Products and Tools & Hardware. On October 9, 1998, the Company divested its Automotive Products segment for proceeds of $1.9 billion. The Automotive Products segment is reflected in the consolidated financial statements incorporated by reference herein as a discontinued operation. The discussion of the Company's business under Items 1 and 2 hereof includes only the Company's continuing operations. Cooper manufactures, markets and sells its products and provides services throughout the world. Cooper has manufacturing facilities in 19 countries and currently employs approximately 28,100 people. On December 31, 1998, the plants and other facilities used by Cooper throughout the world contained an aggregate of approximately 18,070,000 square feet of space, of which approximately 84 percent was owned and 16 percent was leased. The charts on the next page show the number of employees, square footage of facilities owned and leased and location of manufacturing facilities for each industry segment. During the fourth quarter of 1998, Cooper announced its plans to shut down or downsize about a dozen facilities throughout Cooper's worldwide operations. With these adjustments, Cooper believes its facilities will be adequate and suitable for its anticipated level of operations. Certain equipment and production facilities have been financed by industrial revenue bonds issued by local government authorities and are subject to security arrangements customary in such financings. -2- 4
Square Footage of Number and Nature of Facilities Plants and Facilities ------------------------------- --------------------- Number of Segment Employees Manufacturing Warehouse Sales Other Owned Leased - ------- --------- ------------- --------- ----- ----- ----- ------ Electrical 20,400 76 6 77 5 10,265,000 1,803,000 Products Tools & 7,400 35 9 14 1 4,940,000 917,000 Hardware Other 300 - - - 1 - 145,000 ------ ---- ---- ---- ---- ---------- --------- Total 28,100 111 15 91 7 15,205,000 2,865,000
Manufacturing Plant Locations ----------------------------- Europe United South United (Other Republic of Segment States Canada Mexico America Kingdom Than UK) Australia China - ------- ------ ------ ------ ------- ------- -------- --------- ----------- Electrical 37 2 8 3 11 12 2 1 Products Tools & 19 - 4 3 1 7 1 - Hardware ---- ---- --- ---- ----- ------ ----- ------- Total 56 2 12 6 12 19 3 1
-3- 5 Operations in the United States are conducted by unincorporated divisions and wholly-owned subsidiaries of the Company, organized by the two business segments. Activities outside the United States contribute significantly to the revenues and operating earnings of both segments of Cooper. These activities are conducted in major commercial countries by wholly-owned subsidiaries and jointly-owned companies, the management of which is structured through the Company's two business segments. As a result of these international operations, sales and distribution networks are maintained throughout most of the industrialized world. Cooper generally believes that there are no substantial differences in the business risks associated with these international operations compared with domestic activities, although Cooper is subject to certain political and economic uncertainties encountered in activities outside the United States, including trade barriers, restrictions on foreign exchange and currency fluctuations. As the U.S. dollar strengthens against foreign currencies at a rate greater than inflation in those countries, the Company may experience lower segment revenues and operating earnings. The five countries in which the Company generates the most international revenues are Canada, Germany, France, Mexico and the United Kingdom. The Company has several small joint ventures with operations in China. Investments in China are subject to greater risks related to economic and political uncertainties as compared to most countries where the Company has operations. Exhibit 21.0 contains a list of Cooper's subsidiaries. Data with respect to Cooper's industry segments, domestic and international operations and export sales are contained in Note 15 of the Notes to Consolidated Financial Statements, incorporated herein by reference to pages A-37 through A-40 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. A discussion of acquisitions and divestitures is included in Notes 3, 7, 17 and 19 of the Notes to Consolidated Financial Statements, incorporated herein by reference to pages A-25 through A-28 and A-41 through A-43 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. With its two business segments, Cooper serves three major markets: industrial, construction, and electrical power distribution. Markets for Cooper's products and services are worldwide, though the United States is the largest market. Within the United States, there is no material geographic concentration by state or region. Most operating units experience significant competition from both larger and smaller companies with the key competitive factors being price, quality, brand name and availability. Cooper believes that it is among the leading manufacturers in the world of electrical distribution equipment, hazardous duty electrical equipment, emergency lighting, lighting fixtures, fuses, nonpower hand tools, industrial power tools and chain products. Cooper's research and development activities are for purposes of improving existing products and services and originating new products. During 1998, approximately $50.4 million was spent for research and development activities as compared with approximately $41.8 million in 1997 and $39.4 million in 1996. Cooper obtains and holds patents on products and designs in the United States and many foreign countries where operations are conducted or products are sold. Although in the aggregate Cooper's patents are important in the operation of its businesses, the loss by expiration or otherwise of any one patent or group of patents would not materially affect its business. -4- 6 Cooper does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 1999. Cooper has been a party to administrative and legal proceedings with governmental agencies that have arisen under statutory provisions regulating the discharge or potential discharge of material into the environment. Orders and decrees consented to by Cooper have contained agreed-upon timetables for fulfilling reporting or remediation obligations or maintaining specified air and water discharge levels in connection with permits for the operations of various plants. Cooper believes it is in compliance with the orders and decrees, and such compliance is not material to the business or financial condition of Cooper. For additional information concerning the Company's accruals for environmental liabilities, see Note 7 of the Notes to Consolidated Financial Statements, incorporated herein by reference to pages A-27 and A-28 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. Approximately 58 percent of Cooper's hourly production work force in the United States is employed in 43 manufacturing facilities, distribution centers and warehouses not covered by labor agreements. Numerous agreements covering approximately 42 percent of the hourly production employees exist with 23 bargaining units at 22 operations in the United States. Cooper also has agreements with various unions at 38 international operations. During 1998, new agreements were concluded covering hourly production employees at 10 operations in the United States. Cooper considers its employee relations to be excellent. Sales backlog at December 31, 1998 was approximately $385 million, all of which is for delivery during 1999, compared with backlog of approximately $324 million (excluding December 1997 acquisitions) at December 31, 1997. The following describes the business conducted by each of the Company's business segments. Additional information regarding the products, markets and distribution methods for each segment is set forth on the table at the end of this Item. Information concerning market conditions, as well as information concerning revenues and operating earnings for each segment, is incorporated herein by reference to pages A-1 through A-15 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. Electrical Products The Electrical Products segment manufactures, markets and sells electrical and circuit protection products, including fittings, enclosures, plugs, receptacles, lighting fixtures, fuses, emergency lighting, fire detection systems and security products for use in residential, commercial and industrial construction, maintenance and repair applications. The segment also manufactures, markets and sells products for use by utilities and in industry for electrical power transmission and distribution, including distribution switchgear, transformers, transformer terminations and accessories, capacitors, voltage regulators, surge arresters, pole line hardware and other related power systems components. The principal raw material requirements include copper, tin, lead, plastics, insulating materials, pig iron, aluminum ingots, steel, aluminum and brass. These raw materials are available from and supplied by numerous sources located in the United States and abroad. -5- 7 Demand for Electrical Products follows general economic conditions and is generally sensitive to activity in the construction market, industrial production levels and spending by utilities for replacements, expansions and efficiency improvements. The segment's product lines are marketed directly to original equipment manufacturers and utilities and to a variety of end users through major distributor chains and thousands of independent distributors. Tools & Hardware The Tools & Hardware segment manufactures, markets and sells hand tools and chain and clamp products for industrial, construction and consumer markets; and air-powered and electric tools for general industry, primarily automotive and aerospace manufacturers. The principal raw material requirements include rolled coiled steel, wood, plastic pellets, flat and bar stock steel, brass, copper, tin plate, fiberglass, aluminum, iron castings and plastic sheet. These materials are available from and supplied by numerous sources in the United States and abroad. Demand for nonpowered hand tools, chain and clamp products and industrial power tools is driven by employment levels and industrial activity in major industrial countries and by consumer spending. In addition, demand for industrial power tools is influenced by automotive and aerospace production. The segment's products are sold by a company salesforce, independent distributors and retailers. -6- 8 Products, Markets and Distribution Methods by Segment ELECTRICAL PRODUCTS MAJOR PRODUCTS AND BRANDS* ------------------------- ARKTITE plugs and receptacles. ARROW HART wiring devices. ATLITE indoor commercial lighting. BLESSING, CSA, PRETRONICA and UNIVEL emergency lighting and power systems. BUSS electrical and electronic fuses. CAM-LOK electrical connectors. CEAG emergency lighting systems. CHAMP and HAZARD-GARD HID and flourescent lighting. COILTRONICS inductors and transformers. CONDULET fittings and outlet bodies. COOPER POWER SYSTEMS distribution transformers, power capacitors, voltage regulators, surge arresters and pole line hardware and SCADA master stations. CROUSE-HINDS and CEAG electrical construction materials and CROUSE-HINDS aviation lighting products. EDISON and EDISON PRO relays. ELETROMEC DIN style fuses. FAIL-SAFE high abuse, clean room and vandal-resistant lighting fixtures. FULLEON, NUGELEC and TRANSMOULD fire detection systems. HALO recessed and track lighting fixtures. HOMELUX consumer fluorescent lighting. IRIS lighting systems. KARP, EDISON, MERCURY and B&S electrical fuses. KEARNEY fuses, connectors, tools and switches. KYLE distribution switchgear. LUMIERE specification grade landscape lighting. LUMINOX and MENVIER emergency lighting and fire detection systems. MAGNUM terminal strips and disconnect blocks. MCGRAW-EDISON and LUMARK indoor and outdoor lighting. METALUX fluorescent lighting. MOLDED PRODUCTS connectors and systems. MWS modular wiring systems. MYERS electrical hubs. NOVA reclosers, sectionalizers and switches. PORTFOLIO architectural recessed lighting. MCGRAW-EDISON and RTE transformer components, cable accessories and fuses. SCANTRONIC and MENVIER security systems. SURE-LITES and ATLITE exit and emergency lighting. SURGX ESD protection devices. THEPITT electrical outlet and switch boxes. TRANSX transient voltage protection devices. WESTERN POWER fiberglass. TOOLS & HARDWARE MAJOR PRODUCTS AND BRANDS* ------------------------- AIRETOOL, ASSEMBLY SYSTEMS, BUCKEYE, CLECO, COOPER AUTOMATION, DGD, DOLER, DOTCO, GARDNER-DENVER, GARDOTRANS, KOTTHAUS + BUSCH, QUACKENBUSH, ROTOR TOOL and RECOULES industrial power tools and assembly equipment. APEX and GETA screwdriver bits, impact sockets and universal joints. CAMPBELL chain products. CRESCENT pliers and wrenches. DIAMOND farrier tools and horseshoes. EREM precision cutters and tweezers. LUFKIN measuring tapes. MASTER POWER industrial air tools. METRONIX servos and drive controls. NICHOLSON files and saws. PLUMB hammers. STUHR finishing tools. UTICA torque measuring and controls. WELLER soldering equipment. WIRE WRAP solderless connection equipment. WISS and H.K. PORTER cutting products. XCELITE screwdrivers and nutdrivers. * Brand names, which appear in bold type, are registered trademarks of Cooper Industries, Inc. or its subsidiaries, except Assembly Systems, AtLite, Blessing, B&S, Condulet, Cooper Automation, CSA, Eletromec, Fail-Safe, Fulleon, Gardotrans, Geta, Iris, Karp, Kearney, Kotthaus + Busch, Lumiere, Luminox, Menvier, Mercury, Metronix, Molded Products, MWS, Myers, NOVA, Nugelec, Portfolio, Pretronica, Quackenbush, Recoules, SCADA, Scantronic, Stuhr, Thepitt, Transmould, TransX, Univel and Western Power, which are unregistered trademarks. Gardner-Denver and SurgX are registered trademarks of Gardner Denver Machinery Inc. and SurgX Corporation, respectively, and are used by Cooper Industries under license. -7- 9 Products, Markets and Distribution Methods by Segment (Cont'd.) ELECTRICAL PRODUCTS MAJOR MARKETS Fuses are sold to end-users in the construction, industrial, automotive and consumer markets and to manufacturers in the electrical, electronic and automotive industries. Lighting fixtures are utilized in residential construction, industrial and commercial building complexes, shopping centers, parking lots and sports facilities. Electrical power products are used in the utility and industrial markets. Electrical construction materials are used in commercial, residential and industrial projects, by utilities and wastewater treatment plants and in the process and energy industries. Fire detection and security systems are installed in commercial and industrial applications. PRINCIPAL DISTRIBUTION METHODS Products are sold through distributors for use in general construction, plant maintenance, utilities, process and energy applications, shopping centers, parking lots, sports facilities, and data processing and telecommunications systems; through distributors and direct to manufacturers for use in electronic equipment for consumer, industrial, government and military applications; and direct to original equipment manufacturers of appliances, tools, machinery and electronic equipment. TOOLS AND HARDWARE MAJOR MARKETS Power tools are used by general industrial manufacturers, particularly durable goods producers and original equipment manufacturers, such as those in the aerospace and automobile industries. Hand tools are used in a variety of industrial, electronics, agricultural, construction and consumer applications. PRINCIPAL DISTRIBUTION METHODS Products are sold through distributors and agents to general industry, particularly automotive, appliance and aircraft maintenance; through distributors and wholesalers to hardware stores, home centers, lumberyards, department stores and mass merchandisers; and direct to original equipment manufacturers, home centers, specialty stores, department stores, mass merchandisers and hardware outlets. -8- 10 ITEM 3. LEGAL PROCEEDINGS The Company is subject to various suits, legal proceedings and claims that arise in the normal course of business. While it is not feasible to predict the outcome of these matters with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of the shareholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock (symbol - CBE) is listed on the New York Stock Exchange and the Pacific Exchange. Options for the Company's Common Stock are listed on the American Stock Exchange. As of March 1, 1999 there were 29,482 record holders of the Company's Common Stock. The high and low quarterly sales price for the past two years of the Company's Common Stock, as reported by Dow Jones & Company, Inc., are as follows:
Quarter 1 2 3 4 ----------- ---------- ---------- ---------- 1998 High $60.5000 $70.3750 $58.0000 $50.9375 Low 47.0000 54.3125 40.4375 36.8750 1997 High $47.0000 $53.7500 $58.6250 $55.8750 Low 40.0000 41.3570 49.3750 44.5000
Annual cash dividends declared on the Company's Common Stock during 1998 and 1997 were $1.32 a share ($.33 a quarter). On February 10, 1999, the Board of Directors declared a quarterly dividend of $.33 a share, which will be paid April 1, 1999 to shareholders of record on March 1, 1999. -9- 11 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial data for Cooper for each of the five years in the period ended December 31, 1998. The selected historical financial information shown below has been derived from Cooper's audited consolidated financial statements. This information should be read in conjunction with Cooper's consolidated financial statements and notes thereto incorporated herein by reference to pages A-16 through A-44 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders.
Years Ending December 31, ------------------------------------------------------------------- 1998 1997(1) 1996 1995 1994 ---- ------- ---- ---- ---- INCOME STATEMENT DATA: (in millions, except per share data) Revenues $ 3,651.2 $ 3,415.6 $ 3,380.5 $ 3,052.1 $ 2,932.7 --------- --------- --------- --------- --------- Income from continuing operations $ 335.9 $ 310.0 $ 285.1 $ 178.6 $ 185.6 Income from discontinued operations (Automotive Products), net of taxes 87.1 84.6 30.3 102.0 107.2 Charge for discontinued operations (Petroleum and Industrial Equipment) -- -- -- (186.6) (312.7) --------- --------- --------- --------- --------- Net income (loss) $ 423.0 $ 394.6 $ 315.4 $ 94.0 $ (19.9) ========= ========= ========= ========= ========= INCOME PER COMMON SHARE DATA: Basic - Income from continuing operations $ 2.97 $ 2.64 $ 2.66 $ 1.60 $ 1.16 Income from discontinued operations (Automotive Products) .77 .72 .28 .92 .94 Charge for discontinued operations (Petroleum and Industrial Equipment) -- -- -- (1.67) (2.74) --------- --------- --------- --------- --------- Net income (loss) $ 3.74 $ 3.36 $ 2.94 $ .85 $ (.64) ========= ========= ========= ========= ========= Diluted - Income from continuing operations $ 2.93 $ 2.57 $ 2.52 $ 1.60 $ 1.16 --------- --------- --------- --------- --------- Net income (loss) $ 3.69 $ 3.26 $ 2.77 $ .84 $ (.64) ========= ========= ========= ========= ========= BALANCE SHEET DATA (at the end of period): Total assets $ 3,779.1 $ 5,507.3 $ 5,318.9 $ 5,461.2 $ 5,786.7 Long-term debt 774.5 1,272.2 1,737.7 1,865.3 1,361.9 Shareholders' equity 1,563.6 2,683.5 1,967.2 1,787.8 2,788.5 CASH DIVIDENDS PER COMMON SHARE $ 1.32 $ 1.32 $ 1.32 $ 1.32 $ 1.32
- ----------- (1) Includes the results of the Kirsch window treatment operation for the five-month period ended May 30, 1997, which was sold to Newell Co. on May 30, 1997. - ---------- In October 1998, Cooper sold its Automotive Products segment for $1.9 billion in proceeds. As a consequence of treating this segment as a discontinued operation, the financial information in the above table has been restated to exclude the results of the Automotive Products segment from income from continuing operations. The discontinued segment's results are presented separately in the caption, "Income from discontinued operations (Automotive Products), net of taxes." In 1995, Cooper divested the remaining businesses comprising its former Petroleum and Industrial Equipment segment through an exchange offer with shareholders for common stock of Cooper Cameron Corporation. -10- 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to pages A-1 through A-15 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference to "Interest Rate and Foreign Currency Risk" on pages A-13 through A-15 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference to pages A-16 through A-44 of Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to pages 4 through 10 of the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to pages 14 through 25 of the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to pages 3 and 11 of the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. -11- 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Other Financial Data (incorporated by reference to the pages shown below in Appendix A to the Cooper Proxy Statement for the 1999 Annual Meeting of Shareholders).
Page No. -------- Report of Management................................................... A-16 Report of Independent Auditors......................................... A-17 Consolidated Income Statements for each of the three years in the period ended December 31, 1998...................................................... A-18 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. A-19 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998...................................................... A-20 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1998...................................................... A-21 Notes to Consolidated Financial Statements............................. A-22 through A-44
Financial information with respect to subsidiaries not consolidated and 50 percent or less owned entities accounted for by the equity method has not been included because in the aggregate such subsidiaries and investments do not constitute a significant subsidiary. 2. Financial Statement Schedules Financial statement schedules are not included in this Form 10-K Annual Report because they are not applicable or the required information is shown in the financial statements or notes thereto. -12- 14 3. Exhibits 3.1 Twenty-Seventh Amended Articles of Incorporation of Cooper Industries, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company's Form 8-K dated August 5, 1997). 3.2 Code of Regulations (By-Laws), as amended, of Cooper Industries, Inc. (incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended December 31, 1997). 4.1 Rights Agreement, dated as of August 5, 1997, between the Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated August 14, 1997). 10.1 1989 Director Stock Option Plan (incorporated herein by reference to Exhibit 28.1 to Registration Statement No. 2-33-29302). 10.2 Cooper Industries, Inc. Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 of the Company's Form 10-K for the year ended December 31, 1997). 10.3 Cooper Industries, Inc. Directors Retirement Plan (incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1997). 10.4 Cooper Industries, Inc. Executive Restricted Stock Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1997). 10.5 Cooper Industries, Inc. Supplemental Excess Defined Benefit Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(iii) of the Company's Form 10-Q for the quarter ended September 30, 1998). 10.6 Cooper Industries, Inc. Supplemental Excess Defined Contribution Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(iv) of the Company's Form 10-Q for the quarter ended September 30, 1998). 10.7 Management Incentive Compensation Deferral Plan (incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for the year ended December 31, 1997). 10.8 Crouse-Hinds Company Officers' Disability and Supplemental Pension Plan (incorporated by reference to Exhibit 10.8 of the Company's Form 10-K for the year ended December 31, 1997). 10.9 Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.9 of the Company's Form 10-K for the year ended December 31, 1997). -13- 15 10.10 Form of Incentive Stock Option Agreement for Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.10 of the Company's Form 10-K for the year ended December 31, 1997). 10.11 Form of Nonqualified Stock Option Agreement for Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.11 of the Company's Form 10-K for the year ended December 31, 1997). 10.12 Cooper Industries, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit I to the Company's Proxy Statement for the Annual Meeting of Shareholders held April 30, 1996.) 10.13 Form of Incentive Stock Option Agreement for Cooper Industries, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ended December 31, 1997). 10.14 Form of Nonqualified Stock Option Agreement for Cooper Industries, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of the Company's Form 10-K for the year ended December 31, 1997). 10.15 Form of Cooper Industries, Inc. Executive Stock Incentive Agreement (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1995). 10.16 Cooper Industries, Inc. Amended and Restated Management Annual Incentive Plan (incorporated herein by reference to Exhibit 4.3 of Registration Statement No. 333-51441). 10.17 Cooper Industries, Inc. Directors' Stock Plan (incorporated herein by reference to Exhibit III to the Company's Proxy Statement for the Annual Meeting of Shareholders held April 30, 1996). 10.18 Form of Directors' Nonqualified Stock Option Agreement for Directors' Stock Plan (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K for the year ended December 31, 1997). 10.19 Cooper Industries, Inc. Directors' Retainer Fee Stock Plan (incorporated herein by referenced to Exhibit 4.3 of Registration Statement No. 333-51439). 10.20 Form of Management Continuity Agreement between Cooper Industries, Inc. and key management personnel which applies if there is a Change of the Control of the Company (incorporated herein by reference to Exhibit 10(ii) of the Company's Form 10-Q for the quarter ended September 30, 1998). -14- 16 10.21 Purchase and Sale Agreement between Cooper Industries, Inc. and Federal-Mogul Corporation dated August 17, 1998 (incorporated herein by reference to Exhibit 10(i) of the Company's Form 10-Q for the quarter ended September 30, 1998). 12.0 Computation of Ratios of Earnings to Fixed Charges for the Calendar years 1994 through 1998. 13.0 Text of Appendix A to Cooper Industries, Inc. Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1999. 21.0 List of Cooper Industries, Inc. Subsidiaries. 23.0 Consent of Ernst & Young LLP. 24.0 Powers of Attorney from members of the Board of Directors of Cooper Industries, Inc. Cooper will furnish to the Commission supplementally upon request a copy of any instrument with respect to long-term debt of the Company. Copies of the above Exhibits are available to shareholders of record at a charge of $.25 per page, minimum order of $10.00. Direct requests to: Cooper Industries, Inc. Attn: Corporate Secretary P.O. Box 4446 Houston, Texas 77210 (b) Reports on Form 8-K. During the last quarter of 1998, the Company filed the following reports on Form 8-K: (i) dated October 9, 1998, which included a copy of a press release announcing the sale of the Company's Automotive Products segment to Federal-Mogul Corporation; (ii) dated October 22, 1998, which included a copy of a press release containing the Company's financial results for the quarter ended September 30, 1998; (iii) dated November 13, 1998, which contained the Company's 1997 financial statements restated to reflect the Automotive Products segment as a discontinued operation; and (iv) dated December 28, 1998, which contained a copy of a press release announcing that the Company would be implementing cost cutting measures to improve its long-term competitive position and that the Company had elected to deliver 14,000,000 shares of Wyman-Gordon Company Common Stock upon the mandatory exchange of the outstanding $189 million principal amount of its three-year 6% Exchangeable Notes ("DECS"). -15- 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 30, 1999 By: /s/ H. JOHN RILEY, JR. ------------------------ ----------------------------- (H. John Riley, Jr., Chairman, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ H. JOHN RILEY, JR. Chairman, President and Chief March 30, 1999 - ------------------------------- Executive Officer (Principal (H. John Riley, Jr.) Executive Officer and Director) /s/ D. BRADLEY MCWILLIAMS - ------------------------------ Senior Vice President and March 30, 1999 (D. Bradley McWilliams) Chief Financial Officer /s/ TERRY A. KLEBE - ------------------------------ Vice President and Controller March 30, 1999 (Terry A. Klebe) (Principal Accounting Officer) *ALAIN J. P. BELDA Director March 30, 1999 - ------------------------------ (Alain J.P. Belda) *LINDA A. HILL Director March 30, 1999 - ------------------------------ (Linda A. Hill) *HAROLD S. HOOK Director March 30, 1999 - ------------------------------ (Harold S. Hook) *CONSTANTINE S. NICANDROS Director March 30, 1999 - ------------------------------ (Constantine S. Nicandros) *JOHN D. ONG Director March 30, 1999 - ------------------------------ (John D. Ong) *SIR RALPH H. ROBINS Director March 30, 1999 - ------------------------------ (Sir Ralph H. Robins) *DAN F. SMITH Director March 30, 1999 - ------------------------------ (Dan F. Smith) *JAMES R. WILSON Director March 30, 1999 - ------------------------------ (James R. Wilson) * By /s/ DIANE K. SCHUMACHER ----------------------------------------- (Diane K. Schumacher, as Attorney-In-Fact for each of the persons indicated)
-16- 18 Cooper Industries, Inc. 1998 Annual Report on Form 10-K Cross Reference Sheet
Page Reference Page Reference in Incorporated Item No. and Description in Form 10-K in 10-K Proxy Statement - ------------------------------------- -------------- --------------- Item 1. Business 2 through 8 A-1 through A-15 A-25 through A-28 A-37 through A-41 Item 2. Properties 2 through 8 - Item 3. Legal Proceedings 9 - Item 4. Submission of Matters to a Vote of Security 9 - Holders Item 5. Market for Registrant's Common Equity and 9 - Related Stockholder Matters Item 6. Selected Financial Data 10 A-16 through A-44 Item 7. Management's Discussion and Analysis of 11 A-1 through A-15 Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures 11 A-13 through A-15 About Market Risk Item 8. Financial Statements and Supplementary Data 11 A-16 through A-44 Item 9. Changes in and Disagreements with 11 - Accountants on Accounting and Financial Disclosure Item 10. Directors and Executive Officers of the 11 4 through 10 Registrant Item 11. Executive Compensation 11 14 through 25 Item 12. Security Ownership of Certain Beneficial 11 3, 11 Owners and Management Item 13. Certain Relationships and Related 11 - Transactions Item 14. Exhibits, Financial Statement Schedules, 12 through 15 A-16 through A-44 and Reports on Form 8-K
19 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION --------- ----------- 3.1 Twenty-Seventh Amended Articles of Incorporation of Cooper Industries, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company's Form 8-K dated August 5, 1997). 3.2 Code of Regulations (By-Laws), as amended, of Cooper Industries, Inc. (incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended December 31, 1997). 4.1 Rights Agreement, dated as of August 5, 1997, between the Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated August 14, 1997). 10.1 1989 Director Stock Option Plan (incorporated herein by reference to Exhibit 28.1 to Registration Statement No. 2-33-29302). 10.2 Cooper Industries, Inc. Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 of the Company's Form 10-K for the year ended December 31, 1997). 10.3 Cooper Industries, Inc. Directors Retirement Plan (incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1997). 10.4 Cooper Industries, Inc. Executive Restricted Stock Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company's Form 10-K for the year ended December 31, 1997). 10.5 Cooper Industries, Inc. Supplemental Excess Defined Benefit Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(iii) of the Company's Form 10-Q for the quarter ended September 30, 1998). 10.6 Cooper Industries, Inc. Supplemental Excess Defined Contribution Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(iv) of the Company's Form 10-Q for the quarter ended September 30, 1998). 10.7 Management Incentive Compensation Deferral Plan (incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for the year ended December 31, 1997). 10.8 Crouse-Hinds Company Officers' Disability and Supplemental Pension Plan (incorporated by reference to Exhibit 10.8 of the Company's Form 10-K for the year ended December 31, 1997). 10.9 Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.9 of the Company's Form 10-K for the year ended December 31, 1997).
20 10.10 Form of Incentive Stock Option Agreement for Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.10 of the Company's Form 10-K for the year ended December 31, 1997). 10.11 Form of Nonqualified Stock Option Agreement for Cooper Industries, Inc. 1986 Stock Option Plan (incorporated by reference to Exhibit 10.11 of the Company's Form 10-K for the year ended December 31, 1997). 10.12 Cooper Industries, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit I to the Company's Proxy Statement for the Annual Meeting of Shareholders held April 30, 1996.) 10.13 Form of Incentive Stock Option Agreement for Cooper Industries, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ended December 31, 1997). 10.14 Form of Nonqualified Stock Option Agreement for Cooper Industries, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.14 of the Company's Form 10-K for the year ended December 31, 1997). 10.15 Form of Cooper Industries, Inc. Executive Stock Incentive Agreement (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1995). 10.16 Cooper Industries, Inc. Amended and Restated Management Annual Incentive Plan (incorporated herein by reference to Exhibit 4.3 of Registration Statement No. 333-51441). 10.17 Cooper Industries, Inc. Directors' Stock Plan (incorporated herein by reference to Exhibit III to the Company's Proxy Statement for the Annual Meeting of Shareholders held April 30, 1996). 10.18 Form of Directors' Nonqualified Stock Option Agreement for Directors' Stock Plan (incorporated herein by reference to Exhibit 10.18 of the Company's Form 10-K for the year ended December 31, 1997). 10.19 Cooper Industries, Inc. Directors' Retainer Fee Stock Plan (incorporated herein by referenced to Exhibit 4.3 of Registration Statement No. 333-51439). 10.20 Form of Management Continuity Agreement between Cooper Industries, Inc. and key management personnel which applies if there is a Change of the Control of the Company (incorporated herein by reference to Exhibit 10(ii) of the Company's Form 10-Q for the quarter ended September 30, 1998).
21 10.21 Purchase and Sale Agreement between Cooper Industries, Inc. and Federal-Mogul Corporation dated August 17, 1998 (incorporated herein by reference to Exhibit 10(i) of the Company's Form 10-Q for the quarter ended September 30, 1998). 12.0 Computation of Ratios of Earnings to Fixed Charges for the Calendar years 1994 through 1998. 13.0 Text of Appendix A to Cooper Industries, Inc. Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1999. 21.0 List of Cooper Industries, Inc. Subsidiaries. 23.0 Consent of Ernst & Young LLP. 24.0 Powers of Attorney from members of the Board of Directors of Cooper Industries, Inc. 27.1 Financial Data Schedule
EX-12.0 2 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.0 COOPER INDUSTRIES, INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in Thousands) (Unaudited)
Year Ended December 31, ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ---------- ----------- ----------- --------- Interest Expense $ 101,900 $ 90,400 $ 142,100 $ 151,000 $ 73,300 Estimated Interest Portion of Rent Expense (One-Third) 12,352 10,864 10,035 10,064 10,321 --------- ---------- ----------- ----------- --------- Fixed Charges $ 114,252 $ 101,264 $ 152,135 $ 161,064 $ 83,621 ========= ========== =========== =========== ========= Income From Continuing Operations Before Income Taxes $ 523,600 $ 483,200 $ 470,700 $ 297,300 $ 314,600 Add: Fixed Charges 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 595 (320) (1,609) (996) (1,776) --------- ---------- ----------- ----------- --------- Earnings Before Fixed Charges $ 638,447 $ 584,144 $ 621,513 $ 458,336 $ 396,994 ========= ========== =========== =========== ========= Ratio of Earnings to Fixed Charges 5.6x 5.8x 4.1x 2.8x 4.7x
EX-13.0 3 TEXT OF APPENDIX A TO COOPER PROXY STATEMENT 1 EXHIBIT 13.0 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. 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 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." In order to facilitate an understanding of Cooper's continuing operations, Cooper restated the Consolidated Balance Sheet as of December 31, 1997, and the Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996. The net assets of discontinued operations are segregated into a single line, "Net assets of discontinued operations" in the Consolidated Balance Sheets. The cash flows from discontinued operations are summarized into a single line "Cash provided by (used in) discontinued operations" in the Consolidated Statements of Cash Flows. No cash or debt was allocated to the discontinued operations. For a discussion of the financial results of discontinued operations see "Discontinued Operations -- Automotive Products Segment". 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 result in a debt to total capitalization ratio at the lower end of Cooper's targeted range. Due to the timing of the purchases of Common stock in the quarter the sale was consummated, replacing all of the loss of the Automotive Products segment earnings per share in the quarter was not possible. From January 1, 1998 through October 9, 1998, the date of the sale of the Automotive Products segment, the discontinued segment earnings after income taxes were $87.1 million ($.76 per diluted share). For the period October 10, 1998 through December 31, 1998, approximately two-thirds of the expected Automotive Products segment earnings per share contribution was replaced by the utilization of the sale proceeds. On a full year basis going forward, Cooper estimates that the earnings per share impact of the loss of the Automotive Products segment earnings will be approximately replaced by the effects of the utilization of the proceeds. Acquisitions and Divestitures During the last three calendar years, Cooper's continuing operations have completed 22 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. 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 (including a $2 million nonrecurring charge), respectively. The Kirsch operations are included in the continuing operations of Cooper until the date of the sale. In addition, on October 9, 1998, Cooper completed the sale of its Automotive Products segment for $1.9 billion. The Automotive Products segment is reflected as a discontinued operation in the Consolidated Financial Statements. Nonrecurring Income and Expenses During the past three years, Cooper has been transitioning into a business focused on higher growth and less volatile businesses concentrated in electrical products and tools and hardware products. In 1995, Cooper divested the remaining businesses comprising its former Petroleum and 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, an underperforming business that had migrated to more of a fashion business than the basic manufacture A-1 2 of drapery hardware and did not fit with the core electrical products and tools and hardware products businesses. On October 9, 1998, Cooper completed the sale of its Automotive Products segment. In addition, over the past three years, Cooper has been realigning its product lines and operations and positioning itself to compete more efficiently in the global markets. Cooper retained minority interests in the common stock of Belden, Inc. from the initial public offering in 1993 and Cooper Cameron from the 1995 exchange. In 1994, Cooper sold its Cameron Forged Products business to Wyman-Gordon Corporation ("Wyman-Gordon") and received Wyman-Gordon common stock as part of the consideration. In 1995, the Wyman-Gordon common stock was monitized through the issuance of DECS(SM) (Debt Exchangeable for Common Stock). Cooper realized gains from the sale of Cooper's marketable equity securities of Belden, Cooper Cameron and Wyman-Gordon, and the sale of Kirsch over the past three years. In 1998, Cooper also initiated an acquisition of TLG, plc. The acquisition was not consummated as Cooper could not justify exceeding an offer made by another company. However, Cooper realized a gain from the sale of common stock it had acquired at its offer price. The gains before income taxes that Cooper recognized during the three years ended December 31, 1998 were as follows:
1998 1997 1996 ------ ----- ------ (IN MILLIONS) DECS(SM) and Wyman-Gordon common stock...................... $132.7 $23.2 $ -- TLG, plc common stock....................................... 2.5 -- -- Sale of Kirsch.............................................. -- 69.8 -- Belden and Cooper Cameron common stock...................... -- -- 150.4 ------ ----- ------ $135.2 $93.0 $150.4 ====== ===== ======
All of the common stock of Wyman-Gordon, Belden and Cooper Cameron was sold during the three year period ended December 31, 1998, and at this time, Cooper does not own investments in marketable equity securities. In 1998, Cooper recorded a charge of $53.6 million for nonrecurring and unusual items. The nonrecurring and unusual items consist of $26.4 million in severance, $11.1 for impairment of the assets of two product lines and $16.1 million of other charges, including facility exit costs. During the fourth quarter of 1998, Cooper completed its formal annual review of each of its operations and developed plans to strengthen the competitiveness and efficiencies of each operation. In addition to the specific plans for actions of each operation committed to by management during the fourth quarter, Cooper also initiated and announced a voluntary and involuntary severance program. Cooper has a formal written severance policy for salaried personnel and, in certain operations, contractual severance obligations for hourly personnel. 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 established written policies. Cooper accrued a total of $26.4 million in severance in the fourth quarter of 1998 and expects to incur approximately $5 million of additional severance related to the voluntary program in the first quarter of 1999. In addition, Cooper will incur additional severance as the shut down or downsizing of plants and other facilities and other actions are announced and employees are notified. Excluding positions that will be eliminated but are not included in the severance accrual, a total of 1,759 positions will be eliminated across Cooper. Certain of the eliminated positions will be replaced by positions in lower cost manufacturing locations. As of December 31, 1998, a total of 124 positions had been eliminated and, at a minimum, an additional 295 positions will be eliminated by the end of the first quarter of 1999. At December 31, 1998, a total of $25.4 million of the $26.4 million severance accrual remained to be expended. In the fourth quarter of 1998, Cooper also recorded a charge of $11.1 million for impairment of the assets of two electrical product lines. Market conditions, including increased competition from imports, had reduced the profitability of both of these product lines to negative amounts. Due to the inability to recover the investments on an undiscounted cash flow basis, the long-lived assets were written down to the greater of the discounted cash flows or the fair market value. The reduction in future depreciation expense as a result of the write-down is less than $2 million a year. Cooper also recorded $16.1 million in other charges, including facility exit costs. At December 31, 1998, a total of $7.8 million of the $16.1 million accrual remains to be expended. Cooper anticipates A-2 3 incurring in excess of $25 million in 1999 related to severance costs, facility exit costs and disruptions to operations that could not be accrued as of December 31, 1998. In addition to hourly and certain voluntary and involuntary salaried severance, considerable facility exit costs cannot be accrued until the closing of a facility is announced and the costs are incurred. Other than the premium over the normal severance for the voluntary severance program, these costs are spread throughout the year and are less than the savings from the anticipated cost reductions in 1999. The nonrecurring charges in 1998 when combined with the nonrecurring gains result in a net $53.0 million gain after income taxes ($.46 per diluted common share) from nonrecurring and unusual items included in 1998 income from continuing operations. Of the $53.6 million charge before income taxes, $33.2 million remains to be expended at December 31, 1998. The future expenditures against the accrual are $25.4 million in severance and $7.8 million primarily related to exit costs for facilities closed and facilities that will be closed. In 1997, Cooper 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 included impairment in the carrying value of assets and abandonment of assets of $24.2 million and accruals for continuing obligations for replaced systems and facility consolidations of $16.3 million. Cooper began consolidating certain international manufacturing and distribution facilities in the Tools & Hardware segment during 1997. 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 were not expensed until the affected employees were notified and the costs incurred. A majority of the consolidations were announced and such costs were accrued and expensed during 1997. Cash expenditures in 1998 for the payout of accrued severance and other expenditures related to the consolidations were not significant. However, as the projects were completed, Cooper incurred additional expenses from consolidation disruptions to operations and additional consolidation expenses. These additional expenses were expensed as incurred in 1997 and 1998 and were not significant. During 1997, Cooper also assessed the ability of existing information systems to function at the turn of the century. Three of Cooper's seven divisions implemented 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 with 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 were 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 exceeded the reduction in depreciation and amortization. The nonrecurring gains in 1997, combined with nonrecurring charges and a $6.1 million income tax benefit related to the settlements of certain state income tax matters, resulted in the inclusion in income from continuing operations of a net nonrecurring gain of $39.1 million after income taxes ($.32 per diluted share). Cooper incurred nonrecurring charges totaling $15.9 million before income taxes during 1996. A total of $3.0 million was incurred primarily related to a write-down of property and equipment at a facility; $2.0 million in 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 did not affect future earnings, and expenditures beyond 1996 were nominal. Nonrecurring gains from the sale of marketable equity securities, combined with nonrecurring charges in 1996, resulted in the inclusion in continuing income of a net nonrecurring gain of $83.4 million after income taxes ($.67 per diluted share). With the exception of the sale of Kirsch, the actions committed to in 1997 did not have a significant continuing impact on revenues, segment operating earnings or cash flows. The actions committed to in 1998, exclusive of the Automotive Products segment sale, are anticipated to result in a net cash outflow, after cost savings in 1999 of approximately $15 million. The cost savings in 1999 are anticipated to exceed the additional expenses incurred and to be in excess of $40 million in years beyond 1999. See Notes 2 and 6 of Notes to Consolidated Financial Statements for additional information on nonrecurring gains and charges. A-3 4 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 redeemed 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. During 1997, Cooper purchased approximately 3.6 million shares of its Common stock for $191.5 million. This action was taken to maintain Cooper's debt-to-total capitalization ratio between 35% and 45%. During 1998, Cooper repurchased approximately 26.9 million shares of its Common stock at a cost of $1,348.1 million. A total of $1.0 billion of the purchases of Common stock in 1998 were directly related to the sale of the Automotive Products segment as discussed under "The Impact of the Automotive Products Segment Divestiture". The remaining 1998 Common stock repurchases were related to maintaining the debt-to-total capitalization in the targeted range and eliminating the dilutive effect of Common stock issued under employee stock plans. At December 31, 1998, Cooper's debt-to-total capitalization ratio was 36.5%. YEAR 2000 AND EURO CONVERSION YEAR 2000 SYSTEMS ASSESSMENTS AND PREPAREDNESS The Year 2000 problem arises because many information systems and devices containing embedded technology use two digits rather than four digits to identify a year. Calculations in date-sensitive systems using two digits could result in system failures and errors that disrupt normal business operations as the year 2000 approaches. Early in 1997, Cooper conducted an assessment of year 2000 compliance of all of its major information technology systems, non-information technology systems with date-sensitive software and embedded microprocessors and products Cooper manufactured or sold to customers. Cooper developed detailed plans to resolve all major issues by the end of 1998. As of December 31, 1998, Cooper estimates that it is over 90% complete with its efforts to remediate current systems or implement new systems that are year 2000 compliant. The majority of the remaining efforts are anticipated to be completed before the end of the second quarter of 1999. Cooper has substantially completed its efforts to assess noncompliant embedded technology including Cooper's assessment of the products it has delivered to customers. Cooper expects that only three of its seven divisions will be involved in any significant compliance efforts in 1999. The projects that will continue into 1999 include completing lower priority information technology systems projects and replacing systems in recently acquired business units. Efforts in 1999 will become less focused on systems projects and more focused on identifying areas of additional business risk and developing contingency plans where appropriate. Cooper initiated formal communications with its key suppliers and service providers to determine the potential risk to Cooper's operations if these third parties fail to solve year 2000 issues. Cooper's divisions have substantially completed their assessment of suppliers and service providers. If Cooper determines that there is a risk to its operations because a key third party may not be year 2000 compliant, it expects to develop contingency plans to address this risk by the end of the first quarter of 1999. The extent of this risk cannot be determined with any degree of certainty due to the number of small suppliers and service providers used by Cooper and the reliance of all operations on basic utility service providers. Cooper's investment in information technology has become a larger percentage of annual capital expenditures. Cooper estimates that it will have total capital expenditures related to year 2000 compliance of approximately $75 million, and that it has incurred and will continue to incur into mid-1999 approximately $1 to $2 million each quarter in expense related to year 2000 efforts. Cooper has incurred approximately 80% of the capital expenditures as of December 31, 1998. The majority of these expenditures relate to new systems installations. Although the timing of new systems installations was influenced by the year 2000 problem, Cooper would have installed these systems in any event. The above costs for year 2000 compliance efforts do not include costs relating to Cooper's Automotive Products segment, which was sold on October 9, 1998 and is treated as a discontinued operation in the consolidated financial statements. A-4 5 The worst case scenario related to Cooper's preparedness is that Cooper would not complete the information technology systems projects that are scheduled in 1999 on time because of a severe shortage of qualified information systems personnel, both internally and externally. Cooper recognizes that completion of these projects could also be affected for other reasons that are unknown to Cooper at this time. Cooper believes that it is unlikely that such projects would be delayed beyond a point in time where Cooper would suffer material adverse effects from noncompliance. For this reason, Cooper has not developed a contingency plan for this risk. In the unlikely event that the remaining information technology systems projects are not completed before significant problems are encountered, Cooper's results of operations could be adversely affected. Cooper has not determined whether such adverse effect would be material. In addition to the internal risks specific to Cooper and the risks posed by third parties that the company deals with directly, there are a number of other year 2000 risks and uncertainties that could affect Cooper. These risks include utility and communication failures and governmental, economic and market responses to the year 2000 problem. While Cooper continues to believe that these year 2000 matters will not have a material adverse impact on its results of operations, liquidity or financial condition, the ultimate impact on Cooper of the year 2000 problem remains uncertain. Cooper's year 2000 project capital expenditures, estimated percentage of completion and estimated completion dates 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. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. EURO CONVERSION On January 1, 1999, the euro became the common currency of eleven of the fifteen member states of the European Union. The national currencies will remain legal tender in the participating countries until mid-year 2002. During the dual currency phase, businesses must be capable of conducting commercial transactions in either the euro or the national currency. After the dual currency phase, all businesses in participating countries must conduct all transactions in the euro and must convert their financial records and reports to be euro based. The euro introduction may affect cross-border competition by creating cross-border price transparency, beginning with the dual currency phase on January 1, 1999. Cooper estimates that approximately 10% of its 1998 revenues came from countries that adopted the euro. Cooper expects that the impact of the dual currency phase will not be material to its results of operations. Cooper has assessed its information technology systems and believes that they are capable of meeting the dual currency phase requirements. Cooper is assessing the risk to its business of the final phase of the euro conversion which begins during 2002, and currently is unable to determine whether the final phase of the euro conversion will have a material effect on Cooper's operations. The costs of the euro dual currency phase are included with the year 2000 capital expenditures and expense amounts and are not significant. 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 operations as well as its financial position, cash flows and indebtedness. REVENUES
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 -------- ------------- -------- (IN MILLIONS) Electrical Products.................................... $2,824.4 $2,568.3 $2,407.5 Tools & Hardware....................................... 826.8 749.9 720.1 -------- -------- -------- Continuing Revenues.......................... 3,651.2 3,318.2 3,127.6 Kirsch................................................. -- 97.4 252.9 -------- -------- -------- Total Revenues............................... $3,651.2 $3,415.6 $3,380.5 ======== ======== ========
A-5 6 1998 vs. 1997 Revenues Revenues in 1998 increased 10% over 1997, excluding 1997 Kirsch revenues. Excluding the impact of eleven 1998 acquisitions and the carryover impact of 1997 acquisitions, revenues for 1998 were flat when compared to 1997. The continued strengthening of the U.S. dollar against most functional currencies in which international operations conduct business reduced revenues measured in U.S. dollars by approximately $23 million or 1% compared to 1997. The strength of the dollar also had a negative unquantifiable impact on export sales. Annual revenues for the Electrical Products segment increased 10% from the prior year and contributed approximately 77% of Cooper's continuing revenues in 1998. Excluding the impact of acquisitions, revenues increased 1%. Revenue increases across most electrical businesses were strong early in the year. While demand for lighting fixtures remained strong in the later part of the year, beginning in the second quarter of 1998, demand for electrical construction materials and electrical distribution equipment softened. Demand for power systems equipment and electrical construction materials was negatively impacted by the global decline in energy and natural resources projects and the interruption of growth in Southeast Asia. Revenues were also negatively impacted by a weak year end buy-in of fuses by distributors to meet annual volume incentives and disruptions in shipments and the resultant build of backlog of electrical distribution equipment as a new enterprise-wide business system was placed in service at the power systems operation. The Tools & Hardware segment contributed approximately 23% of Cooper's continuing revenues in 1998. Revenues increased 10% over the prior year. Excluding the benefit of 1998 acquisitions, revenues decreased 3% compared to 1997. Lower shipments to domestic aerospace and automotive manufacturers and softness in the industrial and electronic markets resulted in the year-to-year decrease. Improved hand tool demand from consumer markets, strong demand for assembly equipment from international markets and new products provided a partial offset. Revenues were also unfavorably impacted by the implementation of new enterprise-wide business systems at both operations that comprise the Tools & Hardware segment. 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 was 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. SEGMENT OPERATING EARNINGS Cooper measures the performance of its businesses exclusive of nonrecurring charges and financing expenses. All costs directly attributable to operating businesses are included in segment operating earnings. Corporate overhead costs, including costs of centrally managed functions, such as treasury, are not allocated to the businesses. Cooper has historically reported the results of its operations in this manner and, therefore, the required adoption of new reporting standards for segment results did not impact historical comparability of the segment operating results. See Notes 1 and 15 of the Notes to Consolidated Financial Statements. A-6 7 Historically, Kirsch was part of the Tools & Hardware segment. Effective with the decision to divest this operation, its results were segregated from the continuing Tools & Hardware segment for internal management reporting.
YEAR ENDED DECEMBER 31, ----------------------------------- Segment Operating Earnings (internal management reporting -- 1998 1997 1996 excludes nonrecurring gains and charges): ------ ------------- ------ (IN MILLIONS) Electrical Products........................................ $479.0 $461.6 $408.3 Tools & Hardware........................................... 112.4 99.6 91.4 ------ ------ ------ Continuing Segment Operating Earnings............ 591.4 561.2 499.7 Kirsch..................................................... -- 4.8 22.0 ------ ------ ------ Total Segment Operating Earnings................. $591.4 $566.0 $521.7 ====== ====== ======
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ------ ------------- ------ Nonrecurring Gains and (Charges) (IN MILLIONS) Electrical Products....................................... $(42.6) $(15.9) $ (3.0) Tools & Hardware.......................................... (8.7) (22.5) -- ------ ------ ------ Continuing Segments............................. (51.3) (38.4) (3.0) Kirsch.................................................... -- 69.8 (2.0) ------ ------ ------ Total........................................... $(51.3) $ 31.4 $ (5.0) ====== ====== ======
YEAR ENDED DECEMBER 31, Segment Operating Earnings (generally accepted accounting ----------------------------------- principles -- 1998 1997 1996 includes nonrecurring gains and charges): ------ ------------- ------ (IN MILLIONS) Electrical Products....................................... $436.4 $445.7 $405.3 Tools & Hardware.......................................... 103.7 77.1 91.4 ------ ------ ------ Continuing Segment Operating Earnings........... 540.1 522.8 496.7 Kirsch.................................................... -- 74.6 20.0 ------ ------ ------ Total Segment Operating Earnings................ $540.1 $597.4 $516.7 ====== ====== ======
1998 vs. 1997 Segment Operating Earnings Segment operating earnings in 1998 included nonrecurring charges of $51.3 million for adjustments to the carrying value of assets, accruals for facility consolidations and related severance and other obligations committed to by management. Segment operating earnings in 1997 included nonrecurring charges of $38.4 million and a $69.8 million gain on the sale of Kirsch. See "Nonrecurring Income and Expenses" in the "Overview" section and Note 2 of Notes to Consolidated Financial Statements. Excluding nonrecurring charges from 1998 and nonrecurring gains and charges from 1997, segment operating earnings for 1998 increased 4% over 1997. Excluding Kirsch from 1997 results, segment operating earnings increased 5% over 1997. Acquisitions contributed approximately $43 million or 8% to the segment operating earnings over the prior year. The Electrical Products segment operating earnings, excluding nonrecurring charges of $42.6 million in 1998 and $15.9 million in 1997, improved 4% over the prior year and contributed 81% of Cooper's continuing segment operating earnings. Acquisitions contributed approximately $28 million of the increase in earnings before nonrecurring items in 1998. Increased sales volume, performance improvements at the lighting products operations and contribution from recent acquisitions were the primary sources of earnings growth in 1998. Excluding the impact of acquisitions, operating earnings of substantially all electrical products businesses began the year with strong incremental improvement over the prior year. Beginning in the second quarter of 1998, the softening of demand for certain power systems equipment and electrical construction materials began to negatively impact comparable operating earnings. This trend continued in the second half of the year with indications of a more stable environment in the fourth quarter of 1998. The weak year end buy-in of fuses and the disruption of shipments of electrical distribution equipment from the implementation of new business systems also had a negative impact on the comparable operating earnings. Excluding nonrecurring items, return on revenues was 17% in 1998 versus 18% in 1997. Approximately half of the decrease in return on revenues was driven by the addition of acquisitions with lower returns on revenues. The remaining decrease was the result of the increase in sales of A-7 8 lighting fixtures, which carry a lower return on sales than the average, the slowing demand for higher margin construction materials and certain power distribution equipment and costs associated with the implementation of a business enterprise system for the power systems operations. The Tools & Hardware segment operating earnings, excluding nonrecurring items of $8.7 million in 1998 and $22.5 million in 1997, increased 13% from 1997 and contributed 19% of continuing segment operating earnings. Acquisitions contributed approximately $15 million in earnings in 1998. Excluding the impact of acquisitions, operating earnings began the year with relatively strong incremental earnings over the prior year. Softening demand in the industrial and electronic markets and in the aerospace and automotive markets negatively impacted year-over-year performance in the later half of the year. Excluding nonrecurring items, return on revenues increased to 13.6%, up three tenths of a point from the prior year. Acquisitions contributed a small portion of the increase in return on revenues with the remainder of the increase primarily driven by the favorable product mix in the first half of 1998, partially offset by costs associated with the implementation of new enterprise-wide business systems. 1997 vs. 1996 Segment Operating Earnings Segment operating earnings in 1997 included 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. Segment operating earnings also included a $69.8 million gain on the sale of Kirsch. Segment operating earnings in 1996 included $5.0 million in nonrecurring charges. See "Nonrecurring Income and Expenses" in the "Overview" section and Note 2 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 was 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 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, 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 $1 million. Excluding 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. OTHER INCOME AND EXPENSE
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ------- ------- ------- (IN MILLIONS) Segment Operating Earnings(1)............................. $ 540.1 $ 597.4 $ 516.7 General Corporate: Nonrecurring Gains...................................... 135.2 23.2 150.4 Nonrecurring Charges.................................... (2.3) (2.1) (10.9) Expense................................................. (47.5) (44.9) (43.4) Interest Expense, net..................................... (101.9) (90.4) (142.1) ------- ------- ------- Income from Continuing Operations before Income Taxes... $ 523.6 $ 483.2 $ 470.7 ======= ======= =======
- --------------- (1) Includes nonrecurring gain on sale of Kirsch and nonrecurring charges. A-8 9 Nonrecurring Gains and Nonrecurring Charges See Nonrecurring Income and Expenses in the Overview section and Notes 2 and 6 of Notes to Consolidated Financial Statements. General Corporate Expense General corporate expenses, excluding nonrecurring items, increased $2.6 million and $1.5 million in 1998 and 1997, respectively. The impact of inflation on compensation and other expenses continued to impact general corporate expenses. Cost reductions related to the Automotive Products segment divestiture did not significantly impact the comparability of 1998 expense to 1997 due to the transaction activities subsequent to the sale. Interest Expense, Net Interest expense, net, increased in 1998 to $101.9 million from $90.4 million in 1997 as additional debt incurred to fund acquisitions and stock repurchases more than offset the impact of the conversion during 1997 of $610 million of the Company's 7.05% Convertible Subordinated Debentures to Cooper Common stock. The proceeds received on October 9, 1998 from the sale of the Automotive Products segment were utilized to repay debt incurred for a $500 million Common stock repurchase consummated in anticipation of the sale, to repurchase an additional $500 million in Common stock and repay $900 million in debt. The timing of Common stock repurchases and debt repayments resulted in significant fluctuations in the total debt of Cooper at specific points in time during 1998. 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. INCOME FROM CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Income from continuing operations before income taxes....... $523.6 $483.2 $470.7 Income taxes................................................ 187.7 173.2 185.6 ------ ------ ------ Income from continuing operations........................... $335.9 $310.0 $285.1 ====== ====== ====== Diluted earnings per share from continuing operations....... $ 2.93 $ 2.57 $ 2.52 ====== ====== ======
1998 vs. 1997 Income from Continuing Operations Income from continuing operations before income taxes for 1998, excluding net nonrecurring gains, increased 3% to $442.0 million from $430.7 million in 1997. The Automotive Products segment divestiture, as discussed in the Overview section, interest expense on Common stock repurchases and nonrecurring items all had significant impacts on the comparability of income from continuing operations before income taxes. The effective tax rate for 1998 was unchanged from the 1997 rate of 35.8%. Excluding income taxes on both 1998 and 1997 nonrecurring items and the 1997 tax benefit related to the favorable settlements of several state income tax issues, the effective tax rates for 1998 and 1997 were 36.0% and 37.0%, respectively. This rate reduction resulted from Cooper's ongoing tax planning efforts. Income from continuing operations increased 8% over the 1997 level. Excluding the net after-tax impact from nonrecurring items in both years, income from continuing operations increased 4% to $282.9 million from $270.9 million in 1997. Increased segment operating earnings more than offset higher interest expense contributing to the earnings increase. Diluted earnings per share from continuing operations increased 14% over the 1997 level. Excluding the net nonrecurring item impacts of $.46 per share in 1998 and $.32 per share in 1997, diluted earnings per share from continuing operations increased 10%. The Automotive Products segment divestiture, as discussed in the Overview section, interest expense on Common stock repurchases and nonrecurring items all had significant impacts on the comparability of income from continuing operations and earnings per share. 1997 vs. 1996 Income from Continuing Operations Income from continuing operations before income taxes for 1997, exclusive of 1997 net nonrecurring gains, 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 included $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 A-9 10 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, as well as from the increase in income from continuing operations before income taxes diluting the impact of nondeductible goodwill amortization. The 1997 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 included 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, which was related to the conversion of $610 million of 7.05% Convertible Subordinated Debentures to Cooper Common stock, had no effect on diluted earnings per share as the interest expense was excluded and the equivalent Cooper Common stock was 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. PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ Revenue..................................................... 100.0% 100.0% 100.0% Cost of Sales............................................... 67.0% 66.8% 67.3% Selling and Administrative.................................. 16.9% 17.0% 17.6%
1998 vs. 1997 Percentage of Revenues Cost of sales, as a percentage of revenue, increased to 67.0% in 1998 from 66.8% in 1997. An unfavorable product mix, competitive conditions for certain electrical product lines and higher manufacturing costs related to implementation of new business systems in several businesses accounted for the increase. Selling and administrative expenses decreased slightly as a percentage of revenues. Excluding Kirsch in 1997, which had relatively higher selling and administrative expenses, selling and administrative expenses increased slightly as a result of softness in revenues in certain of the Electrical Products segment businesses. 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. DISCONTINUED OPERATIONS -- AUTOMOTIVE PRODUCTS SEGMENT 1998 vs. 1997 Revenues Revenues for the discontinued Automotive Products segment from January 1, 1998 through October 9, 1998, the date of sale of the business, were $1,449.4 million compared to full year revenues for 1997 of $1,873.2 million. Market conditions prior to the sale reflected increased sales to worldwide original equipment manufacturers and improved steering and suspension sales offset by weak domestic aftermarket demand in most product lines. The net impact of the exchange of the temperature control business for the brake business of Standard Motor Products resulted in lower revenues during the period as a result of disruption in the marketplace A-10 11 during the transition. Also, revenues were affected by the bankruptcy of a large customer significantly reducing sales volume to this customer compared to 1997. In total, revenues for a comparable period in 1997 decreased approximately 1%. 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. 1998 vs. 1997 Segment Operating Earnings Excluding 1997 nonrecurring charges, the discontinued Automotive Products segment operating earnings from January 1, 1998 through October 9, 1998 were $143.7 million compared to $186.9 million for the 1997 fiscal year. In comparison to a comparable period in 1997, operating earnings were slightly lower in 1998 than the prior year. The exchange of the temperature control business for the brake business of Standard Motor Products had a significant impact on the comparability of operating earnings. The temperature control business typically had operating losses in the first and fourth quarter of each year with the majority of the operating earnings occurring in the second and third quarter. The comparability of the 1998 operating earnings to 1997 was also impacted by the increase in the allowance for doubtful accounts related to a customer that filed for bankruptcy in 1998 and the settlement of litigation matters. 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. 1998 vs. 1997 Income from Discontinued Operations, Net of Taxes Income from discontinued operations, net of taxes, from January 1, 1998 through the October 9, 1998 sale date, was $87.1 million ($.76 per diluted share) compared to $84.6 million ($.69 per diluted share) for the 1997 fiscal year. Excluding nonrecurring charges of $26.9 million ($.22 per diluted share), income from discontinued operations, net of taxes, in 1997 was $111.5 million ($.91 per diluted share). 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, increased approximately 5%. EARNINGS OUTLOOK The following sets forth Cooper's general business outlook for 1999, based on current expectations. The statements are forward-looking and actual results may differ materially. The comparative figures for 1999 include the effects of acquisitions made during 1998 and exclude 1998 nonrecurring items. Segment revenues are expected to increase by five to ten percent for the Electrical Products segment and approximately five percent for the Tools & Hardware segment. Cooper expects operating earnings for the Electrical Products segment to increase by five to ten percent. Operating earnings for the Tools & Hardware segment are expected to increase by zero to five percent. As discussed in the "Overview" section under "Impact of Automotive Products Segment Divestiture", Cooper anticipates that it will replace substantially all of the 1998 earnings per share contributed by the Automotive Products segment through the effects of the use of proceeds from the sale in 1998 to reduce debt and purchase Cooper Common stock. A-11 12 The above statements are forward-looking, and actual results may differ materially. The above statements are based on a number of assumptions, risks and uncertainties. The primary economic assumptions include, without limitation, (1) modest growth in the domestic economy; (2) a modest improvement in European markets; (3) a modest increase in construction spending worldwide; (4) no significant change in raw material costs; and (5) no significant adverse changes in the relationship of the U.S. dollar to the currencies of countries in which Cooper does business. The estimates also assume, without limitation, the successful completion of the implementation of business enterprise systems for the Company, no significant change in competitive conditions and such other risk factors as are discussed from time to time in Cooper's periodic filings with the Securities and Exchange Commission. 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 judgment that, excluding the year-to-year effects of acquisitions and divestitures, unit volume increased in the Electrical Products segment and decreased in the Tools & Hardware segment in 1998. During the three-year period ending in 1998, 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. 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 1998, operating working capital, as reported in the Consolidated Balance Sheet, increased $97 million, driven by increases in receivables and inventories of $30 million and $49 million, respectively, and a $19 million decrease in accounts payable. Operating working capital turnover for 1998 declined to 5.0 turns from 5.3 turns in 1997. The decline in operating working capital turnover was due to the timing of accounts payable disbursements and a build up of inventories as a result of implementing new business systems. Excluding 1998 acquisition activity, the increase in operating working capital was driven primarily by the timing of accounts payable disbursements. In 1997, operating working capital 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%. Cash Flows On October 9, 1998, Cooper completed the sale of its Automotive Products segment and received $1.9 billion in proceeds. The proceeds were utilized to purchase $1.0 billion in Common stock and repay $900 million in debt. A-12 13 Net cash provided by continuing operating activities in 1998 totaled $333 million as cash generated from earnings was more than sufficient to offset increases in operating working capital. These funds, along with the proceeds from the Automotive Products segment sale and cash received from the exercise of stock options of $42 million were used to fund acquisitions of $294 million, capital expenditures of $142 million, dividends of $149 million, acquisitions of treasury stock of $1,348 million and a net reduction in total debt of $347 million. Net cash provided by continuing 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 continuing operating activities in 1996 totaled $350 million. The cash generated from continuing 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. 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, 1998, is reduced by the amounts expended on the various accruals established in connection with each acquisition. At December 31, 1998, Cooper had accruals totaling $15.6 million related to these activities. Cooper spent $5.7 million, $4.9 million and $3.4 million in 1998, 1997 and 1996, respectively. See Note 7 of the Notes to Consolidated Financial Statements for further information. Debt During 1996, Cooper filed a shelf registration statement for $300 million of medium-term notes and issued $50 million of five-year notes. During 1998, Cooper issued the remaining $250 million of five-year notes at an average interest rate of 6.2% under the existing shelf registration statement. The issuance of additional notes will require the filing of a new 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 a minimum debt-to-capitalization ratio of approximately 35% with excess cash utilized to purchase shares of Cooper's Common stock or fund acquisitions. The ratio of debt-to-total capitalization was 36.5%, 35.4% and 49.3% at year-end 1998, 1997 and 1996, respectively. 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 $142 million in 1998, $117 million in 1997 and $115 million in 1996. Projected capital expenditures for 1999 are anticipated to exceed 1998 expenditures by approximately 10%. The 1999 anticipated capital spending represents approximately 65% for various cost-reduction and capacity-maintenance projects, including machinery and equipment modernization and enhancement and computer hardware and software projects; 11% for capacity expansion; 5% related to environmental matters; and 19% 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 local tax considerations, it also reduces the cash flow risk as a significant portion of cash A-13 14 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, 1998, 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. The table below provides information about Cooper's financial instruments at December 31, 1998 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.
1999 2000 2001 2002 2003 THEREAFTER TOTAL ---- ------ ----- ----- ------ ---------- ------ (IN MILLIONS, WHERE APPLICABLE) Long-term debt: Fixed rate............ $2.3 $ 1.2 $51.1 $60.7 $153.2 $348.7 $617.2 Average interest rate............... 6.3% 6.3% 6.4% 6.4% 6.5% 6.6% 6.4% Variable rate......... $4.0 $100.5 $ 0.5 $ 0.5 $ 0.9 $ 57.2 $163.6 Average interest rate............... 5.3% 5.3% 5.4% 5.3% 5.3% 5.4% 5.3%
The table below provides information about Cooper's foreign currency forward contracts in excess of $5 million at December 31, 1998. The contracts mature during 1999. The table presents the notional amounts and weighted average exchange rates. 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.
1999 ------------------------------- (IN MILLIONS, WHERE APPLICABLE) U.S. Dollar Functional Currency Buy German Deutschemark/Sell U.S. Dollars Notional amount........................................... $ 132.2 Average contract rate..................................... .61 Sell German Deutschemark/Buy U.S. Dollars Notional amount........................................... $ 162.3 Average contract rate..................................... .60 Buy Pounds Sterling/Sell U.S. Dollars Notional amount........................................... $ 107.8 Average contract rate..................................... 1.65 Sell Pounds Sterling/Buy U.S. Dollars Notional amount........................................... $ 175.3 Average contract rate..................................... 1.66 Canadian Dollar Functional Currency Buy U.S. Dollars/Sell Canadian Dollars Notional amount........................................... $ 18.4 Average contract rate..................................... .65 German Deutschemark Functional Currency Sell Pounds Sterling/Buy German Deutschemark Notional amount........................................... $ 7.8 Average contract rate..................................... .61
A-14 15 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.
1998 1999 2000 2001 2002 THEREAFTER TOTAL ----- ------ ------ ----- ----- ---------- ------ (IN MILLIONS, WHERE APPLICABLE) 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%
- --------------- (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 delivered 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.
1998 2000 ----------- ----------- (IN MILLIONS, WHERE APPLICABLE) 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 --
See Note 16 of Notes to Consolidated Financial Statements for additional information regarding the fair value of Cooper's financial instruments. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 1 of Notes to Consolidated Financial Statements. A-15 16 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 1999 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, 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 of the Board of Directors. 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. /s/ H. John Riley, Jr. /s/ D. Bradley McWilliams /s/ Terry A. Klebe 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-16 17 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, 1998 and 1997, and the related consolidated income statements and statements of shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Houston, Texas January 25, 1999 A-17 18 COOPER INDUSTRIES, INC. CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues.................................................... $3,651.2 $3,415.6 $3,380.5 Cost of sales............................................... 2,447.1 2,281.6 2,275.5 Selling and administrative expenses......................... 616.4 580.5 595.2 Goodwill amortization....................................... 43.8 32.4 31.5 Nonrecurring gains.......................................... (135.2) (93.0) (150.4) Nonrecurring charges........................................ 53.6 40.5 15.9 Interest expense............................................ 101.9 90.4 142.1 -------- -------- -------- Income from continuing operations before income taxes..... 523.6 483.2 470.7 Income taxes................................................ 187.7 173.2 185.6 -------- -------- -------- Income from continuing operations......................... 335.9 310.0 285.1 Income from discontinued operations, net of income taxes.... 87.1 84.6 30.3 -------- -------- -------- Net income........................................ $ 423.0 $ 394.6 $ 315.4 ======== ======== ======== Income per Common share Basic: Income from continuing operations...................... $ 2.97 $ 2.64 $ 2.66 Income from discontinued operations.................... .77 .72 .28 -------- -------- -------- Net income........................................ $ 3.74 $ 3.36 $ 2.94 ======== ======== ======== Diluted: Income from continuing operations...................... $ 2.93 $ 2.57 $ 2.52 Income from discontinued operations.................... .76 .69 .25 -------- -------- -------- Net income........................................ $ 3.69 $ 3.26 $ 2.77 ======== ======== ======== Cash dividends per Common share............................. $ 1.32 $ 1.32 $ 1.32 ======== ======== ========
The Notes to Consolidated Financial Statements are an integral part of these statements. A-18 19 COOPER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 1998 1997 -------- -------- (IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 20.4 $ 30.3 Receivables................................................. 626.4 596.4 Inventories................................................. 533.3 484.8 Deferred income taxes and other current assets.............. 237.2 106.6 -------- -------- Total current assets.............................. 1,417.3 1,218.1 -------- -------- Net assets of discontinued operations....................... -- 1,973.7 Property, plant and equipment, less accumulated depreciation.............................................. 710.5 673.3 Intangibles, less accumulated amortization.................. 1,478.0 1,279.0 Investments in marketable equity securities................. -- 274.8 Deferred income taxes and other noncurrent assets........... 173.3 88.4 -------- -------- Total assets...................................... $3,779.1 $5,507.3 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt............................................. $ 118.1 $ 139.0 Accounts payable............................................ 378.7 397.3 Accrued liabilities......................................... 467.6 426.8 Accrued income taxes........................................ -- 5.5 Current maturities of long-term debt........................ 6.3 58.3 -------- -------- Total current liabilities......................... 970.7 1,026.9 -------- -------- Long-term debt.............................................. 774.5 1,272.2 Postretirement benefits other than pensions................. 237.3 241.9 Deferred income taxes and other long-term liabilities....... 233.0 282.8 -------- -------- Total liabilities................................. 2,215.5 2,823.8 -------- -------- Common stock, $5.00 par value............................... 615.0 615.0 Capital in excess of par value.............................. 674.0 679.8 Retained earnings........................................... 1,790.0 1,514.5 Common stock held in treasury, at cost...................... (1,444.8) (149.7) Unearned employee stock ownership plan compensation......... (40.6) (66.5) Accumulated other non-owner changes in equity............... (30.0) 90.4 -------- -------- Total shareholders' equity........................ 1,563.6 2,683.5 -------- -------- Total liabilities and shareholders' equity........ $3,779.1 $5,507.3 ======== ========
The Notes to Consolidated Financial Statements are an integral part of these statements. A-19 20 COOPER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 --------- ------- ------- (IN MILLIONS) Cash flows from operating activities: Net income................................................ $ 423.0 $ 394.6 $ 315.4 Less: income from discontinued operations................. (87.1) (84.6) (30.3) --------- ------- ------- Income from continuing operations......................... 335.9 310.0 285.1 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization.......................... 137.5 122.0 132.7 Deferred income taxes.................................. 12.4 (6.6) (59.8) Gain on sales of marketable equity securities and DECS exchange............................................. (135.2) (23.2) (150.4) Gain on disposition of Kirsch.......................... -- (69.8) -- Changes in assets and liabilities:(1) Receivables.......................................... 1.9 (40.6) 67.3 Inventories.......................................... (31.1) (17.6) (2.1) Accounts payable and accrued liabilities............. 18.8 53.9 46.2 Accrued income taxes................................. (6.9) 3.1 (3.7) Other assets and liabilities, net.................... (0.4) (6.5) 35.0 --------- ------- ------- Net cash provided by operating activities......... 332.9 324.7 350.3 --------- ------- ------- Cash flows from investing activities: Proceeds from disposition of businesses................... 1,900.0 216.0 2.3 Cash paid for acquired businesses......................... (293.7) (366.4) (201.8) Capital expenditures...................................... (142.4) (117.3) (114.8) Purchase of TLG, plc common stock......................... (42.4) -- -- Proceeds from sales of marketable equity securities....... 44.9 -- 231.4 Proceeds from sales of property, plant and equipment...... 5.9 5.2 17.7 --------- ------- ------- Net cash provided by (used in) investing activities...................................... 1,472.3 (262.5) (65.2) --------- ------- ------- Cash flows from financing activities: Proceeds from issuances of debt........................... 1,220.7 564.7 316.0 Repayments of debt........................................ (1,567.8) (351.8) (542.7) Acquisition of treasury shares............................ (1,348.1) (191.5) -- Dividends................................................. (148.8) (157.4) (142.6) Activity under employee stock plans and other............. 41.7 15.6 1.7 --------- ------- ------- Net cash used in financing activities............. (1,802.3) (120.4) (367.6) --------- ------- ------- Cash provided by (used in) discontinued operations.......... (12.2) 74.2 78.5 Effect of exchange rate changes on cash and cash equivalents............................................... (0.6) (1.8) 2.4 --------- ------- ------- Increase (decrease) in cash and cash equivalents............ (9.9) 14.2 (1.6) Cash and cash equivalents, beginning of year................ 30.3 16.1 17.7 --------- ------- ------- Cash and cash equivalents, end of year...................... $ 20.4 $ 30.3 $ 16.1 ========= ======= =======
- --------------- (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 17 for information on noncash investing and financing activities. A-20 21 COOPER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNEARNED CAPITAL EMPLOYEE ACCUMULATED IN EXCESS STOCK NON-OWNER COMMON OF PAR RETAINED TREASURY OWNERSHIP PLAN CHANGES IN STOCK VALUE EARNINGS STOCK COMPENSATION EQUITY TOTAL ------ --------- -------- --------- -------------- ----------- -------- (IN MILLIONS) BALANCE DECEMBER 31, 1995................ $539.4 $141.6 $1,100.3 $ -- $(121.6) $128.1 $1,787.8 -------- Net income............................. 315.4 315.4 Minimum pension liability adjustment... (0.9) (0.9) Translation adjustment................. 0.2 0.2 Increase in unrealized gain on investments in marketable equity securities........................... 60.3 60.3 Reclassification to realized gain...... (93.2) (93.2) -------- Net income and other non-owner changes in equity................. 281.8 -------- Common stock dividends................. (142.6) (142.6) Stock issued under employee stock plans................................ 0.5 4.4 4.9 Principal payments by ESOP............. 28.7 28.7 Other activity......................... 0.3 4.1 2.2 6.6 ------ ------ -------- --------- ------- ------ -------- BALANCE DECEMBER 31, 1996................ 540.2 150.1 1,275.3 -- (92.9) 94.5 1,967.2 -------- Net income............................. 394.6 394.6 Minimum pension liability adjustment... 23.6 23.6 Translation adjustment................. (4.2) (4.2) Decrease in unrealized gain on investments in marketable equity securities........................... (9.1) (9.1) Reclassification to realized gain...... (14.4) (14.4) -------- Net income and other non-owner changes in equity................. 390.5 -------- Common stock dividends................. (157.4) (157.4) Conversion of 7.05% Convertible Subordinated debentures.............. 73.9 536.3 610.2 Purchase of treasury shares............ (191.5) (191.5) Stock issued under employee stock plans................................ 0.7 (7.5) 40.9 34.1 Principal payments by ESOP............. 26.4 26.4 Other activity......................... 0.2 0.9 2.0 0.9 4.0 ------ ------ -------- --------- ------- ------ -------- BALANCE DECEMBER 31, 1997................ 615.0 679.8 1,514.5 (149.7) (66.5) 90.4 2,683.5 -------- Net income............................. 423.0 423.0 Minimum pension liability adjustment... (1.1) (1.1) Translation adjustment................. (8.4) (8.4) Decrease in unrealized gain on investments in marketable equity securities........................... (26.0) (26.0) Reclassification to realized gain...... (84.9) (84.9) -------- Net income and other non-owner changes in equity................. 302.6 -------- Common stock dividends................. (148.8) (148.8) Purchase of treasury shares............ (1,348.1) (1,348.1) Stock issued under employee stock plans................................ (6.3) 50.0 43.7 Principal payments by ESOP............. 25.9 25.9 Other activity......................... 0.5 1.3 3.0 4.8 ------ ------ -------- --------- ------- ------ -------- BALANCE DECEMBER 31, 1998................ $615.0 $674.0 $1,790.0 $(1,444.8) $ (40.6) $(30.0) $1,563.6 ====== ====== ======== ========= ======= ====== ========
The Notes to Consolidated Financial Statements are an integral part of these statements. A-21 22 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: 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, 69% and 71% of inventories at December 31, 1998 and 1997, respectively, 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. 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 -- 3 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 were reflected as available-for-sale securities and stated at fair market value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The cost of securities sold was 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 and only hedges anticipated transactions when 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 6, 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. ACCUMULATED OTHER NON-OWNER CHANGES IN EQUITY: Effective January 1, 1998, Cooper adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). The adoption of this statement had no impact on net income or shareholders' equity. SFAS No. 130 requires the reporting of A-22 23 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) comprehensive income, which includes net income plus other non-owner changes in equity, including unrealized gains or losses on investments in marketable equity securities, the minimum pension liability adjustment and cumulative translation adjustment. Net income plus other non-owner changes in equity has been reported in the Consolidated Statements of Shareholders' Equity. Disclosures of the components of accumulated non-owner changes in equity are included in Note 11. SEGMENT AND GEOGRAPHIC INFORMATION: Effective January 1, 1998, Cooper adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS 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. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect results of operations or financial position, but did result in revised segment information disclosures (See Note 15). INTERNAL USE SOFTWARE: In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires companies to capitalize qualifying computer software costs incurred during the application development stage. SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and permits early adoption. Cooper adopted SOP 98-1 in the first quarter of 1998. The adoption had no impact on net income as Cooper's policy was consistent with the requirements of this statement. START-UP ACTIVITIES: In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 requires that all costs of start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998 and permits early adoption. Cooper adopted this standard in the second quarter of 1998. The adoption had no impact on net income as Cooper's policies are consistent with this statement. 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 ITEMS AND UNUSUAL ITEMS During the past three years Cooper has been transitioning into a business focused on higher growth and less volatile businesses concentrated in electrical products and tools and hardware. In 1995, Cooper divested the remaining businesses comprising its former Petroleum and 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, a business that was underperforming and did not fit with the core electrical products and tools and hardware businesses. On October 9, 1998, Cooper completed the sale of its Automotive Products segment (Note 19). In addition, over the past three years, Cooper has been realigning its product lines and operations and positioning itself to compete more efficiently in the global markets. Cooper retained minority interests in the common stock of Belden, Inc. from the initial public offering in 1993 and Cooper Cameron from the 1995 exchange. In 1994, Cooper sold its Cameron Forged Products business to A-23 24 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Wyman-Gordon Corporation ("Wyman-Gordon") and received Wyman-Gordon common stock as part of the consideration. In 1995, the Wyman-Gordon common stock was monitized through the issuance of DECS(SM) (Debt Exchangeable for Common Stock) (Note 6). Cooper realized gains from the sale of Cooper's marketable equity securities of Belden, Cooper Cameron and Wyman-Gordon, the DECS monitization, and the sale of Kirsch over the past three years. In 1998, Cooper also initiated an acquisition of TLG, plc. The acquisition was not consummated as Cooper could not justify exceeding an offer made by another company. However, Cooper realized a gain from the sale of common stock it had acquired at its offer price (Note 3). The gains before income taxes that Cooper recognized during the three years ended December 31, 1998 are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ------ ----- ------ (IN MILLIONS) DECS(SM) and Wyman-Gordon common stock...................... $132.7 $23.2 $ -- TLG, plc common stock....................................... 2.5 -- -- Sale of Kirsch.............................................. -- 69.8 -- Belden and Cooper Cameron common stock...................... -- -- 150.4 ------ ----- ------ $135.2 $93.0 $150.4 ====== ===== ======
In 1998, Cooper recorded a charge of $53.6 million for nonrecurring and unusual items. The nonrecurring and unusual items consist of $26.4 million in severance, $11.1 million for impairment of the assets of two product lines and $16.1 million of other charges, including facility exit costs. During the fourth quarter of 1998, Cooper completed its formal annual review of each of its operations and developed plans to strengthen the competitiveness and efficiencies of each operation. In addition to the specific plans for actions of each operation committed to by management during the fourth quarter, Cooper also initiated and announced a voluntary and involuntary severance program. Cooper has a formal written severance policy for salaried personnel, and in certain operations, contractual severance obligations for hourly personnel. 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 established written policies. Cooper accrued a total of $26.4 million in severance in the fourth quarter of 1998. Excluding positions that will be eliminated but are not included in the severance accrual, a total of 1,759 positions will be eliminated across Cooper. At December 31, 1998, a total of 124 positions had been eliminated. At December 31, 1998, a total of $25.4 million of the $26.4 million severance accrual remained to be expended. Additional severance related to the voluntary program and additional severance as the shut down or downsizing of plants and other facilities and other actions are announced will be incurred. In the fourth quarter of 1998, Cooper also recorded a charge of $11.1 million for impairment of the assets of two electrical product lines. Market conditions, including increased competition from imports, had reduced the profitability of both of these product lines to negative amounts. Due to the inability to recover the investments on an undiscounted cash flow basis, the long-lived assets were written down to the greater of the discounted cash flows or the fair market value. Cooper also recorded $16.1 million in other charges, including facility exit costs. At December 31, 1998, a total of $7.8 million of the $16.1 million charge remained to be expended. In addition to hourly and certain voluntary and involuntary salaried severance, considerable facility exit costs cannot be accrued until the closing of a facility is announced and the costs are incurred. The charges in 1998 when combined with the nonrecurring gains result in a net $53.0 million after income taxes ($.46 per diluted common share) of nonrecurring and unusual items included in income from continuing operations. In 1997, Cooper 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 impairment in the carrying value of assets and abandonment of assets of $24.2 million and accruals for continuing obligations for A-24 25 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) replaced systems and facility consolidations of $16.3 million. The nonrecurring gains in 1997, 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 $39.1 million after income taxes ($.32 per diluted share) being included in income from continuing operations. Cooper began consolidating certain international manufacturing and distribution facilities in the Tools & Hardware segment during 1997. 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 were not expensed until the affected employees were notified and the costs incurred. A majority of the consolidations were announced and such costs were accrued and expensed during 1997. During 1997, Cooper also assessed the ability of existing information system capabilities to function at the turn of the century. Three of Cooper's seven divisions implemented 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 with third parties or committed internal resources to ensure that all major systems are year 2000 compliant. Of the 1997 total charge, $28.5 million related to the adjustment in the carrying value of abandoned hardware and software and liabilities related to hardware and software. Cooper incurred nonrecurring charges totaling $15.9 million before income taxes during 1996. A total of $3.0 million was incurred primarily related to a write-down of property and equipment at a facility; $2.0 million in 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 did not affect future earnings, and expenditures beyond 1996 were nominal. Nonrecurring gains combined with nonrecurring charges in 1996 resulted in a net nonrecurring gain of $83.4 million after income taxes ($.67 per diluted share) being included in income from continuing operations. NOTE 3: ACQUISITIONS AND DIVESTITURES In 1998, Cooper completed one large acquisition, ten small product-line acquisitions and the divestiture of the Automotive Products segment. Seven acquisitions were in the Tools & Hardware segment and four were in the Electrical Products segment. In March 1998, the Company acquired INTOOL for a total cost of $227.2 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 ten small product line acquisitions had an aggregate cost of $67.6 million. A total of $235.2 million in goodwill was recorded, on a preliminary basis, with respect to the acquisitions. On October 9, 1998, Cooper completed the sale of its Automotive Products segment for $1.9 billion (See Note 19). On September 4, 1998, Cooper announced its offer to acquire TLG, plc in a transaction valued at approximately $535 million. On September 28, 1998, Cooper announced that its offer to acquire TLG, plc had expired and would not be extended due to a rival bid made to acquire TLG, plc for approximately $585 million. During the third quarter of 1998, Cooper acquired common stock of TLG, plc for $42.4 million. The common stock was tendered to the rival bidder in October 1998. Cooper realized a gain of approximately $1.6 million after income taxes in the fourth quarter of 1998 from the sale of the common stock. 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 $343.8 million of goodwill was recorded 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 A-25 26 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) revenues of $97.4 million and $252.9 million, and operating earnings of $4.8 million and $20.0 million (net of $2.0 million in nonrecurring charges), respectively. Kirsch was part of the Tools & Hardware segment. 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. 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 4: INVENTORIES
DECEMBER 31, --------------------- 1998 1997 --------- -------- (IN MILLIONS) Raw materials............................................... $ 213.4 $ 192.5 Work-in-process............................................. 114.7 119.2 Finished goods.............................................. 275.6 246.8 Perishable tooling and supplies............................. 21.0 18.6 --------- -------- 624.7 577.1 Excess of current standard costs over LIFO costs............ (91.4) (92.3) --------- -------- Net inventories................................... $ 533.3 $ 484.8 ========= ========
NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES
DECEMBER 31, --------------------- 1998 1997 --------- -------- (IN MILLIONS) Property, plant and equipment: Land and land improvements................................ $ 56.7 $ 49.9 Buildings................................................. 367.3 348.5 Machinery and equipment................................... 716.3 707.8 Tooling, dies and patterns................................ 151.8 131.4 All other................................................. 227.7 182.2 Construction in progress.................................. 110.0 79.5 --------- -------- 1,629.8 1,499.3 Accumulated depreciation.................................. (919.3) (826.0) --------- -------- $ 710.5 $ 673.3 ========= ======== Intangibles: Goodwill.................................................. $ 1,830.4 $1,589.3 Other..................................................... 12.6 11.4 --------- -------- 1,843.0 1,600.7 Accumulated amortization.................................. (365.0) (321.7) --------- -------- $ 1,478.0 $1,279.0 ========= ========
NOTE 6: INVESTMENTS IN MARKETABLE EQUITY SECURITIES At December 31, 1998, Cooper did not hold any investments in marketable equity securities. At December 31, 1997, Cooper's investment in marketable equity securities consisted of its investment in Wyman-Gordon common stock. In December 1995, Cooper issued 16.5 million DECS at $13.50 which, at maturity, were mandatorily A-26 27 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exchangeable into shares of Wyman-Gordon common stock or, at Cooper's option, into cash in lieu of shares. 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 remaining DECS were exchanged for Wyman-Gordon common stock upon redemption in December 1998 resulting in a realized gain of $132.7 million ($84.9 million after income taxes). The DECS were a hedge of Cooper's investment in Wyman-Gordon common stock. Prior to redemption, the unrealized gain on the investment in Wyman-Gordon common stock was included in shareholders' equity as an unrealized gain on investments in marketable equity securities, net of tax. At December 31, 1997, Cooper's long-term debt included an increase in the market value of Wyman-Gordon common stock related to the DECS of $47.9 million. The offset to the debt increase, net of tax, decreased the unrealized gain on investments in marketable equity securities included in shareholders' equity. 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, Cooper sold its remaining Belden Inc. and Cooper Cameron common stock for proceeds of $231.4 million, resulting in realized gains of $150.4 million. NOTE 7: ACCRUED LIABILITIES
DECEMBER 31, ---------------- 1998 1997 ------ ------ (IN MILLIONS) Salaries, wages and employee benefit plans.................. $187.7 $188.2 Product and environmental liability accruals................ 61.8 66.1 Commissions and customer incentives......................... 32.1 26.7 Facility integration of acquired businesses................. 15.6 6.2 Other (individual items less than 5% of total current liabilities).............................................. 170.4 139.6 ------ ------ $467.6 $426.8 ====== ======
At December 31, 1998, Cooper had accruals of $26.2 million with respect to potential product liability claims and $75.2 million with respect to potential environmental liabilities, including $39.6 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 $5.8 million of known claims with respect to ongoing operations, $15.1 million of known claims for previously divested operations and $5.3 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 1998 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 $23.1 million related to sites owned by Cooper and $52.1 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. 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 A-27 28 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The following table summarizes the accrual balances and activity during each of the last three years:
1998 1997 1996 ----- ----- ----- (IN MILLIONS) ACTIVITY DURING EACH YEAR: Balance, beginning of year.................................. $ 6.2 $14.8 $ 8.8 Spending.................................................... (5.7) (4.9) (3.4) Kirsch disposition.......................................... -- (0.4) -- Reclassifications........................................... -- (4.0) 0.1 Acquisitions -- initial allocation.......................... 9.9 1.4 4.1 Acquisitions -- final allocation adjustment................. 5.2 (0.1) 4.9 Translation................................................. -- (0.6) 0.3 ----- ----- ----- Balance, end of year........................................ $15.6 $ 6.2 $14.8 ===== ===== ===== BALANCE BY CATEGORY OF ACCRUAL: Plant shut-down and realignment............................. $13.4 $ 5.8 $12.0 Facility relocations and severance.......................... 0.1 0.4 0.1 Other realignment and integration........................... 2.1 -- 2.7 ----- ----- ----- $15.6 $ 6.2 $14.8 ===== ===== =====
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. During the three years ended December 31, 1998, accruals reversed to income were insignificant. Reclassifications in 1997 were related to lease obligations on closed facilities reclassified to other accrued liabilities. The 1998 acquisitions -- initial allocation amount primarily relates to the INTOOL acquisition. Acquisitions-final allocation adjustment represents adjustments to goodwill for finalization of the purchase price allocations recorded in the previous year. The 1998 acquisitions -- final allocation adjustment is due to the acquisition of Menvier in December 1997. The 1996 acquisitions -- final allocation adjustment is related to the acquisition of CEAG on the last business day of 1995. The Menvier and CEAG acquisitions had insignificant accruals for terminations and no significant individual exit plan costs were accrued. Substantially all spending related to these accruals represented cash outlays by Cooper. A-28 29 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
DECEMBER 31, ----------------- 1998 1997 ------ -------- (IN MILLIONS) 5.6%* commercial paper maturing at various dates through January 1999.............................................. $100.0 $ 400.0 6.41%-6.97% second series medium-term notes, due through 2010...................................................... 302.1 357.6 5.72%-6.45% third series medium-term notes, due through 2008...................................................... 300.0 50.0 6.0% exchangeable notes (DECS).............................. -- 235.2 3.98% Deutschemark denominated bank loan.................... -- 128.3 6.41%* Pound Sterling bank loans and notes payable maturing at various dates through 2005............................. 29.3 88.2 5.17%* floating-rate ESOP notes, due 1999................... 3.5 16.0 Other....................................................... 45.9 55.2 ------ -------- 780.8 1,330.5 Current maturities.......................................... (6.3) (58.3) ------ -------- Long-term portion........................................... $774.5 $1,272.2 ====== ========
- --------------- * Weighted average interest rates at December 31, 1998. The weighted average interest rates on commercial paper, Pound Sterling bank loans and notes and ESOP notes were, 6.5%, 7.2% and 5.5%, respectively, at December 31, 1997. Cooper has U.S. committed credit facilities of $685 million that expire in 2000, and $315 million that expire in 1999. At December 31, 1998, Cooper had $866.1 million of its $1.0 billion U.S. committed credit facilities available, after considering commercial paper backup. At December 31, 1997, $551.7 million of its total $1.15 billion U.S. committed credit facilities was available after considering commercial paper backup. 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. Interest rates on Cooper's commercial paper and U.S. bank loans were generally 2.8% below the U.S. prime rate during 1998 and 1997, respectively. Total interest paid during 1998, 1997 and 1996 was $100 million, $107 million and $141 million, respectively. Commercial paper of $100 million and $400 million was reclassified to long-term debt at December 31, 1998 and 1997, 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. In December 1995, Cooper issued $222.8 million of three-year 6% Exchangeable Notes (DECS). The notes were 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 6). The remaining DECS were redeemed for shares of Wyman-Gordon common stock in December 1998. At December 31, 1997, Cooper's long-term debt included $47.9 million, which represented 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 were included in shareholders' equity. During 1998, Cooper issued $250 million of five-year medium term notes at an average interest rate of 6.17% under an existing shelf registration statement. At December 31, 1998, all notes registered under the shelf registration statement had been issued. 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 14). A-29 30 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 redeemed 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. Maturities of long-term debt for the five years subsequent to December 31, 1998 are $6.3 million, $101.7 million, $51.6 million, $61.2 million and $154.1 million, respectively. The future net minimum lease payments under capital leases and obligations under operating leases are not significant. NOTE 9: COMMON AND PREFERRED STOCK COMMON STOCK At December 31, 1998, 1997 and 1996, 250,000,000 shares of Common stock were authorized of which 94,248,751 and 120,161,446 and 108,038,851 shares were issued and outstanding at December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, Cooper purchased 26,891,548 shares as treasury stock at an average price of $50.13 per share and 926,770 shares were issued in connection with employee stock plans. During 1997, Cooper issued 14,785,831 shares in exchange for the redemption of the 7.05% Convertible Subordinated Debentures (See Note 8). 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. At December 31, 1998, Cooper had 12,286,218 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. 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, 1998 and 1997, 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, 1998 and 1997, no Preferred shares were issued or outstanding. NOTE 10: 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 $6.6 million, $8.2 million and $7.1 million was recognized in the consolidated income statements during 1998, 1997 and 1996, respectively for the performance- A-30 31 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) based stock awards. If compensation expense for stock options and performance-based stock awards granted under Cooper's stock-based compensation plans 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 1.6% in 1998 and 1.2% in 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 1998, 1997 and 1996, respectively: dividend yield of 2.3%, 2.8% and 3.2%, expected volatility of 22.2%, 20.1% and 20.3%, risk free interest rates of 5.6%, 6.4% and 6.1% and expected lives of 7 years in both 1998 and 1997 and 6 years in 1996. A summary of the status of Cooper's fixed stock option plans for officers and employees as of December 31, 1998 and activity during the three years ended December 31, 1998 is presented below:
1998 1997 1996 --------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- --------- -------- --------- -------- Outstanding at beginning of year... 3,113,077 $43.55 3,189,083 $44.05 2,748,219 $46.48 Granted............................ 968,200 $56.63 974,900 $45.06 1,044,000 $39.06 Exercised.......................... (1,075,905) $45.00 (491,165) $41.67 (12,679) $39.06 Canceled........................... (861,268) $49.02 (559,741) $50.68 (590,457) $46.68 ---------- --------- --------- Outstanding at end of year......... 2,144,104 $46.52 3,113,077 $43.55 3,189,083 $44.05 ========== ========= ========= Options exercisable at end of year............................. 782,509 1,361,573 1,571,842 Options available for grant at end of year.......................... 4,264,190 4,706,406 5,760,467
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------ ---------------------- WEIGHTED SHARES AVERAGE WEIGHTED SHARES WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE EXERCISE PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE - --------------- ----------- ----------- -------- ----------- -------- $39.06 827,378 6.2 $39.06 602,163 $39.06 $45.06 - $56.63.. 1,316,726 8.8 $51.22 180,346 $45.06 --------- ------- 2,144,104 782,509 ========= =======
During 1998, options to purchase 11,000 shares of Common stock were granted to nonemployee directors at an exercise price of $63.78 and options for 4,000 shares were exercised at $24.00 per share. 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. At December 31, 1998, options under the director plans for 8,000 Common shares were exercisable at $14.69 to $17.31 per share, and 159,400 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, 1998, subscriptions for 402,739 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, 1998, an aggregate of 3,042,973 shares of Common stock were reserved for future issuance. A-31 32 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11: ACCUMULATED NON-OWNER CHANGES IN EQUITY
MINIMUM UNREALIZED CUMULATIVE PENSION GAIN ON TRANSLATION LIABILITY INVESTMENTS ADJUSTMENT TOTAL --------- ----------- ----------- ------- (IN MILLIONS) Balance December 31, 1995.......................... $(25.5) $ 167.3 $(13.7) $ 128.1 Current year other non-owner changes in equity..... (0.9) (32.9) 0.2 (33.6) ------ ------- ------ ------- Balance December 31,1996........................... (26.4) 134.4 (13.5) 94.5 Current year other non-owner changes in equity..... 23.6 (23.5) (4.2) (4.1) ------ ------- ------ ------- Balance December 31, 1997.......................... (2.8) 110.9 (17.7) 90.4 Current year other non-owner changes in equity..... (1.1) (110.9) (8.4) (120.4) ------ ------- ------ ------- Balance December 31, 1998.......................... $ (3.9) $ -- $(26.1) $ (30.0) ====== ======= ====== =======
1998 1997 1996 ----------------------------- --------------------------- ---------------------------- BEFORE TAX BEFORE TAX BEFORE TAX TAX (EXPENSE) NET TAX (EXPENSE) NET TAX (EXPENSE) NET AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT ------- --------- ------- ------ --------- ------ ------- --------- ------ (IN MILLIONS) Minimum pension liability adjustment.............. $ (1.8) $ 0.7 $ (1.1) $39.3 $(15.7) $23.6 $ (1.5) $ 0.6 $ (0.9) ------- ----- ------- ------ ------ ------ ------- ------ ------ Increase (decrease) in unrealized gain during the year................ (40.6) 14.6 (26.0) (14.7) 5.6 (9.1) 92.8 (32.5) 60.3 Less reclassification adjustment for realized gains................... (132.7) 47.8 (84.9) (23.2) 8.8 (14.4) (150.4) 57.2 (93.2) ------- ----- ------- ------ ------ ------ ------- ------ ------ Net unrealized gain on investments............. (173.3) 62.4 (110.9) (37.9) 14.4 (23.5) (57.6) 24.7 (32.9) ------- ----- ------- ------ ------ ------ ------- ------ ------ Translation adjustment.... (12.9) 4.5 (8.4) (6.4) 2.2 (4.2) 0.2 -- 0.2 ------- ----- ------- ------ ------ ------ ------- ------ ------ Other non-owner changes in equity.................. $(188.0) $67.6 $(120.4) $(5.0) $ 0.9 $(4.1) $(58.9) $ 25.3 $(33.6) ======= ===== ======= ====== ====== ====== ======= ====== ======
A-32 33 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12: INCOME TAXES
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS, EXCEPT FOR PERCENTAGES) Components of income from continuing operations before income taxes: U.S. operations........................................... $404.8 $405.5 $382.0 Foreign operations........................................ 118.8 77.7 88.7 ------ ------ ------ Income from continuing operations before income taxes........................................... $523.6 $483.2 $470.7 ====== ====== ====== Components of income tax expense: Current: U.S. Federal........................................... $122.8 $131.0 $181.3 U.S. state and local................................... 18.1 16.0 37.2 Foreign................................................ 34.4 32.8 26.9 ------ ------ ------ 175.3 179.8 245.4 ------ ------ ------ Deferred: U.S. Federal........................................... 11.0 (4.5) (54.2) U.S. state and local................................... (2.7) (0.6) (14.0) Foreign................................................ 4.1 (1.5) 8.4 ------ ------ ------ 12.4 (6.6) (59.8) ------ ------ ------ Income tax expense................................ $187.7 $173.2 $185.6 ====== ====== ====== Total income taxes paid..................................... $184.4 $211.4 $155.0 ====== ====== ====== Effective tax rate reconciliation: U.S. Federal statutory rate............................... 35.0% 35.0% 35.0% State and local income taxes.............................. 1.7 1.8 2.9 Foreign statutory rate differential....................... (0.5) (1.0) -- Nondeductible goodwill.................................... 2.2 2.3 2.4 State tax settlements(1).................................. -- (1.3) -- Foreign Sales Corporation................................. (1.0) (0.8) (0.3) Tax credits............................................... (0.8) (1.0) (0.2) Other..................................................... (0.8) 0.8 (0.4) ------ ------ ------ Effective tax rate attributable to continuing operations...................................... 35.8% 35.8% 39.4% ====== ====== ======
- --------------- (1) During 1997, Cooper settled several state income tax matters and recognized a $6.1 million benefit in its income tax provision. A-33 34 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ----------------- 1998 1997 ------- ------- (IN MILLIONS) Components of deferred tax liabilities and assets: Deferred tax liabilities: Property, plant and equipment and intangibles.......... $ (64.6) $ (65.4) Unrealized net gain on investments in marketable equity securities and DECS................................... -- (56.4) Deferred gain on marketable equity securities.......... (47.9) -- Inventories............................................ (24.9) (34.0) Employee stock ownership plan.......................... (19.2) (16.4) Pension plans.......................................... (27.4) (22.3) Other.................................................. (41.0) (64.5) ------- ------- Total deferred tax liabilities.................... (225.0) (259.0) ------- ------- Deferred tax assets: Postretirement and other employee welfare benefits..... 94.2 92.2 Accrued liabilities.................................... 155.8 117.2 Minimum pension liability.............................. 2.6 1.9 Capital loss carryforward(1)........................... 157.3 -- Other.................................................. 20.5 11.5 ------- ------- Total deferred tax assets......................... 430.4 222.8 Valuation allowance(1).................................... (51.6) -- ======= ======= Net deferred tax asset (liability)................ $ 153.8 $ (36.2) ======= =======
- --------------- (1) Cooper incurred a capital loss on the sale of the Automotive Products segment. The capital loss carryforward and valuation allowance are based on preliminary estimates and will be finalized upon the completion of appraisals and the finalization of other matters related to the sale and an allocation of sales proceeds to the various operations that comprised the former Automotive Products segment (See Note 19). The capital loss carryforward is available to offset capital gains through 2003. 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, 1998 and 1997 include the additional U.S. tax estimated to be payable on all unremitted earnings of foreign subsidiaries. NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS Cooper and its subsidiaries have numerous defined benefit pension plans and other postretirement benefit plans. The benefits provided under Cooper's various postretirement benefit 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. Current employees, unless grandfathered under plans assumed in acquisitions, are not provided postretirement benefits other than pensions. The vast majority of the annual other postretirement benefit expense is related to employees who are already retired. A-34 35 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------- ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- (IN MILLIONS) Change in benefit obligation: Benefit obligation at January 1........................ $547.3 $580.6 $ 156.1 $ 204.4 Service cost........................................... 13.3 13.8 0.3 0.5 Interest cost.......................................... 39.0 40.0 10.3 12.5 Benefit payments....................................... (49.2) (46.5) (13.7) (16.2) Actuarial (gains) losses............................... 32.9 20.3 (0.5) (20.1) Acquisitions........................................... 6.7 1.9 6.3 -- Divestiture of Kirsch.................................. -- (57.9) -- (25.0) Other.................................................. 2.5 (4.9) -- -- ------ ------ ------- ------- Benefit obligation at December 31........................ 592.5 547.3 158.8 156.1 ------ ------ ------- ------- Change in plan assets: Fair value of plan assets at January 1................. 569.6 560.7 -- -- Actual return on plan assets........................... 68.7 79.6 -- -- Employer contributions................................. 6.4 24.8 13.7 16.2 Benefit payments....................................... (46.3) (43.8) (13.7) (16.2) Acquisitions........................................... 7.0 1.9 -- -- Divestiture of Kirsch.................................. -- (55.8) -- -- Other.................................................. 1.4 2.2 -- -- ------ ------ ------- ------- Fair value of plan assets at December 31................. 606.8 569.6 -- -- ------ ------ ------- ------- Funded status............................................ 14.3 22.3 (158.8) (156.1) Unrecognized actuarial gain.............................. (16.2) (22.0) (73.6) (79.7) Unrecognized prior service cost.......................... (0.2) (0.2) (4.9) (6.1) Other.................................................... (0.3) (1.9) -- -- ------ ------ ------- ------- Net amount recognized.................................... $ (2.4) $ (1.8) $(237.3) $(241.9) ====== ====== ======= ======= Amounts recognized in the balance sheet consist of: Prepaid benefit asset.................................. $ 68.1 $ 63.1 $ -- $ -- Accrued benefit liability.............................. (79.4) (72.3) (237.3) (241.9) Intangible asset....................................... 2.4 2.8 -- -- Accumulated other non-owner changes in equity.......... 6.5 4.6 -- -- ------ ------ ------- ------- Net amount recognized.................................... $ (2.4) $ (1.8) $(237.3) $(241.9) ====== ====== ======= =======
The projected benefit obligation and accumulated benefit obligation for Cooper's unfunded defined benefit pension plans were $77.9 million and $71.7 million as of December 31, 1998, and $73.1 million and $67.2 million as of December 31, 1997, respectively. A-35 36 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ------------------------ --------------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ----- ----- ----- (IN MILLIONS) Components of net periodic benefit cost: Service cost.......................... $ 13.3 $ 13.8 $ 14.4 $ 0.3 $ 0.5 $ 0.5 Interest cost......................... 39.0 40.0 40.7 10.3 12.5 13.3 Expected return on plan assets........ (47.6) (44.5) (43.6) -- -- -- Amortization of unrecognized transition asset.................... (1.5) (1.4) (1.1) -- -- -- Amortization of prior service cost.... 0.1 0.1 (0.2) (1.4) (1.8) (2.5) Recognized actuarial (gain) loss...... (0.1) 2.2 2.6 (6.6) (5.5) (4.1) Curtailment........................... -- 0.5 -- -- -- -- ------ ------ ------ ----- ----- ----- Net periodic benefit cost............. $ 3.2 $ 10.7 $ 12.8 $ 2.6 $ 5.7 $ 7.2 ====== ====== ====== ===== ===== =====
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Weighted average assumptions as of December 31: Discount rate................................... 5 1/2%-6 3/4% 6%-7 1/2% 6 3/4% 6 3/4% Expected return on plan assets.................. 8 1/2%-9% 8 1/2%-9 3/4% -- -- Rate of compensation increase................... 3%-5% 4%-6% -- --
For other postretirement benefit measurement purposes, an 8.9% annual increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.5% for 2002 and remain at that level thereafter. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- Effect on total of service and interest cost components.... $ 1.0 $ (0.7) Effect on the postretirement benefit obligation............ $13.6 $(11.1)
During 1998, 1997 and 1996, continuing operations expense with respect to domestic and foreign defined contribution plans (primarily related to various groups of hourly employees) totaled $15.7 million, $13.3 million and $14.5 million, respectively. NOTE 14: 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 Retirement Savings and Stock Ownership 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 8). 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. A-36 37 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $.8 million and $1.6 million during 1998 and 1997, 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 $4.8 million and $4.7 million during 1998 and 1997, 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 $14.1 million and $21.6 million in cash to the ESOP during 1998 and 1997, 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 $24.5 million at December 31, 1998. The number of allocated, committed to be released, and unallocated ESOP shares held at December 31, 1998 and 1997 is summarized below.
SHARES PURCHASED SHARES PURCHASED IN 1994 PRIOR TO 1994 ----------------- --------------------- 1998 1997 1998 1997 ------- ------- --------- --------- Allocated....................................... 559,967 619,320 2,813,078 3,638,849 Committed to be released........................ 11,991 8,156 47,793 60,510 Unallocated..................................... 513,823 692,942 321,969 725,412
Compensation expense for continuing operations from the CO-SAV plan and the ESOP was $15.6 million, $13.1 million and $16.6 million and interest expense on ESOP debt was $.4 million, $1.4 million and $2.7 million in 1998, 1997 and 1996, respectively. NOTE 15: INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION 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. Cooper also manufactured and marketed window treatments through its Kirsch division until its sale on May 30, 1997. Historically, Kirsch was included in the Tools & Hardware segment. Effective with the decision to divest the operation, its results were segregated from the continuing Tools & Hardware segment for internal management reporting. The performance of businesses are evaluated at the segment level and resources allocated between the segments. The Cooper executive responsible for each segment further allocates resources between the various division operating units that compose the segment and, in international markets, determines the integration of product lines and operations across division operating units. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Cooper manages cash, debt and income taxes centrally. Accordingly, Cooper evaluates performance of its segments and operating units based on the operating earnings exclusive of financing activities and income taxes. Nonrecurring and unusual items are A-37 38 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) excluded from the evaluations. The segments are managed separately because they manufacture and distribute distinct products. Intersegment sales and related receivables for each of the years presented were insignificant. Financial information by industry segment was as follows:
REVENUES OPERATING EARNINGS TOTAL ASSETS ------------------------------ ------------------------ ------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------------ ------------------------ ------------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 -------- -------- -------- ------ ------ ------ -------- -------- -------- (IN MILLIONS) Electrical Products....... $2,824.4 $2,568.3 $2,407.5 $479.0 $461.6 $408.3 $2,473.3 $2,441.7 $1,976.0 Tools & Hardware.......... 826.8 749.9 720.1 112.4 99.6 91.4 903.8 561.7 569.7 Kirsch.................... -- 97.4 252.9 -- 4.8 22.0 -- -- 217.6 -------- -------- -------- ------ ------ ------ -------- -------- -------- Total management reporting............. $3,651.2 $3,415.6 $3,380.5 591.4 566.0 521.7 3,377.1 3,003.4 2,763.3 ======== ======== ======== Segment nonrecurring and unusual items........... (51.3) 31.4 (5.0) ------ ------ ------ Net segment operating earnings................ 540.1 597.4 516.7 General Corporate: Nonrecurring gains...... 135.2 23.2 150.4 Nonrecurring charges.... (2.3) (2.1) (10.9) Expense................. (47.5) (44.9) (43.4) Interest expense.......... (101.9) (90.4) (142.1) ------ ------ ------ Consolidated income from continuing operations before income taxes..... $523.6 $483.2 $470.7 ====== ====== ====== Corporate assets.......... 402.0 530.2 592.3 Discontinued operations... -- 1,973.7 1,963.3 -------- -------- -------- Consolidated assets....... $3,779.1 $5,507.3 $5,318.9 ======== ======== ========
A-38 39 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELECTRICAL TOOLS & CONSOLIDATED PRODUCTS HARDWARE KIRSCH CORPORATE TOTAL ---------- -------- ------ --------- ------------ (IN MILLIONS) 1998 Depreciation.............................. $66.4 $25.9 $ -- $ 1.4 $ 93.7 Goodwill amortization..................... 35.9 7.9 -- -- 43.8 Nonrecurring gains........................ -- -- -- 135.2 135.2 Nonrecurring charges...................... 42.6 8.7 -- 2.3 53.6 Capital expenditures...................... 95.9 45.3 -- 1.2 142.4 Investment in unconsolidated affiliates... 8.6 -- -- -- 8.6 Other significant noncash item: Write-down of impaired long-lived assets............................... 11.1 -- -- -- 11.1 1997 Depreciation.............................. $61.2 $22.3 $ 4.2 $ 1.9 $ 89.6 Goodwill amortization..................... 27.9 4.2 0.3 -- 32.4 Nonrecurring gains........................ -- -- 69.8 23.2 93.0 Nonrecurring charges...................... 15.9 22.5 -- 2.1 40.5 Capital expenditures...................... 79.2 35.6 1.4 1.1 117.3 Investment in unconsolidated affiliates... .4 2.0 -- -- 2.4 Other significant noncash item: Write-down of impaired long-lived assets............................... 13.4 10.1 -- .7 24.2 1996 Depreciation.............................. $63.4 $27.0 $ 8.2 $ 2.6 $101.2 Goodwill amortization..................... 26.9 3.9 0.7 -- 31.5 Nonrecurring gains........................ -- -- -- 150.4 150.4 Nonrecurring charges...................... 3.0 -- 2.0 10.9 15.9 Capital expenditures...................... 79.1 28.4 4.3 3.0 114.8 Investment in unconsolidated affiliates... 1.6 2.0 19.1 -- 22.7
GEOGRAPHIC INFORMATION Revenues and long-lived assets by country are summarized below. Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
REVENUES LONG-LIVED ASSETS ------------------------------ ------------------------------ 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- (IN MILLIONS) United States.................... $2,815.7 $2,730.4 $2,666.7 $1,756.3 $1,755.6 $1,827.6 Germany.......................... 226.1 197.7 248.4 171.4 149.0 176.6 Canada........................... 127.3 136.3 132.7 5.1 7.2 14.4 United Kingdom................... 164.1 72.4 64.5 302.3 310.7 57.8 Other foreign countries.......... 318.0 278.8 268.2 126.7 93.0 101.0 -------- -------- -------- -------- -------- -------- $3,651.2 $3,415.6 $3,380.5 $2,361.8 $2,315.5 $2,177.4 ======== ======== ======== ======== ======== ========
A-39 40 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) International revenues by destination, based on the location products were delivered, were as follows by segment:
INTERNATIONAL REVENUES ------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Electrical Products......................................... $678.9 $612.7 $578.6 Tools & Hardware............................................ 286.6 290.5 273.9 Kirsch...................................................... -- 29.1 83.3 ------ ------ ------ $965.5 $932.3 $935.8 ====== ====== ======
NOTE 16: 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, 1998 and 1997.
DECEMBER 31, --------------- 1998 1997 ------ ------ (IN MILLIONS) British Pound Sterling(1)................................... $290.9 $175.3 German Deutschemark(2)...................................... 298.2 4.0 Canadian Dollar............................................. 18.6 -- Italian Lira................................................ 2.0 5.4 Australian Dollar........................................... 2.7 7.2 Dutch Guilder............................................... 3.5 2.5 Other....................................................... 9.9 9.9 ------ ------ $625.8 $204.3 ====== ======
- --------------- (1) $276.9 of the 1998 British Pound Sterling forward contracts were entered into in the fourth quarter of 1998 and mature in May 1999. (2) $260.2 million of the 1998 German Deutschemark contracts were entered into in the fourth quarter of 1998 and matured in January 1999. 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. A-40 41 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 3.5% 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. 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 $899 million and $1.5 billion of debt instruments at December 31, 1998 and 1997, respectively. The book value of these instruments was approximately equal to fair value at December 31, 1998 and 1997. 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, 1998 and 1997. NOTE 17: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES The following noncash transactions have been excluded from the consolidated statements of cash flows:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ------- ------- ------ (IN MILLIONS) Assets acquired and liabilities assumed or incurred From the acquisition of businesses: Fair value of assets acquired............................. $ 349.8 $ 505.1 $ 66.1 Cash used to acquire businesses, net of cash acquired..... (293.7) (366.4) (37.8)(2) ------- ------- ------ Liabilities assumed or incurred............................. $ 56.1 $ 138.7(1) $ 28.3 ======= ======= ====== Noncash increase 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............ 235.2 33.8 --
- --------------- (1) Includes $46.2 million of notes payable exchanged for Menvier-Swain common stock. (2) Excludes $164.0 million paid on January 6, 1996 for the acquisition of CEAG in December 1995. A-41 42 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18: NET INCOME PER COMMON SHARE
BASIC DILUTED --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ($ IN MILLIONS, SHARES IN THOUSANDS) Income from continuing operations... $ 335.9 $ 310.0 $ 285.1 $ 335.9 $ 310.0 $ 285.1 Income from discontinued operations........................ 87.1 84.6 30.3 87.1 84.6 30.3 Interest expense on 7.05% Convertible Subordinated Debentures, net of income taxes... -- -- -- -- 5.8 29.2 ------- ------- ------- ------- ------- ------- Net income applicable to Common stock............................. $ 423.0 $ 394.6 $ 315.4 $ 423.0 $ 400.4 $ 344.6 ======= ======= ======= ======= ======= ======= Weighted average Common shares outstanding....................... 113,266 117,459 107,284 113,266 117,459 107,284 ======= ======= ======= Incremental shares from assumed conversions: Options, performance-based stock awards and other employee awards......................... 1,392 1,201 613 7.05% Convertible Subordinated Debentures..................... -- 4,270 16,731 ------- ------- ------- Weighted average Common shares and Common Share equivalents.......... 114,658 122,930 124,628 ======= ======= =======
NOTE 19: DISCONTINUED OPERATION On October 9, 1998, Cooper completed the sale of the Automotive Products segment for cash proceeds of $1.9 billion. Cooper's results of operations and the related footnote information for all periods presented herein excludes 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 $1.5 billion for the period from January 1, 1998 to October 9, 1998 and $1.9 billion during each of the years ended December 31, 1997 and 1996. Income from the discontinued Automotive Products segment was $87.1 million (net of $56.6 million of income taxes) for the period from January 1, 1998 to October 9, 1998, $84.6 million (net of $58.9 million of income taxes) during the year ended December 31, 1997 and $30.3 million (net of $57.0 million of income taxes) during the year ended December 31, 1996. The Consolidated Balance Sheet as of December 31, 1997 and the Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and all related footnote disclosures have been restated to reflect the Automotive Products segment as a discontinued operation. The net assets of discontinued operations at December 31, 1997 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 flows provided by (used in) discontinued operations" in the Consolidated Statements of Cash Flows. No cash or debt has been allocated to the discontinued operations. The pre-tax loss on the sale of $18.8 million was offset by a tax benefit. Cooper sold the common stock of the entity that held a majority of the Automotive Products segment assets domiciled in the United States and certain investments in foreign subsidiaries. In certain countries the assets, net of liabilities or investments in subsidiaries, were sold by existing Cooper entities. Cooper's total income tax basis exceeded the book carrying amount of the net assets exclusive of deferred income tax assets which generated a capital loss carryforward. The amount of the capital loss carryforward will not be finalized until appraisals are completed and the sales proceeds are allocated to the various components of the Automotive Products segment. For financial reporting purposes, the sale of the common stock versus a sale of the net assets of the Automotive Products segment resulted in a realization of items (primarily goodwill amortization) that had reduced A-42 43 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the book carrying amount without a corresponding income tax benefit. Cooper limited the amount of tax benefits recognized based on an evaluation of the amount of the capital loss carryforward that is expected to be realized before it expires. Cooper does not currently anticipate that the finalization of matters related to the sale will result in significant revisions to its estimates. NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS
1998 (BY QUARTER) ------------------------------------- 1 2 3 4 ------- ------- ------- ------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues................................................... $894.1 $951.2 $924.0 $881.9 Cost of sales.............................................. 601.9 639.8 621.8 583.6 Selling and administrative expenses........................ 154.8 156.7 151.0 153.9 Goodwill amortization...................................... 10.1 11.1 11.2 11.4 Nonrecurring gains......................................... -- -- -- (135.2) Nonrecurring charges....................................... -- -- -- 53.6 Interest expense........................................... 25.3 27.4 34.8 14.4 ------ ------ ------ ------ Income from continuing operations before income taxes...... 102.0 116.2 105.2 200.2 Income taxes............................................... 36.7 41.8 37.9 71.3 ------ ------ ------ ------ Income from continuing operations.......................... 65.3 74.4 67.3 128.9 Income from discontinued operations, net of taxes.......... 26.7 31.6 25.9 2.9 ------ ------ ------ ------ Net income................................................. $ 92.0 $106.0 $ 93.2 $131.8 ====== ====== ====== ====== Income per Common share Basic: Income from continuing operations........................ $ 0.55 $ 0.62 $ 0.59 $ 1.27 Income from discontinued operations...................... 0.22 0.27 0.23 0.03 ------ ------ ------ ------ Net income............................................... $ 0.77 $ 0.89 $ 0.82 $ 1.30 ====== ====== ====== ====== Diluted: Income from continuing operations(1)..................... $ 0.54 $ 0.62 $ 0.59 $ 1.26 Income from discontinued operations...................... 0.22 0.26 0.22 0.03 ------ ------ ------ ------ Net income............................................... $ 0.76 $ 0.88 $ 0.81 $ 1.29 ====== ====== ====== ======
- --------------- (1) Includes gains, net of nonrecurring expenses on the redemption of the DECS and sale of investments of $.52 in the fourth quarter. A-43 44 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 (BY QUARTER) ------------------------------------- 1 2 3 4 ------- ------- ------- ------- (IN MILLIONS, EXCEPT PER SHARE DATA) 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: 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: Income from continuing operations(2)..................... $ 0.45 $ 0.76 $ 0.67 $ 0.70 Income from discontinued operations(3)................... 0.22 0.10 0.17 0.20 ------ ------ ------ ------ Net income............................................... $ 0.67 $ 0.86 $ 0.84 $ 0.90 ====== ====== ====== ======
- --------------- (1) Includes $6.1 million related to the favorable settlements of state income tax issues in the fourth quarter. (2) 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. (3) Includes nonrecurring expenses of $.17 in the second quarter and $.05 in the third quarter. A-44 EX-21.0 4 LIST OF COOPER INDUSTRIES, INC. SUBSIDIARIES 1 EXHIBIT 21.0 December 31, 1998 SUBSIDIARIES Cooper has no parent. The subsidiaries of Cooper are listed in groupings that indicate the nature and management of the operations of each. Unless noted herein, all subsidiaries are wholly owned by Cooper or one of its subsidiaries.
Place of Name Incorporation - ---------------- ------------- A. GENERAL CORPORATE ADMINISTRATION ----------------------------------- BZ Holdings Inc. Delaware, U.S. CI Finance, Inc. Delaware, U.S. CI Leasing Company Delaware, U.S. Cooper (Great Britain) Ltd. United Kingdom Cooper (U.K.) Limited Delaware, U.S. Cooper Bussmann Finance, Inc. Delaware, U.S. Cooper CPS Corporation Delaware, U.S. Cooper Enterprises LLC Delaware, U.S. Cooper Finance, Inc. Delaware, U.S. Cooper Finance Group L.P. United Kingdom Cooper Industries (Canada) Inc. Ontario, Canada Cooper Industries Australia Pensions Pty Ltd Australia Cooper Industries Australia Pty Limited Australia Cooper Industries Finanzierungs-GbR Germany Cooper Industries Foreign Sales Company, Limited Barbados Cooper Industries Foundation Ohio, U.S. Cooper Industries France SARL France Cooper Industries International Company Delaware, U.S. Cooper Industries, Inc. Delaware, U.S. Cooper Industries (U.K.) Limited United Kingdom Cooper International Company Delaware, U.S. Cooper Investment Group L.P. United Kingdom Cooper PAC Corporation Delaware, U.S. Cooper Pensions Limited United Kingdom Cooper Power Systems Finance, Inc. Delaware, U.S. Cooper Power Tools Finance, Inc. Delaware, U.S. Cooper Securities, Inc. Texas, U.S. Cooper Technologies Company Delaware, U.S. Cooper Trading, Inc. Delaware, U.S. Cooper (UK) Group plc United Kingdom Cooper Western Hemisphere Company Delaware, U.S. Coopind Inc. Delaware, U.S. CS Holdings International Inc. Cayman Islands
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Place of Name Incorporation - ------------------------- ------------- B. ELECTRICAL PRODUCTS ---------------------- Apparatebau Hundsbach GmbH Mess- und Prozessleittechnik Germany Alpha Lighting, Inc. Delaware, U.S. Arrow-Hart, S.A. de C.V. Mexico Atlite Inc. Delaware, U.S. Blessing Electronics B.V. Netherlands Blessing International B.V. Netherlands Bussmann do Brasil Ltda. Brazil Bussmann International, Inc. Delaware, U.S. Bussmann, S.A. de C.V. Mexico CALP International, Inc. Florida, U.S. CEAG Benelux B.V. Netherlands CEAG Crouse-Hinds Asia Pacific Pte. Ltd. Singapore CEAG Electronics GmbH Germany CEAG Flameproof Control Gears Private Limited (51% owned) India CEAG Grundstucks GmbH & Co. OHG Germany CEAG Grundstucksverwaltungsgesellschaft mbH Germany CEAG Middle East Limited Liability Company (49% owned) Dubai, U.A.E. CEAG Norge AS Norway CEAG NORTEM, S.A. Spain CEAG Sicherheitstechnik GmbH Germany Ceramica Creus, S.A. de C.V. Mexico Coiltronics, Inc. Florida, U.S. Coiltronics International Corporation Florida, U.S. Componentes de Iluminacion, S.A. de C.V. Mexico Connectron, Inc. New Jersey, U.S. Cooper Bussmann, Inc. Delaware, U.S. Cooper Elektrische Ausrustungen GmbH Germany Cooper Elektrische Ausrustungen GmbH & Co. Offene Germany Handelsgesellschaft Cooper Industries GmbH Germany Cooper Lighting, Inc. Delaware, U.S.A. Cooper Power Systems do Brasil Ltda. Brazil Cooper Power Systems Pty. Ltd. Australia Cooper Power Systems, Inc. Delaware, U.S. Cooper Power Systems Overseas, Inc. Delaware, U.S. Cooper Power Systems Transportation Company Wisconsin, U.S. Cooper Power Tools de Mexico, S.A. de C.V. Mexico Cooper Security Limited United Kingdom Cortek Internacional, S.A. Costa Rica Crouse-Hinds (Australia) Pty. Ltd. Australia Crouse-Hinds Domex, S.A. de C.V. Mexico Crouse-Hinds Inc. Delaware, U.S. CTIP Inc. Delaware, U.S. Digital Lighting Holdings Limited (50% owned) British Virgin Islands Dr.-Ing. Dieter Krause GmbH Germany Dunfermline Company Ireland Edison Fusegear, Inc. Delaware, U.S. Forschungsinstitut Professor Dr.-Ing. habil, Dr. phil nat. Karl Otto Lehmann Nachf. GmbH & Cie. Germany
3
Place of Name Incorporation - ------------------------- ------------- Fulleon Limited United Kingdom Iluminacion Cooper de las Californias S.A. de C.V. Mexico Industrias Karp, S.A. de C.V. Mexico Industrias AMB, S.A. de C.V. Mexico Industrial Royer, S.A. de C.V. Mexico Inmobiliaria Raljala, S.A. de C.V. Mexico Kearney-National (Canada) Limited Ontario, Canada Les Appareillages Electriques Kearney Inc. Quebec, Canada Luminox S.A. France McGraw-Edison Company Delaware, U.S. McGraw-Edison Development Corporation Delaware, U.S. Menvier Limited United Kingdom Menvier A/S Denmark Menvier CSA Srl Italy Menvier Electronics International Pty Ltd. Australia Menvier Hybrids Limited United Kingdom Menvier Notstrom-Und Systemtechnik GmbH Germany Menvier Overseas Holdings Limited United Kingdom Menvier Research Limited Ireland Menvier Group plc United Kingdom NOEMY Societe Civile Immobiliere France Nugelec S.A. France Ping Ding Shan Edison Power Systems Company Limited (60% owned) China Pretronica Precisao Electronica Ltda. Portugal Pretronica Precisao Electronica Ltda. II Portugal RTE Far East Corporation Taiwan Scantronic France S.A. France Scantronic Holdings Limited United Kingdom Scantronic International Limited United Kingdom Si-Tronic Srl (49% Owned) Italy Silver Light International Limited (50% owned) British Virgin Islands Transmould Ltd. Ireland Univel EPE Greece Vertriebsgesellschaft Apparatebau Hundsbach mbH Germany Western Power Products, Inc. Oregon, U.S.
4
Place of Name Incorporation - ---------------------------- ------------- C. TOOLS & HARDWARE ------------------- Airtool and Yost Superior Realty, Inc. (50% owned) Ohio, U.S. Collins Associates Ltd. British Virgin Islands Cooper Italia S.p.A. Italy Cooper Power Tools GmbH Beteiligungen Germany Cooper Power Tools, Inc. Delaware, U.S.A. Cooper Power Tools B.V. Netherlands Cooper Power Tools GmbH & Co. Germany Cooper Tools B.V. Netherlands Cooper Tools GmbH Germany Cooper Tools Industrial Ltda. Brazil Cooper Tools Pty. Limited Australia Cooper Tools S.A. France Deutsche Gardner-Denver Beteiligungs-GmbH Germany Disston Co. de Mexico, S.A. de C.V. Mexico Empresa Andina de Herramientas, S.A. Colombia Erem S.A. Switzerland GETA-Werk Gebr. Teipel GmbH Germany Indus S.A. France Lufkin Europa B.V. Netherlands Metro Mex, S.A. de C.V. Mexico Metronix Messgerate und Elektronik GmbH Germany Nicholson Mexicana, S.A. de C.V. Mexico REC Werkzeugbeteiligungs--GmbH (60% owned) Germany REC-Werkzeug Gmb Vertriebsgesellschaft & Co. (60% owned) Germany Recoules S.A. France Societe Civile Immobiliere PRECA France Societe Civile Immobiliere R.M. France The Cooper Group, Inc. Delaware, U.S.
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Place of Name Incorporation - --------------------------- ------------- E. INACTIVE SUBSIDIARIES ------------------------- Aerocharter (Coventry) Limited (50% owned) United Kingdom B & S Fuses Limited United Kingdom Bussmann (U.K.) Limited United Kingdom Carlton Santee Corporation California, U.S CSP Industries GmbH Germany Contronic Inc. Canada Crouse-Hinds de Venezuela, C.A. Venezuela DFL Fusegear Limited United Kingdom Firecom Limited United Kingdom Gardner-Denver (Aust.) Pty. Limited Australia Gardner-Denver International, C.A. Venezuela Homelink Telecom Limited United Kingdom Inmobiliaria Cisco, S.A. Mexico Menvier (CJS) Limited United Kingdom Menvier Security Limited United Kingdom Menvier-Amberlec Systems Limited United Kingdom McGraw-Edison Export Corporation Delaware, U.S. MSG Leasing Limited United Kingdom Scantronic (Singapore) Pte Ltd. Singapore Scantronic Benelux B.V. Netherlands Scantronic B.V. Netherlands Scantronic GmbH Germany Scantronic Holdings Inc. (CAN) Canada Scantronic International Holdings B.V. Netherlands Scantronic Limited United Kingdom Scantronic Spain S.A. Spain Synchrobell Limited United Kingdom WPC Corporation, Inc. Delaware, U.S.
EX-23.0 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.0 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Cooper Industries, Inc. of our report dated January 25, 1999, included in Appendix A to the Cooper Industries, Inc. Proxy Statement for the 1999 Annual Meeting of Shareholders. 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 25, 1999, with respect to the consolidated financial statements incorporated herein by reference. Registration Statement No. Purpose 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. 333-51439 Form S-8 Registration Statement for Cooper Industries, Inc. Director's Retainer Fee Stock Plan No. 333-51441 Form S-8 Registration Statement for Cooper Industries, Inc. Amended and Restated Management Annual Incentive Plan /s/ ERNST & YOUNG LLP Houston, Texas March 30, 1999 EX-24.0 6 POWERS OF ATTORNEY 1 EXHIBIT 24.0 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ ALAIN J.P. BELDA ---------------------------- Alain J.P. Belda 2 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, her true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in her name and in her capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 10th day of February 1999. /s/ LINDA A. HILL ------------------------------- Linda A. Hill 3 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ HAROLD S. HOOK ---------------------------- Harold S. Hook 4 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ CONSTANTINE S. NICANDROS -------------------------------- Constantine S. Nicandros 5 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ JOHN D. ONG ------------------------------- John D. Ong 6 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ SIR RALPH H. ROBINS ------------------------------- Sir Ralph H. Robins 7 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ DAN F. SMITH ---------------------------- Dan F. Smith 8 POWER OF ATTORNEY COOPER INDUSTRIES, INC. KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of Cooper Industries, Inc. ("Cooper"), an Ohio corporation, does hereby make, constitute and appoint Diane K. Schumacher and Terrance V. Helz, and each of them acting individually, his true and lawful attorney with power to act without the other and with full power of substitution, to execute, deliver and file, for and on behalf of the undersigned, and in his name and in his capacity or capacities as aforesaid, the Cooper Annual Report on Form 10-K with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any other documents in support thereof or supplemental thereto, with respect to the fiscal year ended December 31, 1998, and any and all amendments thereto. The undersigned hereby grants to said attorneys and each of them full power and authority to do and perform each and every act and thing whatsoever as said attorney or attorneys may deem necessary or advisable to carry out fully the intent of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorney or attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of February 1999. /s/ JAMES R. WILSON --------------------------------- James R. Wilson EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 20,400 0 626,400 0 533,300 1,417,300 1,629,800 (919,300) 3,779,100 970,700 774,500 0 0 615,000 948,600 3,779,100 3,651,200 3,651,200 2,447,100 2,447,100 0 0 101,900 523,600 187,700 335,900 87,100 0 0 423,000 3.74 3.69
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