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| CBE > SEC Filings for CBE > Form 10-Q on 5-Nov-2012 | All Recent SEC Filings |
5-Nov-2012
Quarterly Report
We often discuss expectations regarding our future markets, demand for our products and services, and our performance in our annual and quarterly reports, press releases, and other written and oral statements. Statements that relate to matters that are not historical facts are "forward-looking statements" within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "should," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements.
This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes forward-looking statements. Forward-looking statements include, but are not limited to, any statements regarding future revenues, costs and expenses, earnings, earnings per share, margins, cash flows, dividends and capital expenditures, as well as statements regarding the timing and likelihood of closing the Transaction Agreement with Eaton. Important factors which may affect the actual results include, but are not limited to, political developments, market and economic conditions, changes in raw material, transportation and energy costs, industry competition, the ability to execute and realize the expected benefits from strategic initiatives including revenue growth plans and cost control and productivity improvement programs, the ability to develop and introduce new products, the magnitude of any disruptions from manufacturing rationalizations, changes in mix of products sold, mergers and acquisitions and their integration into Cooper, the timing and amount of any stock repurchases by Cooper, changes in financial markets including currency exchange rate fluctuations, changing legislation and regulations including changes in tax law, tax treaties or tax regulations, and the ability to obtain foreign regulatory approvals for the Transaction Agreement with Eaton.
The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please see Part I - Item 1A. - Risk Factors.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," "our," "the Company," or "Cooper" means Cooper Industries plc and, where the context requires, includes our subsidiaries.
Three Months Ended September 30, 2012 Compared With Three Months Ended September 30, 2011
Net income for the third quarter of 2012 was $188.4 million on revenues of $1,497.5 million compared with 2011 third quarter net income of $160.2 million on revenues of $1,389.7 million. Third quarter diluted earnings per share increased 18% to $1.16 from $.98 in 2011.
Revenues:
Revenues for the third quarter of 2012 increased 7.8% compared to the third quarter of 2011. Core revenues in the third quarter of 2012 were 6.7% higher than the prior year with acquisitions increasing comparable revenues by 2.6% in 2012. Currency translation decreased reported revenues by approximately 1.5% in the third quarter of 2012.
Energy & Safety Solutions segment revenues for the third quarter of 2012 increased 6.9% compared to the third quarter of 2011. Core revenues were 6.9% higher in the third quarter of 2012 primarily related to continued demand for utility products with strong demand from global industrial and energy markets. Unfavorable currency translation decreased reported revenues by approximately 2.3% with acquisitions adding 2.3% to reported revenues in the quarter.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 65.6% for the third quarter of 2012 compared to 67.0% for the comparable 2011 quarter. The decrease in the cost of sales percentage resulted from favorable impact of higher production volumes, pricing actions which more than offset material price inflation and the positive impact of Cooper's activities to improve overall cost productivity. This favorable impact was partially offset by recent acquisitions which had a higher than average cost of sales, as a percentage of revenues.
Energy & Safety Solutions segment costs of sales, as a percentage of revenues, was 65.4% for the third quarter of 2012 compared to 66.9% for the third quarter of 2011. The decrease in the cost of sales percentage resulted from favorable impact of higher production volumes, pricing actions which more than offset material price inflation and the positive impact of Cooper's activities to improve overall cost productivity. This favorable impact was partially offset by recent acquisitions which had a higher than average cost of sales, as a percentage of revenues and continuing increase in investments made to accelerate new product development.
Electrical Products Group segment cost of sales, as a percentage of revenues, was 66.1% for the third quarter of 2012 compared to 67.2% for the third quarter of 2011. The decrease in the cost of sales percentage resulted from pricing actions which more than offset material price inflation and the positive impact of Cooper's activities to improve overall cost productivity. The favorable impact from productivity and price/material economics improvements was partially offset by recent acquisitions which had a higher than average cost of sales, as a percentage of revenues and increases made in investments to accelerate new product development.
Selling and administrative expenses, as a percentage of revenues, for the third quarter of 2012 was 18.6% compared to 19.4% for the third quarter of 2011. The decrease in percentage is reflective of the favorable impact of higher revenue levels and lower environmental costs in 2012. This improvement was partially offset by recent acquisitions which have selling and administrative expenses at higher than average percentages of revenue and incremental costs related to the proposed transaction with Eaton.
Energy & Safety Solutions segment selling and administrative expenses, as a percentage of revenues, for the third quarter of 2012 was 15.7% compared to 16.4% for the third quarter of 2011. The decrease in 2012 is primarily related to lower environmental and legal expenses in 2012 than 2011. The benefit of higher comparable revenue levels in 2012 was substantially offset by higher than average selling and administrative expenses from newly acquired businesses.
Electrical Products Group segment selling and administrative expenses, as a percentage of revenues, for the third quarter of 2012 was 19.0% compared to 18.9% for the third quarter of 2011. The selling and administrative expenses as a percentage of revenues was essentially flat and reflects the impact of 8.8% higher comparable revenue levels for the third quarter 2012 primarily offset by higher legal costs.
Net interest expense in the third quarter of 2012 decreased $1.8 million from the 2011 third quarter primarily as a result of the favorable impact from foreign currency hedges related to intercompany financing activities. Average debt balances were $1.42 billion and $1.42 billion and average interest rates were 4.53% and 4.79% for the third quarter of 2012 and 2011, respectively.
Energy & Safety Solutions third quarter 2012 segment operating earnings increased 21.5% to $152.6 million from $125.6 million for the same quarter of last year. The increase resulted from the favorable impact of higher production volumes and improved pricing which exceeded material cost inflation during the quarter. The Energy & Safety Solutions segment continues its investment in productivity initiatives which includes manufacturing productivity improvements, product redesign and investment in developing markets to increase global revenues.
Electrical Products Group third quarter 2012 segment operating earnings increased 17.0% to $103.3 million from $88.3 million for the same quarter of last year. The increase resulted from the favorable impact of higher production volumes and pricing actions taken during the third quarter of 2012 more than offsetting the material price inflation encountered. The Electrical Products Group segment continues its investment in productivity initiatives which includes manufacturing productivity improvements and product redesign.
Equity income from Apex Tool Group was $18.5 million in the third quarter of 2012 compared to $16.0 million in the third quarter of 2011. The increase in equity income resulted from the favorable impact of higher production volumes and the positive impact of Apex's activities to improve overall cost productivity.
General Corporate expense decreased $5.1 million to $19.5 million during the third quarter of 2012 compared to $24.6 million during the same period of 2011. The decrease in General Corporate expense in the third quarter of 2012 primarily relates to lower comparative costs for legal and environmental matters related to previously divested businesses partially offset by incremental costs associated with the proposed Eaton transaction.
Income Taxes:
The effective tax rate was 21.6% for the third quarter of 2012 compared to 15.2% for the same period in 2011. The increase in the effective tax rate in the third quarter 2012 is primarily related to an increase in earnings without a corresponding relative increase in tax benefits and the impact from finalization of prior year tax benefits.
Nine Months Ended September 30, 2012 Compared With Nine Months Ended September 30, 2011
Income from continuing operations for the nine month period ended September 30, 2012 was $538.1 million on revenues of $4,370.8 million compared with income from continuing operations in the nine month period ended September 30, 2011 of $477.4 million on revenues of $4,036.3 million. Diluted earnings per share from continuing operations were $3.33 in the nine month period ended September 30, 2012 compared to $2.87 in the same period of 2011. Reported income from continuing operations for the nine month period ended September 30, 2011 was increased by $9.7 million or $.06 per share for discrete tax adjustments related to the settlement of the discontinued operations asbestos liability that was required under accounting principles to be classified in continuing operations.
Revenues:
Revenues for the nine month period ended September 30, 2012 increased 8.3% compared to the nine month period ended September 30, 2011. Core revenues for the nine month period ended September 30, 2012 were 6.4% higher than the prior year. Acquisitions increased comparable revenues in the nine month period ended September 30, 2012 by 3.2% with currency translation decreasing reported revenues by approximately 1.3%.
Electrical Products Group segment revenues in 2012 increased 9.1% compared to the nine month period ended September 30, 2011. Core revenues in the nine month period ended September 30, 2012 were 4.8% higher than the same period in the prior year with unfavorable currency translation decreasing reported revenues by 0.7%. Acquisitions increased reported revenues by 5.0% in 2012 driven primarily by the July 2011 acquisition of Martek Power. Strong demand from our Industrial and Electrical markets with added demand for energy-efficient technologies such as LED products improved results from the non-residential markets partially offset by slowing demand for North American Electrical and Transportation markets.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 65.3% for the nine month period ended September 30, 2012 compared to 66.4% for the comparable 2011 period. The decrease in the cost of sales percentage resulted from the favorable impact of higher production volumes, material price inflation more than offset by pricing actions taken in 2012 and the positive impact of Cooper's activities to improve overall cost productivity. This favorable impact was partially offset by investments made in resources to accelerate new product development and higher warranty expenses.
Energy & Safety Solutions segment cost of sales, as a percentage of revenues, was 64.5% for the nine month period ended September 30, 2012 compared to 66.5% for the same period in 2011. The decrease in the cost of sales percentage resulted from the favorable impact of higher production volumes for selected markets with material price inflation more than offset by pricing actions taken in 2012 and the positive impact of Cooper's activities to improve overall cost productivity. Cost of sales as a percentage of revenue in 2012 was also reduced by 0.6% by the gain on the sale of a product line. Investments made in resources to accelerate new product development and incrementally higher warranty expenses partially offset the favorable items previously identified.
Electrical Products Group segment cost of sales, as a percentage of revenues, was 66.4% for the for the nine month period ended September 30, 2012 compared to 66.4% for the same period in 2011. The unchanged cost of sales as a percentage of revenues in comparison to the prior year period included favorable leverage of fixed costs from improved demand due to the recovery in selected global markets, material price inflation more than offset by pricing actions taken in 2012 and the favorable impact of actions taken to adjust operating costs. These favorable actions were primarily offset by investments made in resources to accelerate new product development and higher warranty expenses.
Selling and administrative expenses, as a percentage of revenues, for the nine month period ended September 30, 2012 was 19.6% compared to 19.3% for the same period in 2011. Higher environmental and legal costs and incremental costs related to the proposed transaction with Eaton increased 2012 selling and administrative expenses, as a percentage of revenues by approximately 0.5%. This increase in percentage was partially mitigated by the favorable impact of higher revenue levels partially offset by expenses associated with global growth initiatives.
Energy & Safety Solutions segment selling and administrative expenses, as a percentage of revenues for the nine month period ended September 30, 2012, was 16.8% compared to 16.3% for the same period in 2011. Higher environmental and legal costs increased 2012 selling and administrative expenses, as a percentage of revenues by approximately 0.4%. The remaining increase in selling and administrative expenses as a percentage of revenues was the result of investments in resources designed to improve global growth and higher than average selling and administrative expenses from newly acquired businesses that was partially offset by the favorable impact of 7.6% higher comparable revenue levels in 2012.
Net interest expense for the nine month period ended September 30, 2012 decreased $5.8 million from the same period in 2011 primarily as a result of the favorable impact from foreign currency hedges related to intercompany financing activities. Average debt balances were $1.42 billion and $1.42 billion and average interest rates were 4.62% and 4.87% for the month periods ended September 30, 2012 and 2011, respectively. Average interest rates in 2011 were unfavorably impacted by the write-off of unamortized debt issuance costs related to the prior bank credit facility that was replaced in May 2011.
Operating Earnings:
Energy & Safety Solutions segment operating earnings for the nine month period ended September 30, 2012 increased 17.1% to $439.6 million from $375.4 million for the same period of last year. The increase resulted from the improved demand for industrial, energy related and utility products. The favorable impact from improving markets coupled with material price inflation that was more than offset through pricing actions taken during 2012 was partially offset by higher environmental and legal costs. The Energy & Safety Solutions segment continues its investment in productivity initiatives which includes manufacturing productivity improvements, product redesign and investment in developing markets to increase global revenues. Operating earnings in 2012 also include the gain on the sale of a product line which increased reported results as a percentage of revenue by 0.4%.
Electrical Products Group segment operating earnings for the nine month period ended September 30, 2012 increased 9.5% to $295.6 million from $270.0 million for the same period in 2011. The increase resulted from the improvement in demand from most global markets and material price inflation that was more than offset through pricing actions taken during 2012. These items were partially offset by higher legal costs and continued investments in productivity initiatives which includes manufacturing productivity improvements, product redesign and investment in developing markets to increase global revenues.
Reported equity income from Apex Tool Group was $50.9 million in the nine month period ended September 30, 2012 compared to equity income from Apex Tool Group of $44.9 million for the nine month period ended September 30, 2011.
General Corporate expense increased $4.0 million to $74.9 million during the nine month period ended September 30, 2012 compared to $70.9 million during the same period of 2011. The increase in General Corporate expense in 2012 primarily relates to incremental costs associated with the proposed transaction with Eaton and higher environmental costs related to previously divested businesses. These increases were partially offset by cost reduction actions taken during 2012 to reduce overall General Corporate expense.
Income Taxes:
The effective tax rate from continuing operations was 19.3% and 16.2% for the nine month periods ended September 30, 2012 and 2011, respectively. Income tax expense from continuing operations was reduced by $8.0 million during the nine month period ended September 30, 2012 for discrete tax adjustments related to the resolution of certain foreign tax matters. Income tax expense from continuing operations was reduced by $9.7 million during the nine month period ended September 30, 2011 for discrete tax adjustments related to the settlement of the discontinued operations asbestos liability that was required under accounting principles to be classified in continuing operations. Excluding these discrete tax adjustments, Cooper's effective tax rate for the nine month periods ended September 30, 2012 and 2011 was 20.5% and 17.9%, respectively. The increase in the effective tax rate is primarily related to an increase in earnings without a corresponding relative increase in tax benefits and the impact from finalization of prior year tax benefits.
As discussed in Note 16 of the Notes to the Consolidated Financial Statements, on February 1, 2011, Cooper entered into a settlement agreement that closed on April 5, 2011 related to its asbestos liability regarding the Automotive Products segment, which was sold in 1998. The settlement terminated the 1994 Mutual Guaranty Agreement between Cooper and Pneumo and created a Settlement Trust. After the closing of the settlement in April 2011 the Company and its subsidiaries have no further obligations under the Mutual Guaranty Agreement. As a result of the settlement agreement, in the first quarter of 2011 Cooper adjusted its previously recorded net liability for its obligations under the Mutual Guaranty agreement to the amounts payable under the settlement agreement and related unpaid legal expenses resulting in the recognition of an after tax gain from discontinued operations of $190.3 million, which is net of a $105.6 million income tax expense.
Cooper believes our internal cash generation together with existing cash and cash equivalent balances and availability under the committed credit facility is sufficient to fund current operations, projected capital expenditures, scheduled debt repayments, the current rate of cash dividends, and anticipated common stock repurchases. Capital expenditures in 2012 are projected to be approximately $160 to $180 million. Cooper evaluates opportunities to expand through acquisitions as well as through the growth of our current businesses. While a significant acquisition may require additional debt and/or equity financing, Cooper believes its conservative financial structure and access to capital markets provides the strength and flexibility to support the liquidity needs to achieve its strategic objectives. Notwithstanding the above, Cooper is prohibited at this time under the Transaction Agreement with Eaton from repurchasing its shares and, without Eaton's consent, from making certain acquisitions.
Liquidity:
Cooper's operating working capital (defined as receivables and inventories less accounts payable) increased $147.5 million during the first nine months of 2012 reflecting working capital investments to support revenue growth and global growth initiatives. A $130.1 million increase in receivables and a $76.5 million increase in inventories were partially offset by a $59.1 million increase in accounts payable. Operating working capital turnover (defined as annualized quarterly revenues divided by average quarterly operating working capital) for the 2012 third quarter was 6.1 turns as compared to the 5.8 turns reported for the same period of 2011 reflecting efficient working capital utilization.
Cash provided by operating activities was $545.2 million during the nine months ended September 30, 2012. This cash plus an additional $120.2 million of cash received from stock option exercises was used primarily to fund dividends of $144.6 million, acquisitions of $136.9 million, capital expenditures of $113.4 million and share purchases of $7.4 million.
Cash provided by operating activities was $177.0 million during the nine months ended September 30, 2011, inclusive of the $250 million asbestos settlement trust payment discussed above. This cash, plus an additional $604.7 million of cash and cash equivalents and $54.8 million of cash received from stock option exercises, was primarily used to fund share purchases of $383.0 million, acquisitions of $250.1 million, dividends of $141.4 million and capital expenditures of $84.8 million.
Capital Resources:
Cooper targets a 30% to 40% debt-to-total capitalization ratio. Cooper's debt-to-total capitalization ratio was 25.6% at September 30, 2012, 28.8% at December 31, 2011 and 29.3% at September 30, 2011.
At September 30, 2012 and December 31, 2011, Cooper had cash and cash equivalents of $965.8 million and $676.6 million, respectively. Cooper had short-term debt of $4.4 million and $6.4 million at September 30, 2012 and December 31, 2011, respectively. Cooper had no commercial paper outstanding at September 30, 2012 or December 31, 2011. Cooper's practice is to back up its short-term debt balance with a combination of cash, cash equivalents, and committed credit facilities. Cooper has $325 million of long-term debt maturing in November 2012 that Cooper anticipates repaying from existing cash on hand.
Cooper's access to the commercial paper market could be adversely affected by a change in the credit ratings assigned to its commercial paper. Should Cooper's access to the commercial paper market be adversely affected due to a change in its credit ratings, Cooper would rely on a combination of available cash and its committed credit facility to provide short-term funding. The committed credit facility does not contain any provision, which makes its availability to Cooper dependent on Cooper's credit ratings.
Cooper's senior unsecured notes, credit facility and any commercial paper amounts outstanding are guaranteed by Cooper and certain of its principal U.S. operating subsidiaries.
Eaton Transaction Agreement:
On May 21, 2012 Cooper entered into a Transaction Agreement (as amended, the "Transaction Agreement") with Eaton Corporation ("Eaton"), Eaton Corporation Limited ("New Eaton") and certain other entities. Under the terms of the Transaction Agreement, New Eaton will acquire Cooper with each Cooper shareholder entitled to receive $39.15 in cash and .77479 of a newly issued New Eaton ordinary share in exchange for each outstanding Cooper ordinary share (the "Acquisition"). In connection with the Acquisition, Eaton will merge with a wholly owned subsidiary of New Eaton, a newly formed Irish company (the "Merger"). As a result of the Acquisition and Merger, both Eaton and Cooper will become wholly owned subsidiaries of New Eaton (the "Transactions"). The Transactions have been approved by the boards of directors and shareholders of both Eaton and Cooper. The closing of the Transactions is subject to customary closing conditions, including regulatory approvals under the antitrust laws of certain jurisdictions, and is expected to close in 2012. There is no assurance that the Transactions will be completed in 2012 or at all.
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