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| CBE > SEC Filings for CBE > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Electrical Products segment selling and administrative expenses, as a
percentage of revenues for the third quarter of 2008, were 16.1% compared to
16.2% for the third quarter of 2007. The decrease in percentage reflects the
higher overall percentages seen in the newly acquired operations, investment in
resources to support international growth offset by leverage on higher revenues
and cost control activities implemented in 2008.
Tools segment selling and administrative expenses, as a percentage of
revenues for the third quarter of 2008, were 19.1% compared to 18.9% for the
third quarter of 2007. The increase in selling and administrative expenses, as a
percentage of revenues, reflects the impact of lower volumes partially offset by
cost reduction actions.
Income of $23.5 million from the Belden agreement was recognized in the 2007
third quarter. In 1993, Cooper completed an initial public offering of the stock
of Belden, formerly a division of Cooper. Under the agreement, Belden and Cooper
made an election that increased the tax basis of certain Belden assets. Belden
is required to pay Cooper ninety percent of the amount by which Belden has
actually reduced tax payments that would otherwise have been payable if the
increase in the tax basis of assets had not occurred, as realized principally
over fifteen years. If Belden does not have sufficient future taxable income, it
is possible that Belden will not be able to utilize the tax deductions arising
from the increase in the tax basis of the assets resulting in a tax loss
carryforward. Belden is not obligated to pay Cooper until a tax loss
carryforward is utilized. Belden can carry any loss forward twenty years to
offset future taxable income. Cooper estimates that between $40 and $45 million
in future payments potentially remain under the Belden agreement. The timing and
ultimate receipt of future payments are contingent upon the ultimate taxable
income Belden reports each year.
Net interest expense in the third quarter of 2008 increased $5.0 million from
the 2007 third quarter, primarily as a result of the March 27, 2008 issuance of
$300 million of senior unsecured notes and the utilization of debt financing to
partially fund acquisitions and share repurchases. Average debt balances were
$1.33 billion and $1.04 billion and average interest rates were 5.2% and 5.4%
for the third quarter of 2008 and 2007, respectively.
Operating Earnings:
Electrical Products segment third quarter 2008 operating earnings increased
11% to $249.7 million from $224.2 million for the same quarter of last year. The
increase resulted from higher revenues, incremental earnings from acquisitions,
and execution on productivity improvement initiatives offset partially by
unfavorable product mix and material price inflation.
Tools segment third quarter 2008 operating earnings were $24.1 million
compared to $22.0 million in the third quarter of 2007. The increase is the
result of favorable product mix and cost improvements from the downsizing of an
international facility and productivity initiatives which were partially offset
by higher material costs and the impact from lower volumes.
General Corporate expense decreased $5.8 million to $23.9 million for the
third quarter of 2008 compared to $29.7 million during the same period of 2007.
The third quarter of 2007 results included $6.4 million of incremental legal
costs. Absent these items, general corporate expense increased by $0.6 million
primarily from normal inflation offset partially by cost reduction initiatives.
Income Taxes:
The effective tax rate was 18.7% for the third quarter of 2008 and 24.5% for
the third quarter of 2007. Cooper reduced income tax expense by $18.3 million
during the three months ended September 30, 2008 for discrete tax items
primarily related to statute expirations and state tax settlements. The third
quarter
2007 effective tax rate was lower due to the income from the Belden agreement
being taxed in a foreign jurisdiction at a significantly lower rate than the
U.S. statutory rate. Excluding the discrete tax items and the income from the
Belden agreement, Cooper's effective tax rate for the three months ended
September 30, 2008 and 2007 was 26.5% and 27.3%. This decrease is primarily
related to the implementation of tax strategies that reduced the forecasted
annual effective tax rate expected for 2008 to 28.0% resulting in the impact of
this lower rate compared to the 28.7% effective tax rate recognized in the first
six months of 2008 being reflected in the third quarter 2008 results.
Income Related to Discontinued Operations:
In the third quarter of 2008, Cooper recorded income from discontinued
operations of $16.6 million, net of a $9.4 million income tax expense (or $.09
per diluted share) related to its asbestos liability regarding the Automotive
Products segment, which was sold in 1998. On September 30, 2008, the Bankruptcy
Court denied the Modified Plan A Settlement resulting in Cooper not
participating in the Federal-Mogul 524(g) trust. As a result of not
participating in the trust, Cooper, has revised its accrual for the Pneumo-Abex
asbestos liability and related insurance recoveries in the third quarter of 2008
based on resolution through the tort system. See Note 13 of the Notes to the
Consolidated Financial Statements.
Nine Months Ended September 30, 2008 Compared With Nine Months Ended
September 30, 2007
Income from continuing operations for the first nine months of 2008 was
$504.5 million on revenues of $4,998.1 million compared with 2007 first nine
months income from continuing operations of $513.0 million on revenues of
$4,359.0 million. First nine months diluted earnings per share from continuing
operations were $2.85 in 2008 compared to $2.75 in 2007. First nine months 2008
income from continuing operations included severance costs associated with the
downsizing of a Tools Segment international facility and the favorable impact of
discrete tax items which increased reported income from continuing operations by
$17.4 million or $.10 per share. First nine months 2007 income from continuing
operations included $8.8 million in incremental legal costs offset by
$26.8 million income from the Belden agreement and $63.5 million of income tax
adjustments that increased income from continuing operations by $82.9 million or
$.44 per share.
Revenues:
Revenues for the first nine months of 2008 increased 15% compared to the
first nine months of 2007. The impact of acquisitions and currency translation
increased revenues by over 9%.
Electrical Products segment revenues for the first nine months of 2008
increased 16% compared to the first nine months of 2007. The impact of
acquisitions increased revenue by slightly more than 8% and currency translation
had approximately a 2% favorable effect on revenues in the first nine months of
the year. Sales growth was a result of demand from the utility and industrial
markets and international expansion. The soft U.S. residential markets and
slower growth in certain European markets partially offset these gains.
Tools segment revenues for the first nine months of 2008 increased 5%
compared to the first nine months of 2007. Favorable currency translation impact
on revenues for the first nine months of 2008 accounted for all of the growth.
Revenue growth in industrial markets was offset by weak demand for U.S. retail
products.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 67.1% for the first nine
months of 2008 compared to 67.4% for the comparable 2007 period. The decrease in
the cost of sales percentage was primarily a result of fixed cost leverage on
higher volume, favorable sales mix, pricing actions and benefits from
productivity improvement initiatives partially offset by a $7.6 million charge
for downsizing a Tools segment international facility and material and other
cost inflation.
Electrical Products segment cost of sales, as a percentage of revenues, was
66.6% for the first nine months of 2008 compared to 67.2% for the first nine
months of 2007. The decrease in the cost of sales percentage was primarily the
result of productivity initiatives, favorable sales mix, production leverage on
higher volume, and pricing actions partially offset by material and other cost
inflation.
Tools segment cost of sales, as a percentage of revenues, was 70.8% for the
first nine months of 2008 compared to 68.7% for the same period of 2007. The
cost of sales percentage for the first nine months of 2008 includes the
$7.6 million impact of severance costs associated with the downsizing of an
international facility, increased material costs, lower production volumes in
selected operations offset by operating efficiency gains from productivity
improvements and cost control measures.
Selling and administrative expenses, as a percentage of revenues, for the
first nine months of 2008 were 18.5% compared to 18.4% for the first nine months
of 2007. The increase is due to the impact of acquisitions and investment in
international growth partially offset by incremental legal expenses of
$8.8 million in 2007, leverage on higher sales and cost reductions from
productivity initiatives.
Electrical Products segment selling and administrative expenses, as a
percentage of revenues, for the first nine months of 2008 were 16.8% compared to
16.1% for the first nine months of 2007. The increase in selling and
administrative expenses percentage is primarily due to the impact of
acquisitions, which generally have higher than average selling and
administrative costs relative to sales, and the significant growth in
international revenues, which generally have higher selling and administrative
costs, partially offset by volume leverage and productivity initiatives.
Tools segment selling and administrative expenses, as a percentage of
revenues, for the first nine months of 2008 were 19.8% compared to 19.9% for the
first nine months of 2007. The benefits from productivity and cost reduction
actions were offset by inflation.
Income from the Belden agreement was $26.8 million for the nine months ended
September 30, 2007. In 1993, Cooper completed an initial public offering of the
stock of Belden, formerly a division of Cooper. Under the agreement, Belden and
Cooper made an election that increased the tax basis of certain Belden assets.
Belden is required to pay Cooper ninety percent of the amount by which Belden
has actually reduced tax payments that would otherwise have been payable if the
increase in the tax basis of assets had not occurred, as realized over
principally fifteen years. If Belden does not have sufficient future taxable
income, it is possible that Belden will not be able to utilize the tax
deductions arising from the increase in the tax basis of the assets resulting in
a tax loss carryforward. Belden is not obligated to pay Cooper until a tax loss
carryforward is utilized. Belden can carry any loss forward twenty years to
offset future taxable income. Cooper estimates that between $40 and $45 million
in future payments potentially remain under the Belden agreement. The timing and
ultimate receipt of future payments are contingent upon the ultimate taxable
income Belden reports each year.
Net interest expense for the first nine months of 2008 increased
$12.4 million from the 2007 first nine months primarily as a result of higher
average debt balances from the utilization of debt financing to partially fund
acquisitions and share repurchases. Average debt balances were $1.39 billion and
$1.05 billion and average interest rates were 5.2% and 5.7% for the first nine
months of 2008 and 2007, respectively.
Operating Earnings:
Electrical Products segment first nine months 2008 operating earnings
increased 16% to $732.2 million from $631.6 million for the same period of last
year. The increase was primarily due to sales volume leverage, pricing actions,
favorable sales mix, productivity initiatives and incremental earnings from
acquisitions.
Tools segment first nine months 2008 operating earnings decreased 14% to
$56.0 million compared to $65.4 million in the same period of 2007. The decrease
reflects the $7.6 million in severance costs associated with the downsizing of
an international facility and expenses to reduce the cost structure offset
partially by cost productivity initiatives.
General Corporate expense decreased $7.3 million to $69.5 million during the
first nine months of 2008 compared to $76.8 million during the same period of
2007. This decrease is primarily related to incremental legal costs in 2007 of
$8.8 million.
Income Taxes:
The effective tax rate was 24.5% for the nine months ended September 30, 2008
and 15.7% for the nine months ended September 30, 2007. The rate change is
primarily related to discrete items in 2008 and 2007. Cooper reduced 2008 income
tax expense by $22.9 million for discrete tax items primarily related to statute
expirations, state tax settlements and foreign taxes while 2007 included a
$63.5 million reduction of income tax expense. Cooper finalized settlements with
the Internal Revenue Service related to the 2000 through 2004 tax years in the
2007 second quarter. Previously unrecognized tax benefits of $55.7 million were
therefore recognized in 2007. A change in rates for the Texas margin tax and
other developments in 2007 represented the remaining $7.8 million of income tax
expense reduction. The 2007 effective tax rate was also lower due to the income
from the Belden agreement being taxed in a foreign jurisdiction at a
significantly lower rate than the U.S. statutory rate. Excluding the discrete
tax items and the income from the Belden agreement, Cooper's effective tax rate
for the nine months ended September 30, 2008 and 2007 was 28.0% and 27.2%. This
increase is primarily related to increased earnings in 2008 without a
corresponding increase in projected tax benefits.
Income Related to Discontinued Operations:
In the third quarter of 2008, Cooper recorded income from discontinued
operations of $16.6 million, net of a $9.4 million income tax expense (or $.09
per diluted share) related to its asbestos liability regarding the Automotive
Products segment, which was sold in 1998. On September 30, 2008, the Bankruptcy
Court denied the Modified Plan A Settlement resulting in Cooper not
participating in the Federal-Mogul 524(g) trust. As a result of not
participating in the trust, in the third quarter of 2008, Cooper has revised its
accrual for the Pneumo-Abex asbestos liability and related insurance recoveries
based on resolution through the tort system. See Note 13 of the Notes to the
Consolidated Financial Statements.
Cash provided by operating activities was $463.3 million for the first nine
months of 2007. This cash, plus $116.1 million of cash and cash equivalents,
$314.0 million of net proceeds from debt issuances and $54.7 million of cash
received from employee stock option exercise activity were primarily used to
fund capital expenditures of $91.0 million, acquisitions of $194.5 million,
dividends of $116.2 million, debt repayments of $303.0 million and share
purchases of $274.8 million.
As discussed in Note 13 of Notes to the Consolidated Financial Statements, on
September 30, 2008, the Bankruptcy Court denied the Modified Plan A Settlement
resulting in Cooper not participating in the Federal-Mogul 524(g) trust. As a
result, Cooper received in October 2008 the $141 million payment, including
interest, from the Federal-Mogul bankruptcy estate as provided in the previously
approved Plan B settlement. This amount is included in the current discontinued
operations receivable balance in the accompanying balance sheet at September 30,
2008. Cooper anticipates that the annual cash outlay for its potential asbestos
liability, net of insurance recoveries, will average in the range of $20 to
$30 million, although amounts will vary as the amount of the actual annual net
cash outlay is not reasonably predictable.
Subsequent to September 30, 2008 and through the date of this filing, Cooper
has repurchased an additional 3.6 million shares of Cooper common stock for
approximately $119.6 million under previously existing authorizations by the
Board of Directors.
Historically, Cooper has relied on the commercial paper markets to fund its
operations. Although recent distress in the financial markets has not had a
significant impact on Cooper's financial position, results of operations or
liquidity as of the date of this filing in 2008, management continues to monitor
the financial markets and general global economic conditions. If further changes
in financial markets or other areas of the economy adversely affect Cooper's
access to the commercial paper markets, Cooper would expect to rely on a
combination of available cash and existing committed credit facilities to
provide short-term funding.
With the recent distress in the financial markets, the likelihood of a
downturn in the global economies has significantly increased. Cooper's financial
results and liquidity remained strong through the third quarter of 2008.
However, it is likely that the markets that Cooper services will experience
slower growth and in some cases declines over the next twelve months. While the
length and depth of a downturn are not predictable, Cooper is proactively
adjusting our cost structure. In this regard, in October 2008, Cooper announced
it is implementing contingency plans that will reduce our cost structure and
expects to take a restructuring charge in the fourth quarter of 2008 in the
range of approximately $20 to $22 million related to reducing our workforce by
over 1,000 employees. Cooper anticipates that the restructuring activities
related to reductions in the workforce will be completed by the end of 2008 and
the related cash payments will be completed in the first half of 2009. Cooper
may also have charges in the fourth quarter of 2008 as it evaluates moving
certain product lines and other restructuring.
Recent deterioration in the securities markets has impacted the value of the
assets included in Cooper's defined benefit pension plan (the Plan), the effect
of which has not been reflected in the accompanying consolidated financial
statements as of and for the nine months ended September 30, 2008 based on the
provisions of SFAS No. 158 that require plan assets and obligations to be
re-measured at December 31, 2008. Should values not recover before December 31,
2008, the decline in fair value of the Plan would result in increased total
pension costs for 2009 as compared to total pension costs expected during 2008.
Further, the decline in fair value may result in additional cash contributions
during 2009 in accordance with the U.S. Pension Protection Act of 2006 or other
international retirement plan funding requirements.
Cooper currently anticipates that it will annually generate in excess of
$500 million in cash flow available for acquisitions, debt repayments and common
stock repurchases.
Capital Resources:
Cooper targets a 30% to 40% debt-to-total capitalization ratio. Excess cash
flows are utilized to fund acquisitions or to purchase shares of Cooper common
stock. Cooper's debt-to-total capitalization ratio was 29.6% at September 30,
2008, 30.8% at December 31, 2007 and 27.4% at September 30, 2007.
At September 30, 2008 and December 31, 2007, Cooper had cash and cash
equivalents of $260.7 million and $232.8 million, respectively and short-term
investments of $35.6 million and $93.7 million, respectively. At September 30,
2008 and December 31, 2007, Cooper had short-term debt of $32.9 million and
$256.1 million, respectively, including commercial paper of $10.0 million and
$228.7 million, respectively. In connection with the acquisition of MTL in
February 2008, Cooper assumed short-term debt of $47.8 million which has
subsequently been repaid and issued short-term loan notes of $8.8 million. At
September 30, 2008, Cooper has $8.0 million of loan notes related to MTL
included in short-term debt.
Cooper's practice is to back up its short-term debt balance with a
combination of cash, cash equivalents, and committed credit facilities. At
September 30, 2008, Cooper had $536 million of committed credit facilities,
$36 million of which matures in March 2009 and $500 million of which matures in
November 2009. Short-term debt, to the extent not backed up by cash or
short-term investments, reduces the amount of additional liquidity provided by
the committed credit facilities.
The credit facility agreements are not subject to termination based on a
decrease in Cooper's debt ratings or a material adverse change clause. The
principal financial covenants in the agreements limit Cooper's debt-to-total
capitalization ratio to 60% and require Cooper to maintain a minimum earnings
before interest expense, income taxes, depreciation and amortization to interest
ratio of 3 to 1. Cooper is in compliance with all covenants set forth in the
credit facility agreements.
Cooper's access to the commercial paper markets could be adversely affected
by a change in the credit ratings assigned to its commercial paper. Should
Cooper's access to the commercial paper markets be adversely affected due to a
change in its credit ratings, Cooper would rely on a combination of available
cash and its committed credit facilities to provide short-term funding. The
committed credit facilities do not contain any provision which makes their
availability to Cooper dependent on Cooper's credit ratings.
The recent distress in the financial markets could result in the commercial
paper markets not being conducive to the issuance of commercial paper or, if
issued, the commercial paper may not be at reasonably attractive interest rates.
See further discussion above under Liquidity.
On March 27, 2008, Cooper's wholly-owned subsidiary, Cooper US, Inc. issued
$300 million of senior unsecured notes due in 2015. The fixed rate notes have an
interest coupon of 5.45% and are guaranteed by Cooper and certain of its
principal operating subsidiaries. Proceeds from the financing were used to repay
outstanding commercial paper. Combined with the debt issuance discount,
underwriting commissions and interest rate hedges implemented in anticipation of
the offering, the notes have an effective annual cost to Cooper of 5.56%.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As of September 30, 2008, there have been no material changes to Cooper's
off-balance sheet arrangements and contractual obligations as described in its
. . .
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