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Cooper Industries 10-K 2011 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2010
OR
For the transition period from to
Commission file number 1-31330
Cooper Industries plc
(Exact Name of Registrant as Specified in Its Charter)
713/209-8400
(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate value of the registrant’s voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2010 was $7,301,365,016 based on the closing sale
price as reported on the New York Stock Exchange.
Number of registrant’s common shares outstanding as of January 31, 2011 — 164,400,389 common
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Cooper Industries plc Proxy Statement to be filed for the Annual Meeting of Shareholders to be held on May 2, 2011 (Part II — Item 5(a), Part III — Items 10, 11, 12, 13 and 14)
TABLE OF CONTENTS
Table of Contents
PART I
Our internet address is www.cooperindustries.com. We make available free of charge through
our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission
(the “SEC”). In addition, documents relating to our corporate governance (such as committee
charters, governance guidelines and other internal policies) can be found on our website. The SEC
maintains an internet site (www.sec.gov) that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
FORWARD-LOOKING STATEMENTS
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 Annual Report on Form 10-K, 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.
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 resolution of
potential liabilities and insurance recoveries resulting from on-going Pneumo-Abex related asbestos
claims.
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 Annual Report on Form 10-K to “we,” “us,”
“our,” “the Company,” or “Cooper” means Cooper Industries plc and, where the context requires,
includes our subsidiaries.
ITEM 1. BUSINESS
GENERAL
The term “Cooper” refers to the registrant, Cooper Industries plc, which was incorporated
under the laws of Ireland on June 4, 2009, and became the successor-registrant to Cooper
Industries, Ltd. on September 9, 2009. Cooper Industries, Ltd. was incorporated under the laws of
Bermuda on May 22, 2001, and became the successor registrant to Cooper Industries, Inc. on May 22,
2002.
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In June 2009 our Board of Directors approved moving Cooper’s place of incorporation from
Bermuda to Ireland. This move was part of a reorganization that created a newly formed Irish
company, Cooper Industries plc. We completed the first step in this reorganization by establishing
our tax residency in Ireland in December 2008. At a Special Shareholders’ Meeting on August 31,
2009, shareholders voted in favor of completing the reorganization pursuant to which all Cooper
Industries, Ltd. Class A common shares held by public shareholders would be cancelled and all
holders of such shares would receive ordinary shares of Cooper Industries plc on a one-for-one
basis. The reorganization transaction was completed on September 8, 2009, following approval from
the Supreme Court of Bermuda, at which time Cooper Industries plc replaced Cooper Industries, Ltd.
as the ultimate parent company. On October 19, 2009, the Irish High Court approved the reduction
of share premium (similar to additional paid-in-capital) to establish distributable reserves in the
statutory balance sheet of Cooper Industries plc. The establishment of distributable reserves was
required to enable the Company to pay dividends and repurchase shares in the future.
We believe being an Irish company offers increased strategic flexibility and operational
benefits as we continue to expand the growing international portion of our business. We do not
expect the reorganization to have any material impact on our financial results. Shares of the
Irish company, Cooper Industries plc, began trading on the New York Stock Exchange on September 9,
2009 under the symbol “CBE”, the same symbol under which Cooper Industries, Ltd. shares were
previously traded. Cooper Industries plc remains subject to the U.S. Securities and Exchange
Commission reporting requirements, the mandates of the Sarbanes-Oxley Act and applicable corporate
governance rules of the New York Stock Exchange.
On March 26, 2010, Cooper announced entering into a Framework Agreement with Danaher
Corporation to create a joint venture combining our Tools business with certain Tools businesses
from Danaher’s Tools and Components Segment (the “Joint Venture”). On July 6, 2010, Cooper
announced the completion of the Joint Venture, named Apex Tools Group, LLC. Cooper and Danaher
each own a 50% interest in the Joint Venture, have equal representation on its Board of Directors
and have a 50% voting interest in the Joint Venture. At completion of the transaction in July 2010
Cooper deconsolidated the Tools business assets and liabilities contributed to the Joint Venture
and recognized Cooper’s 50% ownership interest as an equity investment.
During the first quarter of 2010 Cooper revised its segment reporting to align its external
reporting with changes to its internal reporting structure and in conjunction with the announcement
of the Tools joint venture. The former Electrical Products segment has been divided into two new
reportable segments. Following this change, Cooper’s operations consisted of three segments:
Energy and Safety Solutions, Electrical Products Group and Tools. Following completion of the
Tools joint venture in July 2010 Cooper has two reportable segments. Cooper manufactures, markets
and sells its products and provides services throughout the world. Cooper has manufacturing
facilities in 21 countries and currently employs approximately 24,800 people. Operations in the
United States are conducted by wholly-owned subsidiaries of Cooper, organized by the business
segments. Activities outside the United States contribute significantly to the revenues and
operating earnings of all the business segments of Cooper. These activities are conducted in major
industrialized countries by wholly-owned subsidiaries and jointly-owned companies, the management
of which is structured through Cooper’s business segments. As a result of operations outside the
United States, 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 operations outside the United States compared with United States activities,
although Cooper is subject to certain political and economic uncertainties encountered in
activities outside the United States, including trade barriers and restrictions on the exchange and
fluctuations of currency. Cooper generates the most non-U.S. revenues in the United Kingdom,
Germany, Canada, Mexico, France and the Asia Pacific region. Cooper has operations in India and
China and has two majority-owned joint ventures with operations in China. Investments in emerging
markets such as India and China are subject to
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greater risks related to economic and political uncertainties as compared to most countries
where Cooper has operations. Exhibit 21.0 contains a list of Cooper’s significant subsidiaries.
Financial information with respect to Cooper’s industry segments and geographic areas is
contained in Note 13 of the Notes to the Consolidated Financial Statements. A discussion of
acquisitions and divestitures is included in Notes 2, 4 and 20 of the Notes to the Consolidated
Financial Statements.
With its two business segments, Cooper serves four major markets: the industrial, commercial,
utility and residential markets. Cooper also serves the electronics and telecommunications
markets. 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. Cooper experiences substantial competition in each of its business segments. The
number and size of competitors vary considerably depending on the product line. Cooper cannot
specify with exactitude the number of competitors in each product category or their relative market
position. However, most operating units experience significant competition from both larger and
smaller companies with the key competitive factors being customer and end-user service, price,
quality, brand name and availability. Cooper considers its reputation as a manufacturer of a broad
line of quality products and premier brands to be an important factor in its businesses. Cooper
believes that it is among the leading manufacturers in the world of electrical distribution
equipment, support systems, hazardous duty electrical equipment, lighting fixtures, emergency
lighting and fuses.
Cooper’s research and development activities are for purposes of improving existing products
and services and originating new products. During 2010 approximately $149.7 million was spent for
research and development activities as compared with approximately $141.1 million in 2009 and
$141.8 million in 2008. Cooper obtains and holds patents on products and designs in the United
States and many other 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 license or group of patents or licenses would not
materially affect its business.
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 2011. 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,
or currently under negotiation with state regulatory agencies, 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 Cooper’s
accruals for environmental liabilities, see Note 8 of the Notes to the Consolidated Financial
Statements.
Approximately 57 percent of the United States hourly production work force of Cooper is
employed in 34 manufacturing facilities, distribution centers and warehouses not covered by labor
agreements. Numerous agreements covering approximately 43 percent of all hourly production
employees exist with 14 bargaining units at 15 operations in the United States. We also have
agreements with various unions at 16 operations in other countries. During 2010 new agreements
were concluded covering hourly production employees at 3 operations. Cooper considers its employee
relations to be excellent.
Sales backlog at December 31, 2010 was approximately $640 million, substantially all of which
is for delivery during 2011, compared with backlog of approximately $573.9 million at December 31,
2009.
The following describes the business conducted by each of Cooper’s business segments.
Additional information regarding the products, markets and distribution methods for each segment is
set forth in the table at the end of this Item. Information concerning market conditions, as well
as information
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concerning revenues and operating earnings for each segment, is included under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Energy and Safety Solutions
The Energy & Safety Solutions segment includes the Cooper Crouse-Hinds, Cooper Power Systems,
and Cooper Safety Divisions. This segment manufactures, markets and sells electrical protection
products, including fittings, plugs, receptacles, cable glands, hazardous duty electrical
equipment, intrinsically safe explosion-proof instrumentation, emergency lighting, fire detection
and mass notification systems and security products for use in residential, commercial and
industrial construction and 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, energy automation solutions and other
related power systems components.
The principal raw material requirements include: steel, copper, aluminum, aluminum ingots,
brass, tin, lead, plastics, electronic components and insulating materials including transformer
oil. These raw materials are available from and supplied by numerous sources located in the United
States and other countries, although there are limited sources of supply for electrical core steel
and transformer oil that Cooper uses in electrical power transmission and distribution products.
Demand for products in the Energy and Safety Solutions segment follows general economic
conditions and is generally sensitive to activity in the commercial and residential construction
markets, industrial production levels, electronic component production 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.
Electrical Products Group
The Electrical Products Group segment includes the Cooper B-Line, Cooper Bussmann, Cooper
Lighting, and Cooper Wiring Devices Divisions. The Electrical Products Group segment manufactures,
markets and sells electrical and circuit protection products, support systems, enclosures,
specialty connectors, wiring devices, plugs, receptacles, switches, lighting fixtures and controls,
and fuses for use in residential, commercial and industrial construction, maintenance and repair
applications.
The principal raw material requirements include: steel, copper, aluminum, aluminum ingots,
brass, tin, lead, plastics, electronic components and insulating materials. These raw materials
are available from and supplied by numerous sources located in the United States and other
countries.
Demand for electrical products in the Electrical Products Group follows general economic
conditions and is generally sensitive to activity in the commercial and residential construction
markets, industrial production levels and electronic component production. The segment’s product
lines are marketed directly to original equipment manufacturers and to a variety of end users
through major distributor chains, retail home centers, hardware outlets and thousands of
independent distributors.
Tools Joint Venture
As discussed above, in July 2010 Cooper and Danaher Corporation completed the formation of a
joint venture combining our Tools business with certain Tools businesses from Danaher’s Tools and
Components Segment (the “Joint Venture”). Cooper and Danaher each own a 50% interest in the Joint
Venture, have equal representation on its Board of Directors and have a 50% voting interest in the
Joint Venture. At completion of the transaction in July 2010 Cooper deconsolidated the Tools
business assets and liabilities contributed to the Joint Venture and recognized Cooper’s 50%
ownership interest as an equity investment. The Tools Joint Venture manufactures markets and sells
hand tools for industrial,
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construction, electronics and consumer markets; automated assembly systems; and electric and
pneumatic industrial power tools, related electronics and software control and monitoring systems
for industrial markets, specialized automotive service tools, tool storage, drill chucks and
precision tool and workholders for industrial and consumer markets. Cooper believes that the Tools
Joint Venture is among the leading manufacturers in the world of nonpower hand tools and industrial
power tools.
PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT
ENERGY AND SAFETY SOLUTIONS
Major Markets
Electrical power products are used by utilities and commercial and industrial power users.
Electrical construction materials are used in commercial, residential and industrial projects, by
utilities, airports and wastewater treatment plants and in the process and energy industries.
Emergency lighting, fire detection and security systems are installed in residential, commercial
and industrial applications.
Principal Distribution Methods
Products are sold through distributors for use in general construction and renovation, plant
maintenance, process and energy applications, shopping centers, parking lots, sports facilities,
and data processing and telecommunications systems; and through distributors and direct to
utilities and manufacturers for use in electronic equipment for consumer, industrial, government
and military applications.
ELECTRICAL PRODUCTS GROUP
Major Markets
Fuses and circuit protection products are utilized in products for the construction,
industrial, transportation and consumer markets and by manufacturers in the electrical, electronic,
telecommunications and transportation industries. Lighting fixtures are utilized in residential
construction, industrial, institutional and commercial building complexes, shopping centers,
parking lots, roadways, and sports facilities. Support systems and enclosures are used in
industrial, commercial and telecommunications complexes. Wiring devices are used in the
construction, renovation, maintenance and repair of residential, commercial, industrial and
institutional buildings.
Principal Distribution Methods
Products are sold through distributors for use in general construction and renovation, plant
maintenance, process and energy applications, shopping centers, parking lots, sports facilities,
and data processing and telecommunications systems; through distributors and direct to utilities
and manufacturers for use in electronic equipment for consumer, industrial, government and military
applications; through distributors and direct to retail home centers and hardware outlets; and
direct to original equipment manufacturers of appliances, tools, machinery and electronic
equipment.
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COOPER INDUSTRIES PLC
PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT — (Continued) Energy and Safety Solutions — Major Products and Brands
ACE explosion proof variable frequency drives
Ark•Gard explosion proof plugs and receptacles Arktite and eXLink plugs and receptacles Axent architectural lighting Blessing emergency lighting systems Cannon Technologies automated distribution solutions Capri cable accessories and flexible conduits CEAG emergency lighting systems and explosion protected electrical materials Champ and Hazard-Gard LED, HID and fluorescent lighting Chico conduit sealing compound Condulet fittings and outlet bodies Crompton lighting fixtures Crouse-Hinds Airport Lighting aviation lighting products Crouse-Hinds and CEAG hazardous location electrical construction materials Crouse-Hinds Commercial Products electrical construction materials CSA security systems and fire detection systems Cybectec substation integration and automation solutions CYME International Power Engineering Software Domex Bond coated conduit system (total protection against corrosion) Domex Ground electrical grounding systems Envirotemp FR3 fire resistant, dielectric fluid Envirotran liquid filled transformers Exactra panel boards EX-Cell and industrial enclosures Flex Station control stations Fulleon and Nugelec fire detection systems and notification sounder systems Hernis hazardous environment closed-circuit tv Iluram hazardous location electrical construction materials JSB and Menvier emergency lighting and fire detection systems Kearney connectors, switches, fuses and cutouts Kyle distribution switchgear Luminox emergency lighting MagneX interrupting devices MEDC signals and alarms M-Force switches MTL hazardous area electronic and instrumentation protection devices MTL Surge Technologies surge protection equipment Myers electrical hubs Nortem electrical construction materials NOVA reclosers, sectionalizers and switches Pauluhn harsh environment lighting fixtures and wiring devices PowerPlus panel boards PRE-formance prefabricated construction systems Pretronica and Univel emergency lighting and power systems Raxton and Redapt hazardous environment connectors RSAN personal and regional alerting, texting, e-mailing and automated dialing notification systems SAFEPATH voice evacuation systems and accessories Scantronic and Menvier security systems Space-Saver conduit fittings Stabex explosion protected torch UltraSIL surge arresters VaporGard LED and incandescent lighting fixtures VariSTAR surge arresters WAVES mass notification systems and accessories Wheelock fire and security notification appliances, devices and signals Yukon software platform Electrical Products Group — Major Products and Brands
Access Cabinets electrical enclosures
ALC energy management lighting controls Ametrix architectural asymmetric lighting Antares dimming lighting controls Arista solar rooftop mounting system Arrow Hart commercial and industrial wiring devices and power connection products ArrowLink modular wiring devices Aspire decorative wiring devices Aspire RF radio frequency controls, switches and receptacles AtLite commercial, exit and emergency lighting AutoGrip commercial-grade plugs and connectors B-Line support systems, enclosures, fasteners Burton undersea connectors Bussmann and Buss electrical and electronic fuses, fuse holders, surge protection and accessories Buzznut labor saving fasteners Cam-Lok electrical power connectors Cent-R-Rail cable tray system Coiltronics inductors and transformers for the electronics industry Cooper Interconnect specialty connectors and cables Cooper Wiring Devices residential, commercial and industrial wiring devices and power connection products CORE Controls dimmers, occupancy sensors, RF and integrated control systems Corelite indirect/direct linear & recessed lighting CUBEFuse fuse and fuse holder system Dura-Blok rooftop supports Dura-Clean washdown support systems Dura-Cooper and Dura-Green epoxy coatings E2 electronic enclosures Edison electrical and electronic fuses, fuse holders and accessories Electro Oceaneering waterproof connectors Enviroshield electrical enclosures and wireway F.A.S.T. underfloor cable tray system Fail-Safe confinement, vandal-resistant, clean room and medical lighting Flextray wire mesh cable tray Fusetron, Limitron, Low-Peak and Xi’an electrical fuses G&H Technology specialty connectors General Connectors military connectors Grate-Lock interlocking grating system Greengate energy management lighting controls Grip-Strut safety grating Halo recessed downlighting, track and surface lighting Hart-Lock and Power-Lock locking devices iLight architectural lighting controls (International) iLumin architectural lighting controls (North America) InVision overcurrent protective device monitoring system for industry Invue outdoor architectural area /site, decorative and floodlighting io architectural LED lighting Iris architectural residential recessed downlighting Kwik Clip pipe and conduit supports Kwik-Wire cable support systems Limberoller conveyor idlers Lumark indoor and outdoor industrial, area /site, security and floodlighting Lumière architectural landscape lighting LynxPower industrial connectivity Magnum power distribution blocks and power terminal blocks McGraw-Edison outdoor architectural area /site, garage and floodlighting MediaSync multi-media wiring systems Metalux commercial and industrial fluorescent lighting Mini-Line miniature over-molded connectors-cord sets MWS modular wiring systems Neo-Ray architectural indirect/direct linear, recessed and surface lighting OMNEX wireless signal technology and products Optima fuse holder PDS commercial recessed downlighting Perf-O Grip plank metal grating PolySurg polymer-based ESD suppression devices for the electronics industry Portfolio architectural commercial recessed downlighting Posi-Lok electrical connector panel units PowerStor supercapacitors for the electronics industry Premier electrical enclosures Quick Grip OEM plugs and connectors Quik-Loc high amperage mining connectors Quik-Spec electrical gear RCM + rack cable management systems Redi-Rail cable tray system Regent consumer security lighting REPEL protected switches and wallplates RhinoBox temporary power center Roughneck high amperage oil and gas connectivity Royer commercial and industrial wiring devices & power connection products RSA architectural multi-lamp, recessed, track and linear lighting Ruff-IN prefabricated mounting and support systems Safety Grip industrial-grade plugs and connectors SAFETYBasics electrical safety training Sedna decorative switches and receptacles Shaper indoor and outdoor architectural decorative lighting ShockSentry circuit protection devices Siena decorative wiring devices Snap’n Shield insulated pipe supports SOFTPower industrial power connectivity Streetworks outdoor area/roadway lighting Sure-Lites exit and emergency lighting SurePower power management and wireless control products for the transportation industry SurgeBloc electrical protection receptacles and surge suppressors Traction Tread perforated panel safety grating V-Line electronic cabinets WeatherBox while-in-use outdoor boxes and covers X-Switch NSF certified motor control switch Zero 88 theatrical lighting controls 7
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ITEM 1A. RISK FACTORS
Our financial condition and performance are subject to various risks and uncertainties,
including the risk factors described below. We may amend or supplement the risk factors from time
to time by other reports that we file with the SEC in the future.
Our Businesses Are Subject to Competitive Pressures.
Our businesses operate in markets that are highly competitive, and we compete on the basis of
price, quality, service, innovation and/or brand name across the industries and markets served.
Some of our competitors for certain products have greater sales, assets and financial resources
than we do. Competitive pressures could affect prices we charge our customers or demand for our
products, which could adversely affect our operating results.
Demand for Our Products Is Sensitive to the Economic Conditions in the Markets We Serve.
Demand for electrical products follows general economic conditions and is generally sensitive
to activity in the commercial and residential construction and renovation markets, industrial
production levels, electronic component production and spending by utilities for replacements,
expansions and efficiency improvements. Reduced demand due to economic and market conditions could
adversely affect our results of operations.
Development and Introduction of New Products and Solutions Affect our Ability to Grow Revenues and
Improve Profitability.
Development and introduction of new products that increase our customer’s productivity and
efficiency, provide enhanced energy efficiency, introduce new technology solutions, enhance safety
and conform to electrical standards in regions and local countries contribute significantly to our
revenue growth and profitability. We continually invest in new products and solutions and are not
dependent upon the success of any one product or solution. However, our overall success depends on
continuous new products and solutions being introduced and accepted by our customers.
Price Increases or Significant Shortages of Raw Materials and Components Could Adversely Affect Our
Operating Costs and the Competitive Position of Our Products.
Our major requirements for raw materials include steel, copper, aluminum, electronic
components and plastics and, to a lesser degree brass, tin, lead, fiberglass and insulating
materials including transformer oil. We have multiple sources of supply for each of our major
requirements, although there are limited sources of supply for electrical core steel and
transformer oil that Cooper uses in electrical power transmission and distribution products.
Significant shortages could disrupt the supply of raw materials or price increases could affect
prices we charge our customers, our product costs, and the competitive position of our products and
services, which could adversely affect our results of operations.
Operations and Supply Sources Located Outside the United States, Particularly Emerging Markets, Are
Subject to Increased Risks.
Our operating activities outside the United States contribute significantly to our revenues
and earnings. Serving a global customer base and remaining competitive in the global market place
requires that we place more production in countries other than the United States, including
emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure.
In addition, we source a significant amount of raw materials and other components from third-party
suppliers or majority-owned joint-venture operations in low-cost countries. Our operations outside
the United States could be disrupted by a natural disaster, labor strike, war, political unrest,
terrorist activity or public health concerns.
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Operations outside the United States are also subject to certain regulatory and economic
uncertainties including trade barriers and restrictions on the exchange and fluctuations of
currency. We believe that our operations in certain emerging markets such as China, India and in
the Middle East are subject to greater risks related to these political and economic uncertainties
as compared to most countries where Cooper has operations.
Our Key Strategic Initiatives Affect Our Ability to Grow Revenues, Control Costs and Improve
Productivity.
Our operating model is built on a platform of key strategic initiatives that are designed to
grow revenues, control costs and improve productivity. Our ability to execute and realize the
expected benefits from our strategic initiatives affects our revenues and operating costs. Also,
our operations could be disrupted by manufacturing rationalizations.
We Engage in Acquisitions and May Encounter Difficulties in Integrating These Businesses.
We are a company that seeks to grow through strategic acquisitions. The success of these
transactions depends on our ability to integrate the assets and personnel acquired in these
transactions. We may encounter difficulties in integrating acquisitions with our operations and
may not realize the degree or timing of the benefits that we anticipated from an acquisition.
We Have Liability Exposure for Asbestos-Related Claims.
We have owned businesses that previously produced and sold products that contained asbestos.
We, therefore, have potential liability arising from individuals claiming illnesses from exposure
to asbestos. Insurance policies satisfy portions of the claim settlements and related legal costs.
Many of the asbestos claims arise from our former Abex Friction Products business that was sold to
Federal-Mogul Corporation and was subject to Federal-Mogul Corporation’s bankruptcy plan of
reorganization. On September 30, 2008, the Bankruptcy Court issued a ruling denying the Plan A
Settlement, resulting in Cooper not participating in the Federal-Mogul 524(g) trust and instead
proceeding with the Plan B Settlement under which Cooper resolves through the tort system the
asbestos-related claims arising from the Abex Friction product line that was sold to Federal-Mogul
in 1998.
As a result of the Bankruptcy Court ruling, Cooper adjusted its accounting in the third
quarter of 2008 to reflect the Plan B Settlement. The amounts recorded by Cooper for its asbestos
liability and related insurance receivables rely on various assumptions. The key assumptions
include the number and type of new claims filed each year, the average indemnity and defense costs
of resolving claims, the number of years these assumptions are projected into the future, and the
resolution of ongoing negotiations of additional settlement or coverage-in-place agreements with
insurance carriers. Other factors that may affect Cooper’s liability and ability to recover under
its insurance policies include uncertainties surrounding the litigation process from jurisdiction
to jurisdiction and from case to case, reforms that may be made by state and federal courts, and
the passage of state or federal tort reform legislation. Cooper reviews these assumptions on a
periodic basis to determine whether any adjustments are required to the estimates of its recorded
asbestos liability and related insurance receivables. Further information regarding Cooper’s
asbestos liability is discussed under Item 3 — Legal Proceedings.
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We Are Subject To Litigation and Environmental Regulations That Could Adversely Impact Our
Operating Results.
We are, and may in the future be, a party to a number of legal proceedings and claims,
including those involving product liability, tort, employment claims, intellectual property claims,
and environmental matters, several of which claim, or may in the future claim, significant damages.
Given the inherent uncertainty of litigation, we can offer no assurance that existing litigation
or a future adverse development will not have a material adverse impact. We also are subject to
various laws and regulations relating to environmental protection and the discharge of materials
into the environment, and we could incur substantial costs as a result of the noncompliance with or
liability for cleanup or other costs or damages under environmental laws.
Our operations and facilities are subject to numerous state and federal environmental laws,
rules and regulations, including, without limitation, laws concerning the containment and disposal
of hazardous substances and other waste materials. We employ personnel responsible for monitoring
environmental compliance and arranging for remedial actions that may be required from time to time
and also use consultants to advise on and assist with our environmental compliance efforts.
Liabilities are recorded when the need for environmental assessments and/or remedial efforts become
known or probable and the cost can be reasonably estimated.
Laws protecting the environment generally have become more stringent than in the past and are
expected to continue to become more so. Violation of environmental laws and regulations can lead
to the imposition of administrative, civil or criminal penalties, remedial obligations, and in some
cases injunctive relief. Such violations could also result in liabilities for personal injuries,
property damage, and other costs and claims. Under the Comprehensive Environmental Response,
Compensation and Liability Act, also known as CERCLA or Superfund, and related state laws and
regulations, liability can be imposed jointly on the entire group of responsible parties or
separately on any one of the responsible parties, without regard to fault or the legality of the
original conduct on certain classes of persons that contributed to the release of a “hazardous
substance” into the environment. Under CERCLA, such persons may be liable for the costs of
cleaning up the hazardous substances that have been released into the environment and for damages
to natural resources.
Inability to Maintain Access to Capital Markets May Adversely Affect Our Business and Financial
Results.
Our ability to invest in our businesses, make strategic acquisitions and refinance maturing
debt obligations may require access to the capital markets and sufficient bank credit lines to
support short-term borrowings. If we are unable to access the capital markets, we could experience
a material adverse affect on our business and financial results.
Risks relating to Cooper’s Jurisdiction of Incorporation.
Legislative and regulatory action could materially adversely affect us.
Legislative and regulatory action may be taken in the U.S. which, if ultimately enacted, could
override tax treaties upon which we rely or broaden the circumstances under which we would be
considered a U.S. resident, each of which could materially and adversely affect our effective tax
rate and/or require us to take further action, at potentially significant expense, to seek to
preserve our effective tax rate. We cannot predict the outcome of any specific legislative or
regulatory proposals. However, if proposals were enacted that had the effect of disregarding the
reincorporation to Ireland or limiting our ability as an Irish company to take advantage of tax
treaties with the U.S., we could be subjected to increased taxation and/or potentially significant
expense.
The U.S. Federal Government and certain states and municipalities have enacted legislation
intended to deny federal funding and government contracts to U.S. companies that reincorporate
outside the U.S. For instance, the Financial Services and General Government Appropriations Act
for fiscal year 2010
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signed into law in December 2009 includes a provision that prohibits government contracts with
U.S. companies that have reincorporated outside the United States. We cannot provide any assurance
that the impact on us of any adopted or proposed legislation in this area will not be materially
adverse to our operations.
In addition, there continues to be negative publicity regarding, and criticism of, companies
that conduct substantial business in the U.S. but are domiciled in countries that do not have tax
treaties with the United States, like Bermuda. We cannot assure you that moving our jurisdiction of
incorporation to Ireland in September 2009 will eliminate the risk that we may be subject to
similar criticism.
We may not be able to maintain a competitive worldwide effective corporate tax rate.
We believe that the Irish reincorporation should improve our ability to maintain a competitive
worldwide effective corporate tax rate. We cannot give any assurance as to what our effective tax
rate will be, however, because of, among other things, uncertainty regarding the tax policies of
the jurisdictions where we operate. Our actual effective tax rate may vary from this expectation
and that variance may be material. Additionally, the tax laws of Ireland and other jurisdictions
could change in the future, and such changes could cause a material change in our effective tax
rate.
Irish law differs from the laws in effect in the United States and may afford less protection to
holders of our securities.
It may not be possible to enforce court judgments obtained in the United States against us in
Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In
addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce
judgments of U.S. courts obtained against us or our directors or officers based on the civil
liabilities provisions of the U.S. federal or state securities laws or hear actions against us or
those persons based on those laws. We have been advised that the United States currently does not
have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in
civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any
U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal
or state securities laws, would not automatically be enforceable in Ireland. The following
requirements must be met before the foreign judgment will be deemed to be enforceable in Ireland:
As an Irish company, Cooper Industries plc is governed by the Irish Companies Act, which
differs in some material respects from laws generally applicable to U.S. corporations and
shareholders, including, among others, differences relating to shareholder lawsuits. The duties of
directors and officers of an Irish company generally are owed to the company only. Shareholders of
Irish companies generally do not have a personal right of action against directors or officers of
the company and may exercise such rights of action on behalf of the company only in limited
circumstances. Accordingly, holders of Cooper Industries plc securities may have more difficulty
protecting their interests than would holders of securities of a corporation incorporated in a
jurisdiction in the United States.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
On December 31, 2010, the plants and other facilities used by Cooper throughout the world contained an aggregate of approximately 16.5
million square feet of space, of which approximately 78 percent was owned and 22 percent was leased. The charts below show the number of
employees, square footage of facilities owned and leased and location of manufacturing facilities for each industry segment.
Manufacturing Plant Locations
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ITEM 3. LEGAL PROCEEDINGS
Discontinued Operations Liability
Information regarding the discontinued operations liability is incorporated by reference to
Note 20 of the Notes to Consolidated Financial Statements included in Part II of this Form 10-K.
Other Matters
Information regarding other matters is incorporated by reference to Note 9 of the Notes to
Consolidated Financial Statements included in Part II of this Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES Cooper Industries plc, which was incorporated under the laws of Ireland on June 4, 2009,
became the successor-registrant to Cooper Industries, Ltd. on September 9, 2009. Cooper common
shares (symbol — CBE) are listed on the New York Stock Exchange. Options for Cooper common shares
are listed on the NYSE Alternext U.S. exchange.
As of January 31, 2011 there were 17,976 record holders of Cooper common shares.
The high and low quarterly sales prices for the past two years of Cooper common shares as
reported by Dow Jones & Company, Inc., are as follows:
Cash dividends declared on Cooper Industries, Ltd’s Class A and Class B common shares were
$.25 a share per quarter ($1.00 on an annualized basis) during 2008 and 2009 (through the dividend
declared on August 3, 2009). Based on Cooper Industries, Ltd’s capital structure in 2009, all of
the dividend distributions paid by it in 2009 were treated as a return of capital to its
shareholders. For the dividends payable in 2008 and 2009 (through the dividend payable October 1,
2009), Cooper’s subsidiaries that held Class A and Class B shares of Cooper Industries, Ltd.
received dividends on such shares.
Cash dividends of $.25 a share were declared on Cooper Industries plc’s common shares on
November 3, 2009 that were paid on January 4, 2010. Cash dividends declared on Cooper Industries
plc’s common shares were $.27 a share per quarter ($1.08 on an annualized basis) during 2010.
Based on Cooper Industries plc’s capital structure in 2010, all of the dividend distributions paid
by it in 2010 were treated as dividend income to its shareholders. On February 15, 2011, Cooper’s
Board of Directors declared a dividend of $.29 per share increasing the annual dividend rate of
Cooper’s common stock to $1.16 per share. For dividends payable in 2011, Cooper currently
anticipates that based on its capital structure all or a substantial portion of its dividend
distributions will be treated as dividend income to its shareholders.
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Irish Taxes Applicable to Dividends
In certain circumstances, Cooper will be required to deduct Irish dividend withholding tax
(currently at the rate of 20%) from dividends paid to its shareholders. In the majority of cases,
shareholders resident in the U.S. will not be subject to Irish withholding tax. Dividends paid to
U.S. residents will not be subject to dividend withholding tax provided that:
Shareholders resident in a number of other countries will not be subject to Irish withholding
tax provided that they complete certain Irish dividend withholding tax forms.
Irish income tax may also arise with respect to dividends paid on Cooper shares. A
shareholder who is not a resident in Ireland who meets one of the exemptions from dividend
withholding tax described above and does not hold Cooper shares through a branch or agency in
Ireland through which a trade is carried on generally will not have any Irish income tax liability
on a dividend paid by Cooper. If a shareholder who is not a resident in Ireland is subject to the
dividend withholding tax, the withholding payment discharges any Irish income tax liability,
provided the shareholder furnishes to the Irish Revenue authorities a statement of the dividend
withholding tax imposed. A shareholder who is a resident of Ireland may be subject to Irish income
tax and/or levies on dividends received from Cooper.
A Transfer of Cooper Industries plc Shares May be Subject to Irish Stamp Duty
A transfer of Cooper shares from a seller who holds shares beneficially to a buyer who holds
the acquired shares beneficially will not be subject to Irish stamp duty. A transfer of Cooper
shares by a seller who holds shares directly to any buyer, or by a seller who holds the shares
beneficially to a buyer who holds the acquired shares directly, may be subject to Irish stamp duty
(currently at the rate of 1% of the price paid or the market value of the shares acquired, if
higher) payable by the buyer.
We currently intend to pay stamp duty in connection with share transfers made in the ordinary
course of trading by a seller who holds shares directly to a buyer who holds the acquired shares
beneficially. In other cases Cooper may, in its absolute discretion, pay any stamp duty. Cooper’s
articles of association provide that, in the event of any such payment, Cooper may seek
reimbursement from the buyer or seller, at its discretion.
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The following table reflects activity related to equity securities purchased by Cooper during
the three months ended December 31, 2010:
Purchases of Equity Securities
Further information required by this Item is set forth under the caption “Equity
Compensation Plan Information” in Cooper’s Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with Cooper’s 2010 Annual Meeting of
Shareholders (the “Proxy Statement”) and is incorporated herein by reference.
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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, 2010. 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.
In October 1998 Cooper sold its Automotive Products segment for $1.9 billion in proceeds.
Discontinued operations charges of $20.3 million, which is net of an $11.4 million income tax
benefit, in 2006 were recorded for potential liabilities related to the Automotive Products segment
sale and the Federal-Mogul bankruptcy. In 2008 discontinued operations income of $16.6 million,
which is net of a $9.4 million income tax expense, was recorded to reflect ongoing resolution of
the potential liabilities through the tort system when the Bankruptcy Court denied Cooper’s
participation in the Federal-Mogul 524(g) trust. During 2009 Cooper recognized an after-tax gain
from discontinued operations of $25.5 million, which is net of a $16.2 million income tax expense,
from negotiated insurance settlements consummated in 2009 that were not previously recognized. See
Note 20 of the Notes to the Consolidated Financial Statements.
In July 2010 Cooper completed a Joint Venture, named Apex Tool Group, LLC, by combining
Cooper’s Tools business with certain Tools businesses from Danaher’s Tools and Components Segment.
Cooper and Danaher each own a 50% interest in the Joint Venture, have equal representation on its
Board of Directors and have a 50% voting interest in the Joint Venture. At completion of the
transaction in July 2010 Cooper deconsolidated the Tools business assets and liabilities
contributed to the Joint Venture and recognized Cooper’s 50% ownership interest as an equity
investment. Beginning in the third quarter of 2010, Cooper recognizes its proportionate share of
the Joint Venture’s operating results using the equity method. Recording the joint venture
investment in 2010 at its fair value of $480 million resulted in a pretax
loss of $134.5 million related to the transaction that Cooper recognized in the second quarter
of 2010. See Notes 2 & 3 of the Notes to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 26, 2010, Cooper announced that it entered into a Framework Agreement with Danaher
Corporation to create a joint venture combining Cooper’s Tools business with certain Tools
businesses from Danaher’s Tools and Components Segment (the “Joint Venture”). On July 6, 2010,
Cooper announced the completion of the Joint Venture, named Apex Tool Group, LLC. Cooper and
Danaher each own a 50% interest in the Joint Venture, have equal representation on its Board of
Directors and have a 50% voting interest in the Joint Venture. At completion of the transaction in
July 2010 Cooper deconsolidated the Tools business assets and liabilities contributed to the Joint
Venture and recognized Cooper’s 50% ownership interest as an equity investment. Beginning in the
third quarter of 2010 Cooper recognizes its proportionate share of the Joint Venture’s operating
results using the equity method. Recording the investment at its fair value of $480 million
resulted in a pretax loss of $134.5 million related to the transaction. The pretax loss related to
the formation of the Joint Venture included a $26.5 million gain from the contribution of the Tools
business net assets resulting from the difference in the fair value of the equity investment and
the carrying value of the net assets being contributed and transaction related costs. This gain
was offset by the write-off of approximately $161.0 million (approximately $104.4 million net of
the associated tax effect) from recognition of the accumulated other nonowner changes in equity
related to the Tools business, primarily related to cumulative currency translation losses. The
Tools business assets and liabilities contributed to the Joint Venture in July 2010 have been
reclassified to separate lines in the accompanying December 31, 2009 consolidated balance sheet.
Because the Tools business assets and liabilities to be contributed to the Joint Venture were
considered held for sale at June 30, 2010, Cooper recognized the $134.5 million loss in the second
quarter of 2010 by recognizing $126.1 million of the cumulative currency translation losses
included in other nonowner changes in equity (approximately $82.0 million net of the associated tax
effect) and transaction related costs. In the third quarter of 2010 Cooper recognized the
remaining items previously deferred in accumulated other nonowner changes in equity which was
offset by the gain on the underlying net assets contributed. As a result, there was no impact to
the income statement in the third quarter of 2010 upon deconsolidation of the Tools business assets
and liabilities contributed to the Joint Venture.
In conjunction with the announcement of the Tools joint venture and certain changes in
Cooper’s management structure in the first quarter of 2010, Cooper modified its disclosures related
to segment activities. The former Electrical Products segment has been divided into two segments.
The Energy & Safety Solutions segment includes business unit results from the Cooper Crouse-Hinds,
Cooper Power Systems, and Cooper Safety Divisions. The Electrical Products Group segment includes
business unit results from the Cooper B-Line, Cooper Bussmann, Cooper Lighting, and Cooper Wiring
Devices Divisions. All segment information included in this Annual Report on Form 10-K has been
restated for changes to the segment reporting structure. Beginning in the third quarter of 2010
following completion of the Tools joint venture, Cooper has two reportable segments.
Results of Operations
Revenues
See the geographic information included in Note 13 of the Notes to the Consolidated Financial
Statements for a summary of revenues by country.
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2010 vs. 2009 Revenues Revenues for 2010 were essentially flat compared to 2009.
Excluding the impact of the revenues from the now deconsolidated Tools segment, comparable revenues
increased 5.4% in 2010 compared to 2009. Core revenues, excluding the impact of the deconsolidated
Tools segment, were 4.8% higher than the prior year with acquisitions increasing revenues by 0.6%
and currency translation having a minimal impact overall.
Energy & Safety Solutions segment revenues for 2010, which represent approximately 50% of the
total revenues generated, increased 4.1% compared to 2009. Currency translation decreased reported
revenues by 0.5% while the impact of acquisitions increased the segment revenues by 1.2%. All of
the businesses in the Energy & Safety Solutions segment reported increased revenues for 2010 as the
end markets for the segment showed improvement in the second half of the year, with International
developing markets leading the recovery.
Electrical Products Group segment revenues for 2010, which represent approximately 44% of the
total revenues generated, increased 6.8% compared to 2009. Core revenues in 2010 were 6.3% higher
than 2009 with currency translation increasing reported revenues by 0.5%. Three of the four
businesses in the Electrical Products Group segment reported increased revenues for 2010 while the
other business had an overall decline of less than 2%. Despite weakness in Commercial markets
through most of the year, the revenue growth was driven by stronger Industrial and Electronic
markets with particular strength through international channels.
Tools segment revenues for 2010, which represent about 6% of total revenues, decreased as a
result of the July 6, 2010 formation of the Apex Tool Group, LLC joint venture. Prior to the
deconsolidation of the segment at the beginning of the third quarter of 2010, revenues from
recovering demand in the North American and Western European industrial markets increased Tools
segment revenues 17.4% in the first half of 2010 compared to the same period in 2009, including a
4.3% increase from currency translation.
2009 vs. 2008 Revenues Revenues for 2009 decreased 22.3% compared to 2008. The impact of
currency translation decreased reported revenues by 2.0%, while acquisitions added approximately
0.6% in revenues.
Energy & Safety Solutions segment revenues for 2009, which represented approximately 48% of
the total revenues generated, decreased 20.2% compared to 2008. Currency translation decreased
reported revenues by 2.7%. The impact of acquisitions increased the segment revenues for 2009 by
1.1% over 2008 revenue levels. All of the Energy & Safety Solutions segment businesses reported
decreased revenues for 2009. The global recession resulted in weakness in all markets for the
Energy & Safety Solutions segment, especially the North American and Western European markets when
comparing 2009 results to 2008.
Electrical Products Group segment revenues for 2009, which represented approximately 41% of
the total revenues generated, decreased 23.1% compared to 2008. Currency translation decreased
reported revenues by 0.9%. The impact of acquisitions increased the segment revenues for 2009 by
0.1% over 2008 revenue levels. All of the Electrical Products Group segment businesses reported
decreased revenues for 2009. The global recession resulted in weakness in all markets for the
Electrical Products Group segment, especially the United States and Western European markets when
comparing 2009 results to 2008.
Tools segment revenues for 2009, which represented about 11% of total revenues, decreased
27.2% compared to 2008. Currency translation represented a 2.8% decrease for reported revenues.
Lower revenues from declining retail market activity, weaker demand in the North American and
Western European industrial markets and lower requirements for assembly systems for light passenger
vehicle markets drove the reduction in revenue for 2009 compared to prior year results.
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Operating Results
Cooper measures the performance of its businesses exclusive of restructuring, asset
impairment and financing expenses. All costs directly attributable to operating businesses are
included in segment operating earnings. Corporate overhead costs, including costs of traditional
headquarters activities, such as treasury, are not allocated to the businesses. See Note 13 of the
Notes to the Consolidated Financial Statements.
2010 vs. 2009 Segment Operating Earnings Segment operating earnings were $788.5 million in
2010, an increase of 20% compared to $656.7 million in 2009. Excluding the impact of the operating
earnings from the now deconsolidated Tools segment, comparable operating earnings increased 18% in
2010 compared to 2009.
Energy & Safety Solutions segment 2010 operating earnings increased 13% to $424.7 million from
$374.9 million in 2009. Return on revenues was 16.9% for 2010 compared to 15.5% for 2009.
Operating earnings in 2009 were favorably impacted by net inventory valuation adjustments
(including decrements in LIFO inventory) of approximately $8 million. The increase in 2010
operating earnings resulted from favorable leverage of improving global market demand and the
impact of restructuring actions taken since the fourth quarter of 2008. The investment in
restructuring actions during 2009 and continuing in 2010 coupled with on-going productivity
improvements served to reduce the segment’s cost structure and improve return on revenues in 2010.
Electrical Products Group segment 2010 operating earnings increased 26% to $330.7 million from
$263.3 million for 2009. Return on revenues was 14.8% for 2010 compared to 12.6% for 2009.
Operating
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earnings in 2009 were negatively impacted by net inventory valuation adjustments of
approximately $5 million. The increase in 2010 operating earnings resulted from the positive
leverage of fixed overhead due to improving global market demand and the impact of restructuring
actions taken since the fourth quarter of 2008. The Electrical Products Group segment’s investment
in restructuring actions during 2009 and continuing in 2010 coupled with on-going productivity
improvements served to reduce its cost structure and improve return on revenues in 2010.
Equity income from the Apex Tool Group joint venture is included in operating earnings
commencing in the third quarter of 2010. Reported equity income from Apex Tool Group was $22.8
million in 2010. Prior to the deconsolidation of the Tools segment at the beginning of the third
quarter in 2010, the Tools segment reported $33.1 million in operating earnings for the first six
months of 2010 compared to $18.5 million for the full year of 2009. Tools return on revenues was
10.6% for the first six months of 2010 compared to 3.3% for the full year of 2009. The increase in
earnings as a percentage of revenue was due to the leverage on improved global demand for
industrial products in the Tools segment and the related impact of increased production volumes.
2009 vs. 2008 Segment Operating Earnings Segment operating earnings were $656.7 million in
2009, a decrease of approximately 35% compared to $1.01 billion in 2008.
Energy & Safety Solutions segment 2009 operating earnings decreased 30% to $374.9 million from
$535.0 million for 2008. Return on revenues was 15.5% for 2009 compared to 17.7% for 2008. The
decrease resulted from the reduced global market demand and adjustments made during 2009 to align
production volumes to the global market demand. The Energy & Safety Solutions segment invested in
restructuring actions that served to reduce its cost structure during 2009. The negative impact of
leverage on the segments fixed overhead from the revenue decline was partially offset by net
inventory valuation adjustments (including decrements in LIFO inventory) of approximately $8
million.
Electrical Products Group segment 2009 operating earnings decreased 33% to $263.3 million from
$395.3 million for 2008. Return on revenues was 12.6% for 2009 compared to 14.5% for 2008. The
decrease resulted from the negative leverage of fixed overhead due to reduced global market demand,
adjustments made during 2009 to align production volumes to the global market demand and net
inventory valuation adjustments of approximately $5 million. The Electrical Products Group segment
invested in restructuring actions that served to reduce its cost structure during 2009.
Tools segment 2009 operating earnings decreased 77% to $18.5 million compared to $81.1 million
for 2008. Return on revenues was 3.3% for 2009 compared to 10.6% for 2008. The decrease in
earnings as a percentage of revenue was primarily due to the declining demand for Tools segment
products and the related impact of reduced production volumes. The Tools segment invested in
restructuring actions that served to reduce its cost structure during 2009. The negative impact of
leverage on the segments fixed overhead from the revenue decline was partially offset by net
inventory valuation adjustments (including decrements in LIFO inventory) of approximately $1
million.
Restructuring and Asset Impairment Charges In 2010 Cooper recognized a pre-tax
restructuring charge of $8.0 million, or $6.4 million after taxes, reducing 2010 diluted earnings
by $.04 per share. In 2009 Cooper recognized a pre-tax restructuring charge of $28.7 million and a
pre-tax non-cash impairment charge of $1.2 million. The 2009 restructuring and asset impairment
charges of $29.9 million, or $24.4 million after taxes, reduced 2009 diluted earnings by $.14 per
share. In 2008, Cooper recognized a pre-tax restructuring charge of $43.3 million and a pre-tax
non-cash impairment charge of $9.1 million. The 2008 restructuring and asset impairment charges of
$52.4 million, or $38.3 million after taxes, reduced 2008 diluted earnings by $.21 per share.
In the second quarter of 2008 Cooper recorded a restructuring charge for $7.6 million in
severance costs for downsizing a Tools segment international facility. This facility downsizing
and related cash payments were substantially completed in 2008.
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As a result of the downturn in economic conditions in the latter half of 2008, Cooper
committed in the fourth quarter of 2008 to employment reductions to appropriately size Cooper’s
workforce to current and anticipated market conditions and to downsize a domestic Tools segment
manufacturing operation. During 2009 Cooper committed to additional employment reductions and
certain facility closures as a result of management’s ongoing assessment of its hourly and salary
workforce and its required production capacity in consideration of the global economic recession.
Cooper recorded a $35.7 million charge in the fourth quarter of 2008 related to these actions,
$15.2 million of which related to the Energy and Safety Solutions segment, $10.3 million related to
the Electrical Products Group segment and $10.2 million related to the Tools segment. A total of
1,314 hourly and 930 salaried positions were eliminated as a result of the fourth quarter 2008
restructuring actions to reduce Cooper’s workforce. Cooper recorded additional charges of $28.7
million during the year ended December 31, 2009 related to these actions, $8.1 million of which
related to the Energy and Safety Solutions segment, $10.4 million related to the Electrical
Products Group segment and $8.6 million related to the Tools segment. The remaining $1.6 million
was related to reductions in Cooper’s corporate staff. A total of 1,088 hourly and 772 salaried
positions were eliminated as a result of the 2009 restructuring actions to reduce Cooper’s
workforce. As part of these restructuring actions, Cooper approved the closure of ten factories
and warehouses, eight of which were completed by the end of 2009. Cooper recorded non-cash
impairment charges of $1.2 million in the second half of 2009 related to these actions. In 2010
Cooper completed the two remaining factory closures and recorded $8.0 million of costs associated
with completion of the restructuring actions. The 2010 restructuring costs include $7.4 million
related to the Electrical Products Group segment, $0.5 million related to the Energy and Safety
Solutions segment and $0.1 million related to the Tools segment. The workforce reductions,
contract termination and other exit costs and the related cash payments for these restructuring
actions have been substantially completed. See Note 14 of the Notes to Consolidated Financial
Statements.
Cooper estimates that the restructuring actions taken in the fourth quarter of 2008 and during
2009 reduced operating costs by approximately $87.5 million in 2009. Cooper estimates it realized
approximately $36.1 million of sequential benefits in 2010 from the completed restructuring
actions.
In the fourth quarter of 2008 Cooper also recorded a non-cash impairment charge of $9.1
million related to an investment in a previously unconsolidated international joint venture in the
Electrical Products Group segment. In December 2008 Cooper acquired a majority interest in the
international joint venture and consolidated the joint venture’s net assets of $4.6 million at that
time.
General Corporate Expense General Corporate expense increased $6.6 million during 2010 to
$89.3 million compared to $82.7 million for 2009. General Corporate expense in 2010 includes
approximately $4 million for legal and environmental costs related to businesses disposed of in
prior years and 2009 includes approximately $4 million in costs associated with the reincorporation
of the Company to Ireland. The increase in General Corporate expense in 2010 is primarily related
to higher long-term performance-based stock and incentive compensation compared to 2009. General
Corporate expense in 2010 also includes approximately $2 million related to acquisition activities.
General Corporate expense increased $1.3 million during 2009 to $82.7 million compared to
$81.4 million for 2008. General Corporate expense in 2009 included approximately $4 million in
costs associated with the reincorporation of the Company to Ireland. General Corporate expense in
2008 included the favorable adjustment of approximately $7 million for long-term performance-based
stock compensation. Excluding the impact of the costs for reincorporation to Ireland incurred in
2009 and the favorable long-term performance-based stock compensation adjustment to the 2008
General Corporate expense, 2009 General Corporate expense decreased approximately $10 million
compared to $88.4 million in 2008 reflecting cost control actions undertaken in 2009.
Income from Belden Agreement 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
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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. While Cooper has not recognized any income from the Belden
agreement since 2007, 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.
Interest Expense, Net Net interest expense for 2010 was $49.4 million, a decrease of $12.0
million from 2009 primarily as a result of lower average debt balances. Average debt balances were
$965.8 million and $1.17 billion and average interest rates were 5.21% and 5.36% for 2010 and 2009,
respectively. On December 7, 2010, Cooper issued $250 million of 2.375% fixed rate senior
unsecured notes due in 2016 and $250 million of 3.875% fixed rate senior unsecured notes due in
2020. Net interest expense for 2009 was $61.4 million, a decrease of $9.0 million from 2008
primarily as a result of lower average debt balances including the retirement of $275 million of
5.5% senior unsecured notes from currently available cash in November 2009 offset partially by
higher interest rates. Average debt balances were $1.17 billion and $1.34 billion and average
interest rates were 5.36% and 5.22% for 2009 and 2008, respectively. Net interest expense in 2008
includes $6.0 million for reductions in the value of short-term investments with a recovery of $0.9
million recorded during 2009.
Income Tax Expense The effective tax rate attributable to continuing operations
was 16.3% for 2010, 14.3% for 2009 and 23.7% for 2008.
Cooper reduced income tax expense by $5.6 million, $12.7 million and $23.2 million during
2010, 2009 and 2008, respectively, for discrete tax items primarily related to statute expirations,
tax settlements and other discrete items. In 2010, Cooper also reduced income tax expense by $40.8
million to recognize the discrete tax effects related to the contribution of net assets to the Tool
joint venture as discussed in Note 2 of the Notes to the Consolidated Financial Statements.
Excluding the discrete tax items and the loss on the net asset contribution to the Apex Tool Group
joint venture in 2010, Cooper’s effective tax rate for the years ended December 31, 2010, 2009 and
2008 was 20.0%, 17.0% and 26.6%, respectively. The increase in Cooper’s 2010 effective tax rate
compared to 2009, excluding the discrete tax items and the loss on formation of the Tools joint
venture, is primarily related to the increase in 2010 earnings without a corresponding increase in
tax benefits. The decrease in Cooper’s 2009 effective tax rate compared to 2008, excluding the
discrete tax items, is primarily related to the decrease in 2009 earnings without a corresponding
decrease in tax benefits. See Note 16 of the Notes to the Consolidated Financial Statements.
Income Related to Discontinued Operations During 2009 Cooper recognized an after tax gain
from discontinued operations of $25.5 million, which is net of a $16.2 million income tax expense
(or $.15 per diluted share) related to its asbestos liability regarding the Automotive Products
segment, which was sold in 1998. The income resulted from negotiated insurance settlements
consummated during 2009 that were not previously recognized. Cooper expects that additional
insurance recoveries will be obtained as insurance-in-place agreements are consummated or
settlements with insurance carriers are completed. The timing and value of these agreements and
settlements cannot currently be estimated as they may be subject to extensive additional
negotiation and litigation.
During 2008 Cooper recorded income from discontinued operations of $16.6 million, which is net
of a $9.4 million income tax expense (or $.09 per diluted share) related to its asbestos liability
regarding the Automotive Products segment. 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 adjusted its accrual for the
Pneumo-Abex asbestos liability and related insurance recoveries based on resolution through the
tort system. See Note 20 of the Notes to the Consolidated Financial Statements.
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Diluted Earnings Per Share Diluted earnings per share from continuing operations
was $2.64 in 2010, $2.46 in 2009 and $3.51 in 2008. The increase in earnings per share for 2010
compared to 2009 resulted from favorable leverage of improving global market demand and improved
cost structure reflecting the benefits from restructuring actions taken since the fourth quarter of
2008 partially offset by the loss on the formation of the Tools joint venture. Net income in 2010
was reduced by the non-cash after-tax charge of $93.7 million, or $.56 per share related to the
formation of the Tools joint venture. The impact of the reduced global demand, restructuring and
asset impairment charges partially offset by cost reduction actions and income tax reductions
accounted for the overall decline in the 2009 earnings per share. The restructuring and asset
impairment charges offset by the income tax reductions decreased 2009 and 2008 diluted earnings per
share from continuing operations by $.06 and $.08, respectively.
Percentage of Revenues
2010 vs 2009 Percentage of Revenues Energy & Safety Solutions segment cost of sales, as a
percentage of revenues, was 66.8% for 2010 compared to 67.8% for 2009. The decrease in costs of
sales as a percentage of revenue was primarily the result of the higher absorption of production
costs from the improved global demand coupled with productivity improvements and cost reduction
actions taken since the fourth quarter of 2008. Electrical Products Group segment cost of sales,
as a percentage of revenues, was 66.4% for 2010 compared to 68.5% for 2009. The decrease in costs
of sales as a percentage of revenue was primarily the result of the higher absorption of production
costs from the improved global demand and productivity improvements and cost reduction actions
taken since the fourth quarter of 2008. Tools segment cost of sales reflects reported segment
results for the first six months of 2010 prior to the formation of the Apex Tool Group joint
venture. As a percentage of revenue, cost of sales for the Tools segment was 69.0% for the first
half of 2010 compared to 74.1% for the full year of 2009. The decrease in cost of sales as a
percentage of revenue was due to the higher absorption of production costs from higher volumes and
productivity improvements and cost reduction actions taken during 2008 and 2009.
Energy & Safety Solutions segment selling and administrative expenses, as a percentage of
revenues, for 2010 were 16.3% compared to 16.7% for 2009. The decrease in selling and
administrative expense as a percentage of revenue was primarily the result of favorable impact by
leverage from increased revenues. Electrical Products Group segment selling and administrative
expenses, as a percentage of revenues, for 2010 was 18.8% compared to 18.9% for 2009. The decrease
in selling and administrative expense as a percentage of revenues was favorably impacted by
leverage from increased revenues; partially offset by investments in global infrastructure to
support future global growth opportunities. Tools segment selling and administrative expenses as a
percentage of revenues for 2010 was 20.4% compared to 22.6% for 2009, reflecting the favorable
impact from improved revenues.
2009 vs 2008 Percentage of Revenues Energy & Safety Solutions segment cost of sales, as a
percentage of revenues, was 67.8% for 2009 compared to 66.7% for 2008. The increase in costs of
sales as a percentage of revenue was primarily the result of the lower absorption of production
costs from the reduced global demand and inefficiencies associated with adjusting manufacturing
levels to reduce corresponding inventory levels; offset by productivity improvements and cost
reduction actions taken during 2008 and 2009. Electrical Products Group segment cost of sales, as
a percentage of revenues, was 68.5% for 2009
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compared to 67.5% for 2008. The increase in costs of
sales as a percentage of revenue was primarily the result of the lower absorption of production
costs from the reduced global demand and inefficiencies associated with adjusting manufacturing
levels to reduce corresponding inventory levels; offset by productivity improvements and cost
reduction actions taken during 2008 and 2009. Tools segment cost of sales, as a percentage of
revenue, was 74.1% for 2009 compared to 69.8% for 2008. The increase in cost of sales as a
percentage of revenue was due to the lower absorption of production costs from lower volumes and
inefficiencies associated with adjusting manufacturing levels to achieve inventory reductions to
match lower market demands; offset by productivity improvements and cost reduction actions taken
during 2008 and 2009.
Energy & Safety Solutions segment selling and administrative expenses, as a percentage of
revenues, for 2009 were 16.7% compared to 15.7% for 2008. The increase in selling and
administrative expense as a percentage of revenue was unfavorably impacted by leverage from reduced
revenues; partially offset by restructuring actions initiated during 2008 and 2009 that reduced
reported selling and administrative expenses by 72 basis points. Electrical Products Group segment
selling and administrative expenses, as a percentage of revenues, for 2009 were 18.9% compared to
18.0% for 2008. The increase in selling and administrative expense as a percentage of revenue was
unfavorably impacted by leverage from reduced revenues; partially offset by restructuring actions
initiated during 2008 and 2009 that reduced reported selling and administrative expenses by 82
basis points. Tools segment selling and administrative expenses as a percentage of revenue for
2009 were 22.6% compared to 19.6% for 2008, as the 150 basis point reduction in selling and
administrative expenses resulting from the cost control actions implemented was more than offset by
the impact from the decline in revenue for the Tools segment.
Cooper incurs certain costs that are not directly attributable to the operating segments that
are reflected as General Corporate expenses. See the “General Corporate Expense” section above.
Earnings Outlook
The following sets forth Cooper’s general business outlook for 2011 based on current
expectations.
Cooper expects revenues for the Energy and Safety Solutions segment in 2011 to be up 8 to 11%
as the result of continued recovery in global industrial markets and improving utility markets
partially offset by flat demand expected for products serving the commercial construction markets.
The revenues for the Electrical Products Group in 2011 are expected to be up in a range of 4 to 7%
as improving global industrial and electronic component demand is expected to be partially offset
by flat demand for products serving the commercial construction markets. Operating earnings are
expected to improve from continued focus on productivity improvements and the favorable leverage of
fixed costs from the higher global market demands. Cooper is expecting diluted continuing earnings
per share to be in the range of $3.60 to $3.80.
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.
Unit volumes in all segments increased during 2010 with the improvement in global demand
favorably impacting all of Cooper’s businesses. Unit volumes decreased in 2009 compared to 2008
levels with the global recession impacting all of Cooper’s businesses.
During the first half of 2010 Cooper experienced favorable customer pricing from actions taken
during the period. During the second half of 2010 Cooper was unable to fully offset inflationary
costs for commodities by available market price increases primarily in certain product lines with
heavy material content. During the first half of 2009 Cooper recognized favorable year-over-year
customer pricing impacts from actions taken during 2008. The second half of 2009 saw a decline in
customer pricing as commodity
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prices weakened from their 2008 elevated levels. During 2009 Cooper
was able to maintain a positive benefit from the difference between price realization and material
inflation / deflation.
Through the first half of 2008 Cooper experienced an overall increase in customer pricing,
primarily in response to increased material, energy and components costs. During the second half
of 2008 Cooper was unable to fully offset inflationary costs for commodities by available market
price increases primarily in certain product lines with heavy material content. Cooper has
aggressively acted to control and reduce costs during the three-year period through strategic
sourcing, manufacturing improvement and rationalization efforts in order to improve profitability
in the segments.
Effect of Inflation
During 2010 as the global economies improved, the pricing of commodities used in the
manufacture of certain products escalated. Through the first half of 2010 Cooper realized price
increases and productivity improvements at least equal to material purchase cost increases. During
the second half of 2010 Cooper was unable to fully offset the inflationary costs for commodities by
available market price increases with the impact of these inflationary pressures partially offset
through productivity improvements.
During 2009 as the global economies showed some signs of recovery, the pricing of commodities
used in the manufacture of certain products began to escalate. However, in 2009 the overall mix of
inflationary and deflationary material costs was not significant and Cooper was able to maintain
customer pricing sufficient to offset the changing commodity costs.
During 2008 there were significant increases in certain key commodities and components, which
resulted in price increases in certain businesses, on occasion, lagging the increased costs.
Through the first half of 2008 Cooper realized price increases and productivity improvements at
least equal to material purchase cost increases. During the second half of 2008 Cooper was unable
to fully offset inflationary costs for commodities by available market price increases primarily in
certain product lines with heavy material content.
Cooper endeavors to mitigate the price volatility of selected commodities such as copper and
steel through the use of derivatives and supply agreements. The impact of changes to these
commodity costs could impact margins for several quarters as a result of this activity. Cooper’s
on-going initiatives to improve productivity and rationalize its operational base have mitigated
increases in employee compensation and benefits, as well as general inflation on operating costs.
Liquidity and Capital Resources
Operating Working Capital
For purposes of this discussion, operating working capital is defined as receivables and
inventories less accounts payable.
Cooper’s operating working capital decreased $1.9 million during 2010, exclusive of the Tools
business contributed to Apex Tool Group in July 2010. A $98.2 million increase in accounts
receivable and
a $15.0 million increase in inventories offset by a $115.1 million increase in accounts
payable were driven primarily by the 5.4% increase in total Electrical segment sales offset by
aggressive actions to improve Cooper’s vendor terms and conditions. Operating working capital
turnover (defined as annualized quarterly revenues divided by average quarterly operating working
capital) for the fourth quarter of 2010 was 6.1 turns compared to 5.6 turns for the same period of
2009, reflecting efficient utilization of operating working capital.
Cooper’s operating working capital decreased $263.5 million during 2009. A $213.7 million
decrease in accounts receivable and a $157.9 million decrease in inventories partially offset by a
$108.1 million decrease in accounts payable were driven primarily by a 22% decrease in sales and
aggressive
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actions to right size Cooper’s businesses for current market conditions. Cooper’s
operating working capital at December 31, 2009 was approximately 23% lower than at December 31,
2008, as operating working capital levels were adjusted to the current lower operating levels.
Operating working capital turnover (defined as annualized quarterly revenues divided by average
quarterly operating working capital) for the fourth quarter of 2009 was 5.4 turns compared to 4.9
turns for the same period of 2008.
Cooper’s operating working capital increased $1.5 million during 2008. The increase included
a $40.6 million decrease in accounts payable substantially offset by a $37.2 million decrease in
receivables and a $1.9 million decrease in inventories. The increase in operating working capital
of $80.2 million from completed acquisitions and consolidation of a now majority-owned
international joint venture was substantially offset by initiatives focused on improved inventory
turns and improved accounts receivable performance as measured by days sales outstanding.
Cash Flows
Net cash provided by operating activities was $700.5 million during 2010. On December 7,
2010, Cooper issued $250 million of 2.375% fixed rate senior unsecured notes due in 2016 and $250
million of 3.875% fixed rate senior unsecured notes due in 2020. The cash from operating
activities, plus net debt proceeds of $494.0 million from the December 2010 issuance and $81.4
million of cash received from stock option exercises resulted in more than a $600 million increase
in cash and cash equivalents in 2010 after funding share purchases of $276.1 million, dividends of
$177.4 million, capital expenditures of $98.5 million, and acquisitions of $93.2.
Net cash provided by operating activities was $751.9 million during 2009. Cash provided by
operating activities in 2009 is net of a $90 million payment related to a German tax dispute (see
Note 16 of the Notes to the Consolidated Financial Statements for further information) and a $25
million voluntary contribution to the U.S. defined benefit pension plan. The cash from operating
activities, plus $22.9 million from redemption of short-term investments and $20.1 million of cash
received from stock option exercises was primarily used to fund debt repayments of $299.6 million,
dividends of $167.4 million, capital expenditures of $126.7 million, acquisitions of $61.4 million,
and share purchases of $38.5 million. On November 2, 2009, Cooper repaid the $275 million 5.5%
senior unsecured notes at maturity with existing cash.
Net cash provided by operating activities was $896.4 million during 2008. Cash provided by
operating activities in 2008 includes the $141 million payment from the Federal-Mogul bankruptcy
estate partially offset by $60 million of voluntary contributions to the U.S. defined benefit
pension plans as well as the related tax affect of these items. The cash from operating
activities, plus $297.5 million of net proceeds from issuances of debt, $290.1 million of proceeds
from cash previously restricted, $65.7 million from redemption of short-term investments, and $17.1
million of cash received from stock option exercises, was primarily used to fund capital
expenditures of $137.0 million, acquisitions of $297.0 million, dividends of $170.3 million, debt
repayments of $397.2 million and share purchases of $517.2 million.
Cooper’s financial position and liquidity remained strong during the recent global economic
recession. While the length and depth of the recession was more severe than predicted by most
experts,
Cooper proactively and aggressively adjusted its cost structure. In this regard, in the fourth
quarter of 2008 Cooper implemented contingency plans to reduce its cost structure and recognized a
restructuring charge of $35.7 million primarily related to reductions in our workforce in excess of
2,200 employees. During 2009 Cooper further reduced its workforce by approximately 1,900
additional employees and recognized restructuring charges of $28.7 million. As part of these
restructuring actions, Cooper approved the closure of ten factories and warehouses, eight of which
were completed at the end of 2009. In 2010 Cooper completed the two remaining factory closures and
recorded $8.0 million of costs associated with completion of these restructuring actions. Cash
flows from operating activities in 2010, 2009 and 2008 have been reduced by $13.5 million, $52.3
million and $6.0 million expended in connection with these restructuring actions. At December 31,
2010, Cooper had completed the restructuring activities. See Note 14 of the Notes to the
Consolidated Financial Statements for further information.
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The decrease in the value of the assets included in Cooper’s defined benefit pension plans
(“Plans”) resulting from the deterioration in the securities markets in 2008 has been partially
recovered in 2009 and 2010. Cooper made voluntary cash contributions to the Plans of $60 million
in December 2008 and an additional $25 million in September 2009. The change in fair value of the
Plans, the cash contributions and the actuarial change in the benefit obligations has been
reflected in the accompanying consolidated financial statements as of and for the year ended
December 31, 2010. The increase in fair value of the Plans’ assets and other actuarial changes in
2010 will result in a decrease to total pension costs for 2011 of approximately $7.3 million as
compared to total pension costs in 2010. During 2011 Cooper expects to pay in cash approximately
$6.0 million for payment of unfunded pension plan benefits and make approximately $2.7 million in
employer contributions to certain international funded defined benefit pension plans. Cooper does
not expect to have any minimum regulatory funding requirement for its U.S. funded defined benefit
pension plan in 2011.
Cooper currently anticipates that it will annually generate in excess of $550 million in cash
flow available for acquisitions, debt repayment, dividends and common stock repurchases in 2011.
As discussed in Note 20 of the Notes to the Consolidated Financial Statements, Cooper’s
contingent liabilities related to the Automotive Products sale to Federal-Mogul in 1998 continue to
be resolved through the tort system. Cooper anticipates that the annual cash outlay for its
potential asbestos liability, net of insurance recoveries, will vary from year to year and could be
material to Cooper’s operating cash flow for a particular reporting period or year, depending upon
the case load for a particular year and the outcome of trials and settlement negotiations. In
2010 payments for indemnity and defense costs exceeded insurance recoveries, while in 2009
insurance recoveries exceeded cash outlays due to negotiated insurance settlements consummated
during 2009. On February 1, 2011, Cooper entered into a settlement agreement that upon closing
would resolve its asbestos liability regarding the Automotive Products segment. The settlement
contemplates termination of the 1994 Mutual Guaranty Agreement between Cooper and Pneumo and the
creation of a Settlement Trust. Upon closing of the
transactions contemplated by the settlement agreement, a subsidiary of Cooper will make payments to
the Settlement Trust totaling $307.5 million, subject to certain reductions ($250 million at
closing and the remainder due in installments over four years). After the closing, the Company and
its subsidiaries will have no further obligations under the Mutual Guaranty Agreement.
Consummation of the settlement is expected during the second quarter of 2011, subject to a favorable ruling regarding the tax treatment of the Settlement Trust from the
Internal Revenue Service and other closing conditions. There can be no assurance that the settlement agreement will be
consummated.
Debt
At December 31, 2010 and 2009, Cooper had cash and cash equivalents of $1.0 billion and $381.6
million, respectively. At December 31, 2010 and 2009, Cooper had short-term debt of $7.7 million
and $9.4 million, respectively. Cooper had no commercial paper outstanding at December 31, 2010 or
2009.
On August 14, 2009, Cooper entered into a credit agreement that provides a $350 million
three-year committed bank credit facility that matures in August 2012, replacing Cooper’s previous
credit facility that was to mature in November 2009. Cooper’s practice is to back up its
short-term debt balance with a combination of cash, cash equivalents, and committed credit
facilities. 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 facility.
The credit facility agreement is 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
agreement limits Cooper’s debt-to-total capitalization ratio to 60% and requires 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
agreement.
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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 their 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 operating subsidiaries.
On December 7, 2010, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $250 million of
2.375% fixed rate senior unsecured notes due in 2016 and $250 million of 3.875% fixed rate senior
unsecured notes due in 2020. Proceeds from the financing have been primarily invested in highly
liquid investments and will be used for general corporate purposes. Combined with the debt
issuance discount, underwriting commissions and interest rate hedges implemented in anticipation of
the offering, the 2016 notes have an effective annual cost to Cooper of 2.56% and the 2020 notes
have an effective annual cost to Cooper of 4.02%.
On March 27, 2008, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $300 million of
5.45% fixed rate senior unsecured notes due in 2015. Proceeds from the financing were used to
repay commercial paper outstanding at that time. 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%.
On June 18, 2007, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $300 million of
6.10% fixed rate senior unsecured notes due in 2017. Proceeds from the financing were used to
repay $300 million of maturing 5.25% senior unsecured notes. Combined with interest rate hedges
implemented in anticipation of the offering, the notes have an effective annual cost to Cooper of
5.75%.
On November 8, 2005, Cooper’s wholly-owned subsidiary, Cooper US, Inc., issued $325 million of
5.25% fixed rate senior unsecured notes that mature on November 15, 2012. Proceeds of the notes
were swapped to €272.6 million with cross-currency interest-rate swaps, effectively converting the
seven-year U.S. notes to seven-year Euro notes with an annual interest rate of 3.55%. The proceeds
of €272.6 million partially funded repayment of the 6.25% Euro bonds that matured in October 2005.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Cooper executes stand-by letters of credit, performance bonds and other guarantees in the
normal course of business that ensure Cooper’s performance or payments to third parties. The
aggregate notional value of these instruments was $108.7 million and $107.4 million at December 31,
2010 and 2009, respectively. Approximately eighty percent of these instruments have an expiration
date within one year. In the past, no significant claims have been made against these financial
instruments. Management believes the
likelihood of demand for payment under these instruments is minimal and expects no material
cash outlays to occur in connection with these instruments.
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The following table summarizes Cooper’s contractual obligations at December 31, 2010 and
the effect such obligations are expected to have on its liquidity and cash flows in future periods.
Capitalization
On February 12, 2008, Cooper’s Board of Directors authorized the purchase of up to ten million
shares of common stock with the repurchases being completed during 2010. On February 9, 2009,
Cooper’s Board of Directors increased the share repurchase authorization by ten million shares. At
December 31, 2010, 8,728,735 shares remain available to be repurchased under the February 9, 2009
authorization. Cooper’s Board has also authorized the repurchase of shares issued from time to
time under its equity compensation plans, matched savings plan and dividend reinvestment plan in
order to offset the dilution that results from issuing shares under these plans. For 2011,
Cooper’s current estimate is that 3 million shares would be issued under equity compensation plans.
Cooper may continue to repurchase shares under these authorizations from time to time during 2011.
The decision whether to do so will be dependent on the favorability of market conditions, as well
as potential cash requirements for acquisitions and debt repayments.
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. At December 31, 2010,
2009 and 2008, Cooper’s debt-to-total capitalization ratio was 30.8%, 24.0% and 32.1%,
respectively.
On February 12, 2008, Cooper announced that the Board of Directors approved an increase in the
annual dividend rate of Cooper’s common stock by $.16 per share to $1.00 per share. On February
15, 2010, Cooper’s Board of Directors declared a dividend of $.27 per share increasing the annual
dividend rate of Cooper’s common stock to $1.08 per share. On February 15, 2011, Cooper announced
that the Board of Directors approved an increase in the annual dividend rate of Cooper’s common
stock by $.08 per share to $1.16.
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Capital Expenditures and Commitments
Capital expenditures on projects to reduce product costs, improve product quality, increase
manufacturing efficiency and operating flexibility, or expand production capacity were $99 million
in 2010, $127 million in 2009 and $137 million in 2008. Capital expenditures are projected to be
approximately $120 to $140 million in 2011. Projected expenditures for 2011 will focus on capacity
expansions in key markets, development of new products and cost reduction programs.
Interest Rate, Currency and Commodity Price Risk
Changes in interest rates, currency exchange rates and commodity prices affect Cooper’s
earnings and cash flows. As a result of having sales, purchases and certain intercompany
transactions denominated in currencies other than the functional currencies used by Cooper’s
businesses, Cooper is exposed to the effect of exchange rate changes on its cash flows and
earnings. Cooper enters into currency forward exchange contracts to hedge significant
non-functional currency denominated transactions for periods consistent with the terms of the
underlying transactions. Contracts generally have maturities that do not exceed one year.
The table below provides information about Cooper’s derivative financial instruments and other
financial instruments at December 31, 2010 that are sensitive to changes in interest rates. For
debt obligations, the table presents principal cash flows by expected maturity dates and weighted
average interest rates in effect during the periods presented.
The table below provides information about Cooper’s derivative financial instruments and
other financial instruments at December 31, 2009 that were sensitive to changes in interest rates.
For debt obligations, the table presents principal cash flows by expected maturity dates and
weighted average interest rates.
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The table below provides information about Cooper’s currency forward exchange contracts
to purchase currencies in excess of $10 million at December 31, 2010. The notional amount is used
to calculate the contractual payments exchanged under the contracts. The notional amount
represents the U.S. dollar equivalent.
Changes in availability and fluctuations in commodity prices for raw materials such as
steel, copper, aluminum and zinc affect Cooper’s earnings and cash flows. Cooper primarily manages
this exposure through price changes; however, in periods of significant increases in commodity
prices, the price increases in certain businesses, on occasion, lag the increased costs. Cooper
also uses commodity swaps to reduce the volatility of price fluctuations on a portion of certain
forecasted material purchases for copper, aluminum and zinc for periods up to eighteen months. At
December 31, 2010, Cooper has commodity swaps with a notional amount of approximately $14 million,
all of which mature in 2011. At December 31, 2009, Cooper had commodity swaps with a notional
amount of approximately $15 million, all of which matured in 2010.
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The table below provides information about Cooper’s currency forward exchange contracts to
purchase currencies in excess of $10 million at December 31, 2009. The notional amount was used to
calculate the contractual payments exchanged under the contracts. The notional amount represented
the U.S. dollar equivalent.
See Note 19 of the Notes to the Consolidated Financial Statements for additional information
regarding the fair value of Cooper’s financial instruments.
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Critical Accounting Policies and Estimates
The Consolidated Financial Statements and Notes to the Consolidated Financial Statements
contain information that is pertinent to management’s discussion and analysis. The preparation of
financial statements in conformity with United States 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. Cooper believes the following
critical accounting policies involve additional management judgment due to the sensitivity of the
methods, assumptions and estimates necessary in determining the related asset and liability
amounts.
Cooper recognizes revenues when products are shipped, and accruals for sales returns and other
allowances are provided at the time of shipment based upon past experience. If actual future
returns and allowances differ from past experience, adjustments to our allowances may be required.
The accrual for sales returns and other allowances reported net in receivables was $59.1 million
and $77.1 million at December 31, 2010 and 2009, respectively.
Cooper provides certain customers incentives primarily consisting of volume discounts and
other short-term discount and promotion programs. Cooper recognizes these incentives as a
reduction in reported revenues at the time of the qualifying sale based on our estimate of the
ultimate incentive amount to be earned using historical experience and known trends. If actual
customer incentives differ from our estimates, adjustments to our accruals may be required. The
accrual for customer incentives reported in accrued liabilities was $77.0 million and $63.9 million
at December 31, 2010 and 2009, respectively.
Allowances for excess and obsolete inventory are provided based on current assessments about
future demands, market conditions and related management initiatives. If market conditions are
less favorable than those projected by management, adjustments to our inventory allowances may be
required. The allowance for excess and obsolete inventory was $57.8 million at December 31, 2010
and $66.8 million at December 31, 2009.
Pension assets and liabilities are determined on an actuarial basis and are affected by the
market value of plan assets, estimates of the expected return on plan assets, discount rates and
estimated future employee earnings and demographics. Actual changes in the fair market value of
plan assets and differences between the actual return on plan assets and the expected return on
plan assets will affect the amount of pension expense ultimately recognized. Differences between
actuarial assumptions and estimates and actual experience are deferred in accumulated other
nonowner changes in equity as actuarial net gains and losses. Actuarial net gains and losses in
excess of a calculated minimum annual amount are amortized and recognized in net periodic pension
cost over the average remaining service period of active employees.
Total net periodic pension benefit cost was $16.6 million in 2010, $26.1 million in 2009 and
$7.6 million in 2008. The increase in the net periodic pension cost in 2009 resulted from a
decline in fair value of the plan assets and other actuarial changes related to the deterioration
in the securities markets in 2008. Total net periodic pension benefit cost in 2008 includes a $3.7
million curtailment loss as a result of ceasing future benefit accruals for two defined benefit
plans in the U.K. The decrease in the net periodic pension cost in 2010 resulted from a partial
recovery in the fair value of the plan assets, contribution of certain pension plans to the Tools
joint venture in July 2010 and other actuarial changes. The estimated net periodic pension benefit
cost of $9.3 million for 2011 has been estimated assuming a discount rate of 5.0% and an expected
return on plan assets of 8.25%. See Note 17 of the Notes to the Consolidated Financial Statements.
The postretirement benefits other than pensions liability is also determined on an actuarial
basis and is affected by assumptions including the discount rate and expected trends in health care
costs. Changes in the discount rate and differences between actual and expected health care costs
will affect the recorded amount of postretirement benefits expense. Differences between
assumptions and actual experience are deferred in accumulated other nonowner changes in equity as
actuarial net gains and losses. Actuarial net gains and losses in excess of a minimum annual
amount are amortized and recognized in net periodic postretirement benefit cost over the average
remaining life expectancy of the participants. Net periodic
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postretirement benefit cost was $0.7 million in 2010, ($0.4) million in 2009 and $0.7 million
in 2008. Net periodic postretirement benefit cost is expected to be approximately ($1.5) million
in 2011, assuming a discount rate of 4.75%. See Note 17 of the Notes to the Consolidated Financial
Statements.
Stock-based compensation expense is recorded for stock-option grants, performance-based and
restricted stock awards based upon fair value. The fair value of stock option awards is estimated
at the grant date using the Black-Scholes-Merton option pricing model, which includes assumptions
for volatility, expected term, risk-free interest rate and dividend yield. Expected volatility is
based on implied volatilities from traded options on Cooper stock, historical volatility of Cooper
stock and other factors. Historical data is used to estimate employee termination experience and
the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant. The fair value of performance-based and restricted stock
awards granted is measured at the market price on the grant date. Performance awards are typically
arranged in levels, with increasing number of shares earned as higher levels of growth are
achieved. If goal-level assumptions are not met, stock-based compensation expense is adjusted and
previously recognized compensation expense would be reversed. During 2007 and through the third
quarter of 2008, performance goals for performance awards granted in 2007 and 2008 were assumed to
be achieved at the maximum level. In the fourth quarter of 2008, Cooper revised its assumption to
lower the performance goals assumed to be achieved to below the maximum level for these awards.
The revised achievement levels assumed for the 2007 and 2008 performance award grants considered
the past performance and current expectations of future performance in the respective three-year
performance period. As a result of lowering the performance goals assumed to be achieved, Cooper
adjusted previously recognized stock-based compensation expense by reducing operating expenses in
the fourth quarter of 2008 by $11.3 million. Performance goals were achieved at the maximum level
for performance awards granted in 2009. Performance goals for performance awards granted in 2010
are assumed to be achieved at the maximum level. Total stock-based compensation expense was $32.0
million in 2010, $26.3 million in 2009 and $23.1 million in 2008. See Note 15 of the Notes to the
Consolidated Financial Statements.
Environmental liabilities are accrued based on estimates of known environmental remediation
exposures. The liabilities include accruals for sites owned by Cooper and third-party sites where
Cooper was determined to be a potentially responsible party. Third party sites frequently involve
multiple potentially responsible parties and Cooper’s potential liability is determined based on
estimates of Cooper’s proportionate responsibility for the total cleanup. The amounts accrued for
such sites are based on these estimates as well as an assessment of the financial capacity of the
other potentially responsible parties. Environmental liability estimates may be affected by
changing determinations of what constitutes an environmental liability or an acceptable level of
cleanup. To the extent that remediation procedures change or the financial condition of other
potentially responsible parties is adversely affected, Cooper’s estimate of its environmental
liabilities may change. The liability for environmental remediation was $21.4 million at December
31, 2010 and $25.4 million at December 31, 2009. See Note 8 of the Notes to the Consolidated
Financial Statements.
Cooper records current tax liabilities as well as deferred tax assets and liabilities for
those taxes incurred as a result of current operations but deferred until future periods. The
annual provision for income taxes is the sum of both the current and deferred tax amounts. Current
taxes payable represents the liability related to Cooper’s income tax returns for the current year,
while the net deferred tax expense or benefit represents the change in the balance of deferred tax
assets or liabilities reported on Cooper’s consolidated balance sheet. Deferred tax assets or
liabilities are determined based upon differences between the book basis of assets and liabilities
and their respective tax basis as measured by the enacted tax rates that Cooper expects will be in
effect when these differences reverse. In addition to estimating the future applicable tax rates,
Cooper must also make certain assumptions regarding whether tax differences are permanent or
temporary and whether taxable operating income in future periods will be sufficient to fully
recognize any gross deferred tax assets. Cooper has established valuation allowances when it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
Cooper is subject to income taxes in both the United States and numerous non-U.S.
jurisdictions. Cooper is regularly under examination by various tax authorities. United States
federal and state tax
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authorities and tax authorities in other countries have challenged the amount of taxes due for
certain tax periods. Cooper evaluates the potential exposure associated with various filing
positions and records a liability for tax contingencies. Although Cooper believes all tax
positions are reasonable and properly reported in accordance with applicable tax laws and
regulations in effect during the periods involved, the final determination of tax audits and any
related litigation could be materially different than that which is reflected in historical income
tax provisions and accruals. The resolution of tax audits and litigation could have a material
effect on Cooper’s consolidated cash flows in the period or periods for which that determination is
finalized. In 2010, 2009 and 2008, Cooper reduced income tax expense by $5.6 million, $12.7
million and $23.2 million, respectively, as a result of the expiration of statute of limitations,
tax settlements and other discrete tax items. See Note 16 of the Notes to the Consolidated
Financial Statements.
Cooper has goodwill of $2.36 billion and $2.34 billion (excluding $305 million related the
Tools segment) at December 31, 2010 and December 31, 2009, respectively. Cooper records goodwill
related to business acquisitions when the purchase price exceeds the fair value of identified
assets and liabilities acquired. Goodwill is subject to an annual impairment test and Cooper has
designated January 1 as the date of this test. If an event occurs, or circumstances change, that
would more likely than not reduce the fair value of a reporting unit below its carrying value; an
interim impairment test would be performed between annual tests. Cooper has identified seven
reporting units, consisting of three units in the Energy and Safety Solutions reportable operating
segment and four units in the Electrical Products Group reportable operating segment for which
goodwill is tested for impairment.
Goodwill impairment is evaluated using a two-step process. The first step of the goodwill
impairment test compares the fair value of a reporting unit with its carrying value. If the
carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test shall be performed. The second step compares the implied fair value of the
reporting unit’s goodwill to the carrying amount of its goodwill to measure the amount of
impairment loss. The implied fair value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination (e.g., the fair value of the reporting unit is
allocated to all of the assets and liabilities, including any unrecognized intangible assets, as if
the reporting unit had been acquired in a business combination and the fair value of the reporting
unit was the purchase price paid to acquire the reporting unit).
The primary technique we utilize in estimating the fair value of our reporting units is
discounted cash flow analysis. Discounted cash flow analysis requires us to make various
judgments, estimates and assumptions, many of which are interdependent, about future sales,
operating margins, growth rates, capital expenditures, working capital and discount rates. In
addition to estimating the fair value of each of our reporting units using discounted cash flow
analysis, we compare the sum of the fair values of our reporting units that resulted from the
discounted cash flow analysis to our market capitalization to determine that our estimates of
reporting unit fair value are reasonable.
The starting point for the assumptions used in our discounted cash flow analysis is the annual
long range financial forecast which projects our future results for a three year period. The
annual planning process that we undertake to prepare the long range financial forecast takes into
consideration a multitude of factors including historical growth rates and operating performance,
related industry trends, macroeconomic conditions, inflationary and deflationary forces, pricing
strategies, customer analysis, operational issues, competitor analysis, customer needs and
marketplace data, among others. Assumptions are also made for perpetual growth rates for periods
beyond the long range financial forecast period. Our estimates of fair value are sensitive to
changes in all of these variables, certain of which relate to broader macroeconomic conditions
outside our control. The long range financial forecast is typically completed early in the fourth
quarter of each year, and it serves as the primary basis for our estimate of reporting unit fair
values used in our annual impairment tests, absent significant changes in our outlook on future
results. To determine the outlook beyond the horizon of the long range financial forecast period,
we estimated a 3% annual growth rate beyond 2013 to arrive at a “normalized” residual year
representing the perpetual cash flows of each reporting unit. The forecasted 3% annual growth rate
is less than Cooper’s historical compounded annual growth rate achieved through 2010 for the prior
five year period and is consistent with the historical compounded annual growth rate over the prior
ten year period. The residual year cash flow was capitalized to arrive at the
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terminal value for each of the reporting units. Utilizing a discount rate of 12% for each
reporting unit, the present value of the cash flows during the projection period and terminal value
were aggregated to estimate the fair value for each of the reporting units. We assumed a discount
rate of 11% in our discounted cash flow analysis at January 1, 2010 for each of our reporting
units. In determining the appropriate discount rate, we considered the weighted average cost of
capital for market participants.
Due to the effects of the recent global economic recession and the various stages of recovery
in each of our operations, we determined that the excess fair value for each of our reporting units
over its carrying value as of January 1, 2011 was generally consistent with such excess as of
January 1, 2010, with the margin by which the estimated fair value exceeded carrying value
generally improving. If the recovery from the recent global economic recession takes longer than
we have projected or the economic environment worsens, the estimated fair values of our reporting
units could decrease.
The following table provides information ($ in millions) for each of Cooper’s reporting units.
In addition to estimating the fair value of each of our reporting units using the discounted
cash flow analysis as described above, we compared the sum of the fair values of our reporting
units that resulted from the discounted cash flow analysis to our market capitalization to
determine that our estimates of reporting unit fair value were reasonable. As of December 31,
2010, our equity market capitalization was approximately $9.7 billion, compared to the $3.2 billion
book value of equity. As of December 31, 2009, our equity market capitalization was approximately
$7.2 billion, compared to the $3.0 billion book value of equity.
The above table reflects the percentage reduction in estimated fair value required to reduce
the stated fair value estimates to the respective reporting unit’s carrying value at January 1,
2011. To evaluate the sensitivity of the fair value calculations and to address the uncertainty
inherent in estimating the fair values of our reporting units, we applied a range of discount rates
and long-term cash flow growth assumptions. Discount rates applied ranged from 10% to 14% with
long-term cash flow growth assumptions ranging from 2% to 4%. Under this range of assumptions, no
scenario would reduce the fair value of a reporting unit below its carrying value. If the
projected recovery from the global economic recession is significantly delayed beyond our
projections, it is possible the estimated fair values of certain reporting units could decrease
such that the second step of the goodwill impairment test must be completed.
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There are significant inherent uncertainties and management judgment involved in estimating
the fair value of each reporting unit. While we believe we have made reasonable estimates and
assumptions to estimate the fair value of our reporting units, it is possible that a material
change could occur. If actual results are not consistent with our current estimates and
assumptions, or if changes in macroeconomic conditions outside the control of management change
such that it results in a significant negative impact on our estimated fair values, we may be
required to perform the second step of the impairment test for one or more of our reporting units,
which could result in a material impairment of our goodwill.
In October 1998 Cooper sold its Automotive Products business to Federal-Mogul Corporation
(“Federal-Mogul”). These discontinued businesses (including the Abex Friction product line
obtained from Pneumo-Abex Corporation (“Pneumo”) in 1994) were operated through subsidiary
companies, and the stock of those subsidiaries was sold to Federal-Mogul pursuant to a Purchase and
Sale Agreement dated August 17, 1998 (“1998 Agreement”). In conjunction with the sale,
Federal-Mogul indemnified Cooper for certain liabilities of these subsidiary companies, including
liabilities related to the Abex Friction product line and any potential liability that Cooper may
have to Pneumo pursuant to a 1994 Mutual Guaranty Agreement between Cooper and Pneumo. On October
1, 2001, Federal-Mogul and several of its affiliates filed a Chapter 11 bankruptcy petition. The
Bankruptcy Court for the District of Delaware confirmed Federal-Mogul’s plan of reorganization and
Federal-Mogul emerged from bankruptcy in December 2007. As part of Federal-Mogul’s Plan of
Reorganization, Cooper and Federal-Mogul reached a settlement agreement that was subject to
approval by the Bankruptcy Court resolving Federal-Mogul’s indemnification obligations to Cooper.
As discussed further in Item 3 — Legal Proceedings and Note 20 of the Notes to the Consolidated
Financial Statements, on September 30, 2008, the Bankruptcy Court issued its final ruling denying
the Modified Plan A Settlement resulting in Cooper not participating in the Federal-Mogul 524(g)
trust and instead proceeding with the Plan B Settlement that had previously been approved by the
Bankruptcy Court. As a result of the Plan B Settlement, Cooper received in October 2008 the $141
million payment, including interest, from the Federal-Mogul Bankruptcy estate and continues to
resolve through the tort system the asbestos related claims arising from the Abex Friction product
line that it had sold to Federal-Mogul in 1998. As part of its obligation to Pneumo for any
asbestos-related claims arising from the Abex Friction product line (“Abex Claims”), Cooper has
rights, confirmed by Pneumo, to significant insurance for such claims.
As a result of the September 30, 2008 Bankruptcy Court ruling discussed above, Cooper adjusted
its accounting in the third quarter of 2008 to reflect the separate assets and liabilities related
to the on-going activities to resolve the potential asbestos related claims through the tort
system. Cooper recorded income from discontinued operations of $16.6 million, net of a $9.4
million income tax expense, in the third quarter of 2008 to reflect the Plan B Settlement.
During 2009 Cooper recognized an after tax gain from discontinued operations of $25.5 million,
which is net of a $16.2 million income tax expense, from negotiated insurance settlements
consummated in 2009 that were not previously recognized. Cooper expects that additional insurance
recoveries will be obtained as insurance-in-place agreements are consummated or settlements with
insurance carriers are completed. The timing and value of these agreements and settlements cannot
currently be estimated as they may be subject to extensive additional negotiation and litigation.
Asbestos Liability Estimate
As of December 31, 2010, Cooper estimates that the undiscounted liability for pending and
future indemnity and defense costs for the next 45 years will be $747.1 million. This amount
includes accruals for unpaid indemnity and defense costs at December 31, 2010 which are not
significant. The estimated liability is before any tax benefit or insurance recoveries and is not
discounted as the timing of the actual payments is not reasonably predictable.
The methodology used to project Cooper’s liability estimate relies upon a number of
assumptions including Cooper’s recent claims experience and declining future asbestos spending
based on past trends and
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publicly available epidemiological data, changes in various jurisdictions, management’s judgment
about the current and future litigation environment, and the availability to claimants of other
payment sources.
Abex discontinued using asbestos in the Abex Friction product line in the 1970’s and
epidemiological studies that are publicly available indicate the incidence of asbestos-related
disease is in decline and should continue to decline steadily. Although Cooper believes that its
estimated liability for pending and future indemnity and defense costs represents the best estimate
of its future obligation, Cooper utilized scenarios that it believes are reasonably possible that
indicate a broader range of potential estimates from $500 to $785 million (undiscounted).
Asbestos Receivable Estimate
As of December 31, 2010, Cooper, through Pneumo-Abex LLC, has access to Abex insurance
policies with remaining limits on policies with solvent insurers in excess of $670 million.
Insurance recoveries reflected as receivables in the balance sheet include recoveries where
insurance-in-place agreements, settlements or policy recoveries are probable. As of December 31,
2010, Cooper’s receivable for recoveries of costs from insurers amounted to $163.6 million, of
which $59.5 million relate to costs previously paid or insurance settlements. Cooper’s
arrangements with the insurance carriers may defer certain amounts of insurance and settlement
proceeds that Cooper is entitled to receive beyond twelve months. Approximately 92% of the $163.6
million receivable from insurance companies at December 31, 2010 is due from domestic insurers
whose AM Best rating is Excellent (A-) or better. The remaining balance of the insurance
receivable has been significantly discounted to reflect management’s best estimate of the
recoverable amount.
Cooper expects that additional insurance recoveries will be obtained as insurance-in-place
agreements are consummated or settlements with insurance carriers are completed. However,
extensive litigation with the insurance carriers may be required to receive those additional
recoveries.
The amounts recorded by Cooper for its asbestos liability and related insurance receivables
are not discounted and rely on assumptions that are based on currently known facts and strategy.
The value of the liability on a discounted basis net of the amount of insurance recoveries likely
to materialize in the future would be significantly lower than the net amounts currently recognized
in the balance sheet. Cooper’s actual asbestos costs or insurance recoveries could be higher or
lower than those recorded if assumptions used in the estimation process vary significantly from
actual results over time. As the estimated liability is not discounted and extends over 45 years,
any changes in key assumptions could have a significant impact on the recorded liability. Key
variables in these assumptions include the number and type of new claims filed each year, the
average indemnity and defense costs of resolving claims, the number of years these assumptions are
projected into the future, and the resolution of on-going negotiations of additional settlement or
coverage-in-place agreements with insurance carriers. Other factors that may affect Cooper’s
liability and ability to recover under its insurance policies include uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be
made by state and federal courts, and the passage of state or federal tort reform legislation.
Cooper will review these assumptions on a periodic basis to determine whether any adjustments are
required to the estimate of its recorded asbestos liability and related insurance receivables.
Cooper anticipates that the annual cash outlay for its potential asbestos liability, net of
insurance recoveries, will vary from year to year and could be material to Cooper’s operating cash
flow for a particular reporting period or year, depending upon the case load for a particular year
and the outcome of trials and settlement negotiations. In 2010 payments for indemnity and defense
costs exceeded insurance recoveries, while in 2009 insurance recoveries exceeded cash outlays due
to negotiated insurance settlements consummated during 2009. On February 1, 2011, Cooper entered
into a settlement agreement that upon closing would resolve its asbestos liability regarding the
Automotive Products segment. The settlement contemplates termination of the 1994 Mutual Guaranty
Agreement between Cooper and Pneumo and the creation of a Settlement Trust. Upon closing of the transactions contemplated by the settlement
agreement, a subsidiary of Cooper will make payments to the Settlement Trust totaling $307.5 million, subject to certain
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reductions ($250 million at closing and the
remainder due in installments over four years). After the closing, the Company and its
subsidiaries will have no further obligations under the Mutual Guaranty Agreement. Consummation of
the settlement is expected during the second quarter of 2011, subject to a
favorable ruling regarding the tax treatment of the Settlement Trust from the Internal Revenue
Service and other closing conditions.
As discussed above, the Company has recorded an estimated accrual on an undiscounted basis for
pending and future indemnity and defense costs under the Mutual Guaranty. In addition, the Company
has recorded a receivable for related insurance recoveries where insurance-in-place agreements,
settlements or policy recoveries are probable. Upon completion of the transactions contemplated by
the settlement agreement, the Company expects that it will adjust its estimated net liability
currently recorded for its obligations under the Mutual Guaranty with the amount payable under the
settlement agreement, which is expected to result in a pre-tax, noncash gain for the difference
between the two amounts. There can be no assurance that the settlement agreement will be
consummated or such pre-tax noncash gain will be realized.
Recently Issued Accounting Standards
There are no recently issued accounting standards that Cooper expects to have a material
effect on the presentation or disclosure of our future consolidated operating results, cash flows
or financial condition.
The information required by this Item is included under “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Cooper’s consolidated financial statements, together with the report thereon of Ernst & Young
LLP and the supplementary financial data are set forth on pages F-1 through F-52 hereof. (See Item
15 for Index.)
Not applicable.
The Company’s management, with the participation of the Company’s Chairman and Chief Executive
Officer and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of
the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, the Company’s Chairman and Chief Executive Officer and Senior Vice President and
Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure
controls and procedures are effective, at the reasonable assurance level, in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act and are effective, at the reasonable
assurance level, in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including the Company’s Chairman and Chief Executive Officer and Senior Vice
President and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There have not been any changes in the Company’s internal control over financial reporting
during the most recently completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
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Not applicable.
PART III
The information required by this Item is set forth under the captions “Election of Directors”,
“Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Corporate
Governance” in Cooper’s Proxy Statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with Cooper’s 2011 Annual Meeting of Shareholders (the “Proxy
Statement”) and is incorporated herein by reference.
The information required by this Item is set forth under the caption “Executive Management
Compensation” and “Directors’ Compensation” in the Proxy Statement and, except as specified in the
following sentence, is incorporated herein by reference.
Information in Coopers’ Proxy Statement not deemed to be “soliciting material” or “filed” with
the Commission under its rules, including the Compensation Committee Report, is not deemed to be
incorporated by reference.
The information required by this Item is set forth under the captions “Cooper Stock Ownership
of Certain Beneficial Owners”, “Securities Ownership of Officers and Directors” and “Equity
Compensation Plan Information” in the Proxy Statement and is incorporated herein by reference.
The information required by this Item is set forth under the caption “Transactions with
Related Persons” and “Corporate Governance-Director Independence” in the Proxy Statement and is
incorporated herein by reference.
The information required by this Item is set forth under the caption “Relationship with
Independent Auditors” in the Proxy Statement and is incorporated herein by reference.
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PART IV
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.
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.
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Pursuant to Rule 406T of Regulation S-T, the interactive data included in Exhibit
101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections
11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Cooper will furnish to the Commission supplementally upon request a copy of any instrument
with respect to long-term debt of Cooper. 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 plc
Attn: Corporate Secretary 5 Fitzwilliam Square Dublin 2, Ireland 46
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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.
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.
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REPORT OF MANAGEMENT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management conducted an evaluation of the effectiveness of the Company’s internal control over
financial reporting based on the framework in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2010.
Cooper’s independent registered public accounting firm has issued an audit report on Cooper’s
internal control over financial reporting. This report appears on Page F-2.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cooper Industries plc:
We have audited Cooper Industries plc’s (“the Company”)
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Report of Management on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2010 and
2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2010, and our report dated February 22, 2011,
expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 22, 2011 F-2
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cooper Industries plc:
We have audited the accompanying consolidated balance sheets of Cooper Industries plc
(“the Company”), as of December 31, 2010 and 2009, and the
related consolidated statements of income, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2010. 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 the standards of the Public Company Accounting
Oversight Board (United States). 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 the Company at December 31, 2010 and 2009, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 22, 2011, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 22, 2011 F-3
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The Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
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The Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
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The Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
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The Notes to Consolidated Financial Statements are an integral part of these statements.
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COOPER INDUSTRIES PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements of Cooper Industries plc (formerly
Cooper Industries, Ltd.), an Irish company (“Cooper”), have been prepared in accordance with
generally accepted accounting principles in the United States.
In June 2009 our Board of Directors approved moving Cooper’s place of incorporation from
Bermuda to Ireland. This move was part of a reorganization that created a newly formed Irish
company, Cooper Industries plc. We completed the first step in this reorganization by establishing
our tax residency in Ireland in December 2008. At a Special Shareholders’ Meeting on August 31,
2009, shareholders voted in favor of completing the reorganization pursuant to which all Cooper
Industries, Ltd. Class A common shares held by public shareholders would be cancelled and all
holders of such shares would receive ordinary shares of Cooper Industries plc on a one-for-one
basis. The reorganization transaction was completed on September 8, 2009, following approval from
the Supreme Court of Bermuda, at which time Cooper Industries plc replaced Cooper Industries, Ltd.
as the ultimate parent company. Shares of the Irish company, Cooper Industries plc, began trading
on the New York Stock Exchange on September 9, 2009 under the symbol CBE, the same symbol under
which Cooper Industries, Ltd. shares were previously traded. This transaction was accounted for as
a merger between entities under common control; accordingly, the historical financial statements of
Cooper Industries, Ltd. for periods prior to this transaction are considered to be the historical
financial statements of Cooper Industries plc. No changes in asset or liability amounts resulted
from this transaction. Cooper Industries plc has provided a guarantee of amounts due under certain
borrowing arrangements as described in Notes 10 and 22. See Note 11 for a discussion of the
capital structure of Cooper Industries plc.
Principles of Consolidation: The consolidated financial statements include the accounts of Cooper
and its majority-owned subsidiaries or affiliated companies where Cooper has the ability to control
the entity through voting or similar rights. All intercompany transactions have been eliminated.
The results of companies acquired or disposed of are included in the financial statements from the
effective date of acquisition or up to the date of disposal.
Use of Estimates: The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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
highly liquid investments which are readily convertible to cash, present insignificant risk of
changes in value due to interest rate fluctuations and have original maturities of three months or
less to be cash equivalents.
Restricted Cash: For purposes of the 2008 statement of cash flows, Cooper recorded cash held at
December 31, 2007 in an account for the irrevocable tender offer to purchase all outstanding shares
of MTL Instruments Group plc, a publicly-traded company based in the United Kingdom, as restricted
cash until consummation of the transaction in 2008.
Accounts Receivable: Cooper provides an allowance for doubtful trade accounts receivable,
determined under the specific identification method. The allowance was $10.1 million and $13.2
million at December 31, 2010 and 2009, respectively.
Inventories: Inventories are carried at cost or, if lower, net realizable value. On the basis of
current costs, 46% and 46% of inventories at December 31, 2010 and 2009, respectively, were carried
on the last-in, first-out (LIFO) method. The remaining inventories are carried on the first-in,
first-out (FIFO) method. Allowances for excess and obsolete inventory are provided based on
current assessments about future
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) demands, market conditions and related management initiatives. If market conditions are less
favorable than those projected by management, additional inventory allowances may be required.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is
provided using primarily the straight-line method over the estimated useful lives of the related
assets, which in general have the following lives: buildings — 10 to 40 years; machinery and
equipment — 3 to 18 years; computer hardware and software — 1 to 12 years; and tooling, dies,
patterns and other — 3 to 10 years.
Investment in Apex Tool Group, LLC: Cooper’s interest in the Apex Tool Group, LLC joint venture is
accounted for using the equity method. Cooper recognizes its proportionate share of Apex’s
operating results in the consolidated income statement and recognizes its proportionate share of
movements in Apex’s other comprehensive income in other non-owner changes in equity.
Business Combinations: Cooper makes an allocation of the purchase price based on its estimate of
the fair value of the assets acquired, including identified intangible assets, and liabilities
assumed as of the date of acquisition. Cooper allocates any excess purchase price over the fair
value of the net tangible and intangible assets acquired to goodwill. Cooper recognizes
acquisition-related costs in the period in which such costs are incurred.
Goodwill: Goodwill is subject to an annual impairment test and Cooper has designated January 1 as
the date of this test. Cooper has identified eight reporting units, consisting of three units in
the Energy and Safety Solutions reportable operating segment, four units in the Electrical Products
Group reportable operating segment and the Tools reportable operating segment, for which goodwill
is tested for impairment. If an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying value, an interim impairment test
would be performed between annual tests. Goodwill impairment is evaluated using a two-step
process.
The first step of the goodwill impairment test compares the fair value of a reporting unit
with its carrying value. If the carrying amount of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test shall be performed. The second step compares the
implied fair value of the reporting unit’s goodwill to the carrying amount of its goodwill to
measure the amount of impairment loss. The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination (e.g., the fair value of
the reporting unit is allocated to all of the assets and liabilities, including any unrecognized
intangible assets, as if the reporting unit had been acquired in a business combination and the
fair value of the reporting unit was the purchase price paid to acquire the reporting unit).
Intangible Assets: Intangible assets are stated at cost. Certain intangible assets are amortized
over the estimated useful lives of the related assets using primarily the straight-line method.
Intangible assets subject to amortization primarily include, with related estimated useful lives:
customer relationships — 3 to 30 years; technology — 5 to 20 years; and trademarks — 15 to 40
years. Certain trademarks with an indefinite useful life are not amortized and are instead tested
for impairment on an annual basis.
Income Taxes: Deferred tax assets and liabilities are determined based upon differences between
the book basis of assets and liabilities and their respective tax basis as measured by the enacted
tax rates that Cooper expects will be in effect when these differences reverse. In addition to
estimating the future applicable tax rates, Cooper must also make certain assumptions regarding
whether tax differences are permanent or temporary and whether taxable operating income in future
periods will be sufficient to fully recognize any gross deferred tax assets. Cooper has
established valuation allowances when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Derivatives and Hedging Activities: All derivatives are recognized as assets and liabilities and
measured at fair value. For derivative instruments that are not designated as hedges, the gain or
loss on the derivative is recognized in earnings currently. A derivative instrument may be
designated as a hedge of the exposure to changes in the fair value of an asset or liability or
variability in expected future cash flows if the hedging relationship is expected to be highly
effective in offsetting changes in fair value or cash flows attributable to the hedged risk during
the period of designation. If a derivative is designated as a fair value hedge, the gain or loss
on the derivative and the offsetting loss or gain on the hedged asset, liability or firm commitment
is recognized in earnings. For derivative instruments designated as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported as a component of
accumulated nonowner changes in equity and reclassified into earnings in the same period that the
hedged transaction affects earnings. The ineffective portion of the gain or loss is immediately
recognized in earnings.
Hedge accounting is discontinued prospectively when (1) it is determined that a
derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged
item; (2) the derivative is sold, terminated or exercised; (3) the hedged item no
longer meets the definition of a firm commitment; or (4) it is unlikely that a forecasted
transaction will occur within two months of the originally specified time period.
When hedge accounting is discontinued because it is determined that the derivative no longer
qualifies as an effective fair-value hedge, the derivative will continue to be carried on the
balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for
changes in fair value. When hedge accounting is discontinued because a hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried on the balance
sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of
the firm commitment will be removed from the balance sheet and recognized as a gain or loss
currently in earnings. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur within two months of the originally specified time period,
the derivative will continue to be carried on the balance sheet at its fair value, and gains and
losses reported in accumulated nonowner changes in equity will be recognized immediately in
earnings.
Fair Value of Financial Instruments: Assets and liabilities measured at fair value are based on one
or more of three valuation techniques. The valuation techniques are as follows:
The inputs used in measuring fair value are prioritized using a three-tier fair value
hierarchy as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level
2) inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions.
Foreign Currency Translation: Financial statements for international subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and
the exchange rates in effect during the respective period for revenues, expenses, gains and losses.
Exchange rate adjustments resulting from translation of foreign currency financial statements are
recorded in accumulated other nonowner changes in equity whereas exchange rate adjustments
resulting from foreign currency transactions are recorded in income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Treasury Stock: Treasury stock is carried at cost.
Revenue Recognition: Cooper recognizes revenues when products are shipped. Accruals for sales
returns and other allowances are provided at the time of shipment based upon past experience. If
actual future returns and allowances differ from past experience, adjustments to our allowances may
be required. The accrual for sales returns and other allowances reported net in receivables was
$59.1 million and $77.1 million at December 31, 2010 and 2009, respectively. Shipping and handling
costs of $131.8 million, $121.0 million and $181.9 million in 2010, 2009 and 2008, respectively,
are reported as a reduction of revenues in the consolidated income statements.
Customer Incentives: Customer incentives primarily consist of volume discounts and other
short-term discount and promotion programs. Cooper recognizes these incentives as a reduction in
reported revenues at the time of the qualifying sale based on our estimate of the ultimate
incentive amount to be earned using historical experience and known trends. If actual customer
incentives differ from our estimates, adjustments to our accruals may be required. The accrual for
customer incentives reported in accrued liabilities was $77.0 million and $63.9 million at December
31, 2010 and 2009, respectively.
Research and Development Expenditures: Research and development expenditures are charged to
earnings as incurred. Research and development expenses were $149.7 million, $141.1 million and
$141.8 million in 2010, 2009 and 2008, respectively.
Stock Based Compensation: Cooper recognizes stock-based compensation expense based on the fair
value of the award at the grant date with expense recognized over the service period, which is
usually the vesting period. Cooper uses the Black-Scholes-Merton formula to estimate the value of
stock options granted to employees, as well as the straight-line recognition method for awards
subject to graded vesting. The fair value of restricted stock and performance-based awards granted
are measured at the market price on the grant date. Cooper recognizes an estimate for forfeitures
of awards of stock options, performance-based shares and restricted stock units. These estimates
are adjusted as actual forfeitures differ from the estimate.
Pension & Other Post Retirement Benefit Plans: Cooper measures its pension and other post
retirement benefit plans assets and related obligations that determine the respective plan’s funded
status as of December 31 each year, and recognizes an asset for a plan’s over funded status or a
liability for a plan’s underfunded status in the consolidated balance sheets. Changes in the
funded status of the plans are recognized in the year in which the changes occur and reported in
other nonowner changes in equity.
Reclassifications: Other intangible assets in the December 31, 2009 consolidated balance sheet have
been reclassified to conform to the 2010 presentation. As discussed in Note 2 of the Notes to
Consolidated Financial Statements, the amounts related to the contribution of certain Tools
business assets and liabilities to Apex Tool Group, LLC in July 2010 have been reclassified to
separate lines in the December 31, 2009 consolidated balance sheet and related notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2: CONTRIBUTION OF TOOLS BUSINESS ASSETS AND LIABILITIES TO JOINT VENTURE
On March 26, 2010, Cooper announced that it entered into a Framework Agreement with Danaher
Corporation to create a joint venture combining Cooper’s Tools business with certain Tools
businesses from Danaher’s Tools and Components Segment (the “Joint Venture”). On July 6, 2010,
Cooper announced the completion of the Joint Venture, named Apex Tool Group, LLC. Cooper and
Danaher each own a 50% interest in the Joint Venture, have equal representation on its Board of
Directors and have a 50% voting interest in the Joint Venture. At completion of the transaction in
July, Cooper deconsolidated the Tools business assets and liabilities contributed to the Joint
Venture and recognized Cooper’s 50% ownership interest as an equity investment. Beginning in the
third quarter of 2010, Cooper recognizes its proportionate share of the Joint Venture’s operating
results using the equity method. Recording the investment at its fair value of $480 million
resulted in a pretax loss of $134.5 million related to the transaction. The pretax loss related to
the formation of the Joint Venture included a $26.5 million gain from the contribution of the Tools
business net assets resulting from the difference in the fair value of the equity investment and
the carrying value of the net assets being contributed and transaction related costs. This gain
was offset by the write-off of approximately $161.0 million (approximately $104.4 million net of
the associated tax effect) from recognition of the accumulated other nonowner changes in equity
related to the Tools business, primarily related to cumulative currency translation losses. The
Tools business assets and liabilities contributed to the Joint Venture in July 2010 have been
reclassified to separate lines in the accompanying December 31, 2009 consolidated balance sheet.
Because the Tools business assets and liabilities to be contributed to the Joint Venture were
considered held for sale at June 30, 2010, Cooper recognized the $134.5 million loss in the second
quarter of 2010 by recognizing $126.1 million of the cumulative currency translation losses
included in other nonowner changes in equity (approximately $82.0 million net of the associated tax
effect) and transaction related costs. In the third quarter of 2010 Cooper recognized the
remaining items previously deferred in accumulated other nonowner changes in equity which was
offset by the gain on the underlying net assets contributed. As a result, there was no impact to
the income statement in the third quarter of 2010 upon deconsolidation of the Tools business assets
and liabilities contributed to the Joint Venture.
The following table reflects the components of the Tools business assets and liabilities as of
June 30, 2010 and December 31, 2009.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3: INVESTMENT IN APEX TOOL GROUP, LLC
As discussed in Note 2, Cooper contributed its Tools business assets and liabilities to Apex
Tool Group, LLC (“Apex”) in July 2010 and recognized Cooper’s 50% ownership interest as an equity
investment. Beginning in the third quarter of 2010, Cooper recognizes its proportionate share of
Apex’s operating results using the equity method.
The following table reflects summarized financial information for Apex.
NOTE 4: ACQUISITIONS
Cooper completed ten acquisitions during 2010 and 2009 that were selected because of their
strategic fit with existing Cooper businesses or were new strategic lines that were complementary
to Cooper’s operations.
In 2010 Cooper completed five acquisitions, four in the Energy and Safety Solutions segment
and one in the Electrical Products Group. Cooper also acquired certain other intangible assets in
the Electrical Products Group segment in 2010. The acquisition date fair value of the total
consideration for the 2010 transactions was approximately $112.6 million and resulted in the
recognition of aggregate goodwill of $47.9 million, with approximately 15% expected to be
deductible for tax purposes. The transactions consummated in 2010 also resulted in the recognition
of $47.8 million in other intangible assets consisting primarily of customer relationships,
technology and trademarks. All of the other intangibles are finite-lived intangible assets that
are preliminarily expected to be amortized over periods of 7 to 25 years with a weighted average
amortization period of approximately 14 years.
In 2009 Cooper completed five acquisitions, two in the Energy and Safety solutions segment and
three in the Electrical Products Group segment, and acquired certain intellectual property rights
in the Energy and Safety Solutions segment. The acquisition date fair value of the total
consideration for the 2009 acquisitions was approximately $61.3 million. The acquisitions resulted
in the recognition of preliminary estimated aggregate goodwill of $29.5 million, with approximately
46% expected to be deductible for tax purposes. The transactions consummated during 2009 resulted
in the preliminary recognition of $29.3 million in other intangible assets consisting primarily of
customer relationships, technology and trademarks.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) All of the other intangibles are finite-lived
intangible assets that are preliminarily expected to be amortized over periods of 5 to 40 years
with a weighted average amortization period of approximately 12 years.
In 2010 Cooper paid total cash consideration, net of cash acquired, of $93.2 million related
to acquisitions. Pro-forma income from continuing operations and diluted earnings per share for
2010 and 2009, assuming the acquisitions had occurred at the beginning of the period, would not be
materially different from reported results.
NOTE 5: INVENTORIES
As a result of the reduction in inventories during 2009, Cooper recognized an $18.8 million
reduction to cost of sales related to decrements in LIFO inventories. In addition, Cooper
recognized a $14.5 million increase to cost of sales in 2009 related to increases in excess and
obsolete inventory allowances and other inventory valuation adjustments.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment were as follows:
Cooper completed its annual impairment tests for each reporting unit’s goodwill. The
results of step one of the goodwill impairment tests did not require the completion of step two of
the test for any reporting unit. As a result of the Tools joint venture as discussed above, Cooper
completed an interim impairment test during 2010 for the Tools reporting unit goodwill. The
results of step one of the interim goodwill impairment test for the Tools reporting unit did not
require the completion of step two of the test.
The gross carrying value of finite-lived other intangible assets was $353.1 million and $306.7
million at December 31, 2010 and 2009, respectively. Accumulated amortization of finite-lived
other intangible assets was $70.5 million and $51.9 million at December 31, 2010 and 2009,
respectively. Amortization expense of finite-lived other intangible assets was $18.4 million in
2010, $17.9 million in 2009, and $17.1 million in 2008. Annual amortization expense, exclusive of
businesses that may be acquired in 2011, is expected to be $20.0 million in 2011, $18.7 million in
2012, $18.0 million in 2013, $18.0 million in 2014 and $17.4 million in 2015.
Certain trademarks with a gross carrying value of approximately $51 million and $52 million at
December 31, 2010 and 2009, respectively, are considered indefinite-lived other intangibles and not
subject to amortization. Cooper completed its annual impairment test for indefinite-lived other
intangible assets resulting in no impairment.
NOTE 8: ACCRUED LIABILITIES
At December 31, 2010, Cooper had accruals of $19.0 million with respect to potential product
liability claims and $21.4 million with respect to potential environmental liabilities, including
$10.2 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The product liability accrual includes estimated amounts for known claims with respect to
ongoing operations and previously divested operations as well as an estimated amount for 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 claims above $5 million.
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 amounts related to sites owned by Cooper, retained
environmental liabilities related to sites previously owned by Cooper and third-party sites where
Cooper was a potentially responsible party. 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.
In the first quarter of 2010 Cooper received two notices of potential liability under Section
107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA) from the United States Environmental Protection Agency with respect to the release or
threatened release of hazardous substances, pollutants, and contaminants into the 17-mile stretch
of the river known as the Lower Passaic River Study Area, which is part of the Diamond Alkali
Superfund Site located in Newark, New Jersey. The EPA sent notices to over 125 companies. The
notices to Cooper identified three former sites in the Newark area owned by the former Thomas A.
Edison, Inc. and McGraw-Edison Company. The notice alleges that as the successor to Thomas A.
Edison, Inc. and the McGraw-Edison Company, the former owners and operators of the facilities,
Cooper may be potentially liable for response costs and clean up of the site. Although the notices
do not state an amount of potential liability, Cooper has included a provision for this claim in
its environmental accrual assessment at December 31, 2010 based on Cooper’s current estimate of the
most likely amount of losses that it believes will be incurred.
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 change over time, 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.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Cooper and its subsidiaries are defendants or otherwise involved in a number of lawsuits in
the ordinary course of business. Cooper records its best estimate of a loss when the loss is
considered probable. When a liability is probable and there is a range of estimated loss with no
best estimate in the range, Cooper records the minimum estimated liability related to the lawsuits
or claims. As additional information becomes available, Cooper assesses the potential liability
related to pending litigation and claims and revises its estimates. Due to uncertainties related
to the resolution of lawsuits and claims, the ultimate outcome may differ from the estimates. In
the opinion of management and based on liability accruals provided, the ultimate exposure with
respect to these pending lawsuits and claims is not expected to have a material adverse effect on
Cooper’s consolidated financial position or cash flows, although they could have a material adverse
effect on the results of operations for a particular reporting period.
The U.S. Federal Government has enacted legislation intended to deny certain federal funding
and government contracts to U.S. companies that reincorporate outside the United States, including
Section 745 of the Consolidated Appropriations Act, 2008 (Public Law 110-161), Section 724(c) of
the Transportation, Treasury, Housing and Urban Development, the Judiciary, and Independent
Agencies Appropriations Act,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2006 (Public Law 109-115), and 6 U.S.C. 395(b) of The Homeland Security Act. Cooper has
self-reported to the Department of Defense certain transactions aggregating approximately $8
million with U.S. government entities which may be subject to the legislation. At the time of this
filing, it is too early to determine whether any fines or penalties may be assessed against Cooper.
In connection with laws and regulations pertaining to the protection of the environment,
Cooper and its subsidiaries are party to several environmental proceedings and remediation
investigations and cleanups and, along with other companies, have been named a potentially
responsible party (PRP) for certain sites at which hazardous substances have been released into the
environment (“Superfund sites”).
Each of these matters is subject to various uncertainties and it is possible that some of
these matters will be decided unfavorably against Cooper. The resolution of these matters often
spans several years and frequently involves regulatory oversight or adjudication. Additionally,
many remediation requirements are not fixed and are likely to be affected by future technological,
site and regulatory developments. Consequently, the ultimate liability with respect to such
matters, as well as the timing of cash disbursements cannot be determined with certainty. See Note
8 to Notes to Consolidated Financial Statements for additional information.
Cooper has entered into various operating lease agreements, primarily for manufacturing,
warehouse and sales office facilities and equipment. Generally, the leases include renewal
provisions and rental payments may be adjusted for increases in taxes, insurance and maintenance
related to the property. Rent expense for all operating leases was $41.0 million, $42.9 million
and $42.2 million during 2010, 2009 and 2008, respectively. At December 31, 2010, minimum annual
rental commitments under noncancellable operating leases that have an initial or remaining lease
term in excess of one year were $24.2 million in 2011, $21.3 million in 2012, $14.4 million in
2013, $10.4 million in 2014, $7.0 million in 2015 and $24.4 million thereafter.
Cooper has purchase obligations of approximately $240 million related to commitments to
purchase certain goods and services in 2011.
NOTE 10: DEBT
Cooper has available a $350 million U.S. committed credit facility that matures in August
2012. The agreement for the credit facility requires that Cooper maintain certain financial
ratios, including a prescribed limit on debt as a percentage of total capitalization and minimum
earnings before interest, income taxes, depreciation and amortization to interest ratio. 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-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) total capitalization ratio. The credit
agreement is not subject to termination based upon a decrease in Cooper’s debt ratings or a
material adverse change.
There were no commercial paper borrowings outstanding at December 31, 2010 or 2009. Cooper’s
senior unsecured notes, credit facility and any commercial paper amounts outstanding are guaranteed
by Cooper and certain of its principal operating subsidiaries.
On December 7, 2010, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $250 million of
2.375% fixed rate senior unsecured notes due in 2016 and $250 million of 3.875% fixed rate senior
unsecured notes due in 2020. Proceeds from the financing have been primarily invested in highly
liquid investments with original maturities of less than three months and will be used for general
corporate purposes. Combined with the debt issuance discount, underwriting commissions and
interest rate hedges implemented in anticipation of the offering, the 2016 notes have an effective
annual cost to Cooper of 2.56% and the 2020 notes have an effective annual cost to Cooper of 4.02%.
On March 27, 2008, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $300 million of
5.45% fixed rate senior unsecured notes due in 2015. Proceeds from the financing were used to
repay commercial paper outstanding at that time. 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%.
On June 18, 2007, Cooper’s wholly-owned subsidiary, Cooper US, Inc. issued $300 million of
6.10% fixed rate senior unsecured notes due in 2017. Proceeds from the financing were used to
repay $300 million of maturing 5.25% senior unsecured notes. Combined with interest rate hedges
implemented in anticipation of the offering, the notes have an effective annual cost to Cooper of
5.75%.
On November 8, 2005, Cooper’s wholly-owned subsidiary, Cooper US, Inc., issued $325 million of
5.25% fixed rate senior unsecured notes that mature on November 15, 2012. Proceeds of the notes
were swapped to €272.6 million with cross-currency interest-rate swaps, effectively converting the
seven-year U.S. notes to seven-year Euro notes with an annual interest rate of 3.55% (see Note 19).
The proceeds of €272.6 million partially funded repayment of Euro bonds that matured in October
2005.
Maturities of long-term debt for the five years subsequent to December 31, 2010 are $1 million
in 2011, $325 million in 2012, $300 million in 2015, and $800 million thereafter. The future net
minimum lease payments under capital leases are not significant. Total interest paid during 2010,
2009 and 2008 was $53.2 million, $68.6 million and $70.8 million, respectively.
NOTE 11: SHAREHOLDERS’ EQUITY
As discussed in Note 1, Cooper completed a reorganization transaction on September 8, 2009
whereby all Cooper Industries, Ltd. Class A common shares held by public shareholders were
cancelled and all holders of such shares received ordinary shares of Cooper Industries plc on a
one-for-one basis. The Class A and Class B common shares of Cooper Industries, Ltd. held by
wholly-owned subsidiaries of Cooper Industries, Ltd. did not participate in the exchange
transaction and continued to be held by wholly-owned subsidiaries of Cooper Industries, Ltd. On
October 19, 2009, the Irish High Court approved the reduction of share premium (similar to
additional paid-in-capital) to establish distributable reserves in the statutory balance sheet of
Cooper Industries plc. The establishment of distributable reserves was required to enable the
Company to pay dividends and repurchase shares in the future. The reorganization transaction and
establishment of distributable reserves had no impact on consolidated shareholders’ equity.
Cooper Industries plc’s authorized share capital is €40,000 and $7,600,000 consisting of
40,000 ordinary shares with a par value of €1 per share, 750,000,000 common shares, par value of
$.01 per share
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and 10,000,000 preferred shares, par value $.01 per share, which preferred shares
may be designated and created as shares of any other classes or series of shares with the
respective rights and restrictions determined by action of the Board of Directors. No preferred
shares of Cooper Industries plc were outstanding at December 31, 2010 or 2009.
Cooper Industries plc had common shares, $.01 par value outstanding of 164,130,802 (net of
6,537,900 treasury shares) and 167,316,595 (net of 294,600 treasury shares) at December 31, 2010
and 2009, respectively. During 2010 Cooper issued 3,057,507 common shares primarily in connection
with employee incentive and benefit plans and Cooper’s dividend reinvestment program. During 2010
Cooper Industries plc purchased 6,243,300 shares of treasury stock at an average price of $44.23
per share. Subsequent to the reorganization transaction in 2009, Cooper Industries plc purchased
294,600 shares of treasury stock at an average price of $42.38 per share.
Cooper Industries, Ltd’s authorized share capital was $7,600,000 consisting of 500,000,000
Class A common shares, par value of $.01 per share, 250,000,000 Class B common shares, par value
$.01 per share and 10,000,000 preferred shares, par value $.01 per share, which preferred shares
could be designated and created as shares of any other classes or series of shares with the
respective rights and restrictions determined by action of the Board of Directors. No preferred
shares of Cooper Industries, Ltd. were outstanding at December 31, 2008 or 2007.
Cooper Industries, Ltd. had Class A common shares, $.01 par value issued and outstanding of
166,908,287 and 179,453,923 as of December 31, 2008 and 2007 respectively, (excluding the Class A
common shares held by wholly-owned subsidiaries of 37,362,915 and 27,195,002 shares at each
respective date). During 2009 and 2008 Cooper issued Class A common shares totaling 1,965,708 and
1,864,076, respectively primarily in connection with employee incentive and benefit plans and
Cooper’s dividend reinvestment program. During 2009 and prior to the reorganization transaction
described above, Cooper Industries Ltd. and its wholly-owned subsidiaries purchased 1,262,800 Class
A common shares of Cooper Industries, Ltd. for $26.0 million under Cooper’s share repurchase plans.
During 2008 Cooper and its wholly-owned subsidiaries purchased 14,409,712 shares of Cooper
Industries, Ltd. Class A common shares under Cooper’s share repurchase plan for $517.2 million.
The share purchases are recorded by Cooper’s wholly-owned subsidiaries as an investment in its
parent company that is eliminated in consolidation. During 2008, 598,482 Class A common shares
held by wholly-owned subsidiaries were issued in connection with employee incentive and benefit
plans, leaving 37,362,915 Class A common shares held by wholly-owned subsidiaries at December 31,
2008.
On February 12, 2008, Cooper’s Board of Directors authorized the purchase of ten million
shares of common stock with the repurchases being completed during 2010. On February 9, 2009,
Cooper’s Board of Directors increased the share repurchase authorization by ten million shares. As
of December 31, 2010, 8,728,735 shares remain available to be repurchased under the February 9,
2009 authorization by the Board of Directors. Cooper’s Board has also authorized the repurchase of
shares issued from time to time under its equity compensation plans, matched savings plan and
dividend reinvestment plan in order to offset the dilution that results from issuing shares under
these plans. For 2011 Cooper’s current estimate is that 3 million shares would be issued under
equity compensation plans. Cooper may continue to repurchase shares under these authorizations
from time to time during 2011. The decision whether to do so will be dependent on the favorability
of market conditions, as well as potential cash requirements for acquisitions and debt repayments.
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. At December 31, 2010, Cooper had
15,558,347 shares reserved
for the Dividend Reinvestment Plan, grants and exercises of stock options, performance-based
stock awards, restricted stock awards and other plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Board of Directors of Cooper Industries, Ltd. adopted a Shareholder Rights Plan that
authorized the issuance of one right for each common share outstanding on May 22, 2002. Each Right
entitled 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
shares having a value of twice the purchase price. Each Right became exercisable only in certain
circumstances constituting a potential change of control on a basis considered inadequate by the
Board of Directors. The Rights were scheduled to expire August 5, 2007.
On August 3, 2007, Cooper Industries, Ltd. entered into an Amended and Restated Rights
Agreement (“the Amended Rights Plan”). The Amended Rights Plan extended the final expiration of
the Shareholder Rights Plan to August 1, 2017. In addition, the Amended Rights Plan increased the
exercise price of each full Right from $225 to $600 (equivalent to $300 for each one-half of a
Right, which was the fraction of a Right that was associated with each Class A common share of
Cooper Industries, Ltd. following the two-for-one stock split effective March 2007); eliminated a
ten-day window to redeem the Rights after a person has become an “Acquiring Person” (as defined in
the Amended Rights Plan); added a provision that allows the Board of Directors to exchange the
outstanding and exercisable Rights for additional common shares (or, in certain situations, a
number of Series A Participating Preferred Shares) at the rate of one common share per Right, at
anytime after a person becomes an “Acquiring Person,” and added a provision clarifying that Cooper
is allowed to lower the acquiror ownership threshold at which dilution is triggered to no less than
10% at anytime prior to the time any person becomes an “Acquiring Person.”
In connection with the Irish reincorporation, Cooper Industries plc and Cooper Industries,
Ltd. entered into a Second Amended and Restated Rights Agreement dated as of September 8, 2009 (the
“Second Amended Rights Plan”). The Second Amended Rights Plan further amends and restates the
Amended Rights Plan. Pursuant to the Second Amended Rights Plan, the preferred share purchase
rights associated with the Cooper Industries, Ltd. Class A common shares were replaced with newly
issued preferred share purchase rights associated with the Cooper Industries plc common shares.
The terms of the Second Amended Rights Plan are substantially similar to that of the Amended Rights
Plan.
On February 15, 2011, Cooper’s Board of Directors increased the annual dividend rate of
Cooper’s common stock by $.08 per share to $1.16. On February 15, 2010, Cooper’s Board of
Directors increased the annual dividend rate of Cooper’s common stock by $.08 per share to $1.08.
On February 12, 2008, Cooper’s Board of Directors increased the annual dividend rate of Cooper’s
common stock by $.16 per share to $1.00.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12: ACCUMULATED OTHER NONOWNER CHANGES IN EQUITY
In 2010 the translation adjustment includes a gain from the reclassification of
$159.3 million ($103.5 million net of the associated tax effect) of previously deferred currency
translation losses and the change in pension and postretirement plans includes a gain from the
reclassification of $1.7 million ($0.9 million net of the associated tax effect) of previously
deferred pension plan losses that were recognized as a loss in net income related to the Tools
joint venture as discussed in Note 2.
NOTE 13: INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
Industry Segments
During the first quarter of 2010 Cooper revised its segment reporting to align its external
reporting with changes to its internal reporting structure and in conjunction with the announcement
of the Tools joint venture. The former Electrical Products segment has been divided into two new
reportable segments. Following this change, Cooper’s operations consisted of three segments:
Energy and Safety Solutions, Electrical Products Group and Tools. All periods have been restated
for the changes to the segment reporting structure. Beginning in the third quarter of 2010
following completion of the Tools joint venture, Cooper has two reportable segments.
The Energy and Safety Solutions segment includes the business unit results from the Cooper
Crouse-Hinds, Cooper Power Systems, and Cooper Safety divisions. This segment manufactures,
markets and sells electrical protection products, including fittings, plugs, receptacles, cable
glands, hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation,
emergency lighting, fire detection and mass notification systems and security products for use in
residential, commercial and industrial construction and 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, energy
automation solutions and other related power systems components.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Electrical Products Group segment includes the business unit results from the Cooper
B-Line, Cooper Bussmann, Cooper Lighting and Cooper Wiring Devices divisions. This segment
manufactures, markets and sells electrical and circuit protection products, support systems,
enclosures, specialty connectors, wiring devices, plugs, receptacles, switches, lighting fixtures
and controls, and fuses for use in residential, commercial and industrial construction, maintenance
and repair applications.
The Tools segment manufactures, markets and sells hand tools for industrial, construction,
electronics and consumer markets; automated assembly systems for industrial markets and electric
and pneumatic industrial power tools, related electronics and software control and monitoring
systems for general industry, primarily automotive and aerospace manufacturers. In July 2010,
Cooper contributed substantially all of the assets and liabilities of the Tools segment to Apex
Tool Group, LLC as discussed in Note 2 of the Notes to Consolidated Financial Statements.
Cooper manages cash, debt and income taxes centrally. Accordingly, Cooper evaluates
performance of its segments and operating units based on operating earnings exclusive of financing
activities and income taxes. The accounting policies of the segments are the same as those for
Cooper. Intersegment sales and related receivables for each of the years presented were
insignificant.
Financial information by industry segment was as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 are
generally denominated in the currency of the location of the assets producing the revenues.
Revenues by destination, based on the location products were delivered outside the United
States, were as follows by segment:
NOTE 14: RESTRUCTURING AND ASSET IMPAIRMENT
In the second quarter of 2008 Cooper recorded a $7.6 million restructuring charge for
severance costs for downsizing a Tools segment international facility. This facility downsizing
and related cash payments were substantially completed in 2008.
During the fourth quarter of 2008 Cooper committed to employment reductions to appropriately
size Cooper’s workforce to current and anticipated market conditions and to downsize a domestic
Tools segment manufacturing operation. Cooper recorded a $35.7 million charge in the fourth
quarter of 2008 related to these actions, $15.2 million of which relates to the Energy and Safety
Solutions segment, $10.3 million relates to the Electrical Products Group segment and $10.2 million
relates to the Tools segment. A total of 1,314 hourly and 930 salaried positions were eliminated
as a result of the fourth quarter 2008 restructuring actions to reduce Cooper’s workforce.
During 2009 Cooper committed to additional employment reductions and certain facility closures
as a result of management’s ongoing assessment of its hourly and salary workforce and its required
production capacity in consideration of current and anticipated market conditions and demand
levels. Cooper recorded charges of $28.7 million in 2009 related to these actions, $8.1 million of
which related to the Energy and Safety Solutions segment, $10.4 million related to the Electrical
Products Group segment and $8.6 million related to the Tools segment. The remaining $1.6 million
was related to reductions in Cooper’s corporate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) staff. A total of 1,088 hourly and 772 salaried
positions were eliminated as a result of the 2009 restructuring
actions to reduce Cooper’s workforce. As part of these restructuring actions, Cooper approved
the closure of ten factories and warehouses, eight of which were completed by the end of 2009.
Cooper recorded non-cash impairment charges of $1.2 million in 2009 related to these actions. In
2010 Cooper completed the two remaining factory closures and recorded $8.0 million of costs
associated with completion of the restructuring actions. The 2010 restructuring costs include $7.4
million related to the Electrical Products Group segment, $0.5 million related to the Energy and
Safety Solutions segment and $0.1 million related to the Tools segment.
The following table reflects activity related to the restructuring accrual.
As of December 31, 2010, the workforce reductions, contract termination and other exit
costs and the related cash payments for the above actions have been substantially completed.
In the fourth quarter of 2008 Cooper also recorded a non-cash impairment charge of $9.1
million related to an investment in a previously unconsolidated international joint venture in the
Electrical Products Group segment. In December 2008 Cooper acquired a majority interest in the
international joint venture and consolidated the joint venture’s net assets of $4.6 million at such
time.
NOTE 15: STOCK-BASED COMPENSATION
Cooper has a share-based compensation plan known as the Amended and Restated Stock Incentive
Plan (the “Plan”). The Plan provides for the granting of stock options, performance-based share
awards and restricted stock units. Since the original Plan’s inception in 1996, the aggregate
number of shares authorized under the Plan is 41 million. As of December 31, 2010, 4,330,005
shares were available for future grants under the Plan. Of the total shares available for future
grants, 2,349,414 are available for grants of performance-based shares and restricted stock units.
Activity for each of these stock-incentive awards is discussed in more detail below. Total
compensation expense for all share-based compensation arrangements under the Plan was $32.0
million, $26.3 million and $23.1 million during the years ended December 31, 2010, 2009 and 2008,
respectively. The total income tax benefit recognized in the income statement for all
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) share-based
compensation arrangements under the Plan was $11.7 million, $9.5 million and $7.8 million during
the years ended December 31, 2010, 2009 and 2008, respectively.
Stock Options
Stock option awards are granted with an exercise price no less than the market price of
Cooper’s stock at the date of grant. Stock option awards generally vest over a three-year period
with one-third vesting in each successive year so that the option is fully exercisable after three
years and generally have seven-year contractual terms (ten-year contractual terms for awards
granted 2000-2002). Stock option awards provide that, upon a change in control in Cooper (as
defined in the Plan), all options will be cancelled and Cooper will make a cash payment to the
employee equal to the difference in the fair market value of Cooper common shares (or the highest
price actually paid for the stock in connection with the change in control, if higher) and the
option price.
The fair value of each stock option award is estimated on the date of grant using the
Black-Scholes-Merton option valuation model using the assumptions noted in the following table.
Expected volatility is based on implied volatilities from traded options on Cooper stock,
historical volatility of Cooper stock, and other factors. Cooper believes that the resulting
blended volatility represents a more accurate estimate of potential fluctuations in Cooper stock.
Cooper uses historical data to estimate employee termination experience. The expected term of
options granted is determined based on historical exercise behavior. The risk-free interest rate
for periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
A summary of option activity under the Plan as of December 31, 2010, and changes during the
year then ended is presented below:
The weighted-average grant date fair values of options granted during the years ended
December 31, 2010, 2009 and 2008 were $11.25, $6.75 and $8.19, respectively. The total intrinsic
value of options
exercised during the years ended December 31, 2010, 2009 and 2008 was $43.1
million, $13.2 million and $12.7 million, respectively. Total stock options granted were 1,609,480
shares in 2010, 2,425,725 shares in 2009 and 1,973,850 shares in 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of December 31, 2010, total unrecognized compensation expense related to nonvested stock
options was $15.9 million. This expense is expected to be recognized over a weighted-average
period of 1.8 years. The total grant date fair value of stock options vested during the years
ended December 31, 2010, 2009 and 2008 was $9.2 million, $13.0 million and $13.1 million,
respectively.
Performance-Based Shares and Restricted Stock Units
Under the Plan, Cooper grants certain executives and other key employees performance-based
share awards with vesting contingent upon meeting Company-wide performance goals generally over a
multi-year performance period. In order to earn the performance shares, participants also are
required to remain actively employed by Cooper for the performance period. For performance-based
awards granted during 2007, 2008 and 2010, performance goals are tied to cumulative compound growth
in earnings per share over a defined three-year performance period. Awards under the
performance-based component of the Plan are typically arranged in levels, with increasing numbers
of shares earned as higher levels of growth are achieved. For performance-based awards granted
during 2009, performance goals were tied to achieving a net debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio in 2009 with vesting occurring over a
three-year period. Under the Plan, Cooper also awards grants of restricted stock units to certain
executives and other key employees in order to provide financial incentive to remain in the employ
of Cooper, thereby enhancing management continuity. Cooper may also utilize restricted stock units
for new executives and other key employees to replace equity compensation forfeited upon
resignation from their former employer. Restricted stock units vest pursuant to time-based service
conditions.
The fair value of each performance-based share and restricted stock unit was calculated at the
market price on the date of grant. If goal-level assumptions are not met, compensation expense is
adjusted and previously recognized compensation expense is reversed. During 2007 and through the
third quarter of 2008, performance goals for performance awards granted in 2007 and 2008 were
assumed to be achieved at the maximum level. In the fourth quarter of 2008 Cooper revised its
assumption to lower the performance goals assumed to be achieved to below the maximum level for
these awards. The revised achievement levels assumed for the 2007 and 2008 performance award
grants considers the past performance and current expectations of future performance in the
respective three year performance period. As a result of lowering the performance goals assumed to
be achieved, Cooper adjusted previously recognized stock compensation expense by reducing expense
in the fourth quarter of 2008 by $11.3 million. Performance goals were achieved at the maximum
level for performance awards granted in 2009. Performance goals for performance awards granted in
2010 are assumed to be achieved at the maximum level. Upon distribution of performance-based
shares, Cooper also pays the recipient cash equal to the aggregate amount of cash dividends that
the recipient would have received had they been the owner of record from the date of grant.
Dividends on restricted stock units are payable on the dividend payment date or on the date when
restrictions lapse, depending upon the specific award. For performance-based share and restricted
stock unit awards, upon a change in control in Cooper (as defined in the Plan), all restrictions on
those awards will lapse and shares shall be issued as otherwise provided in the Plan.
A summary of the status of Cooper’s nonvested performance-based shares as of December 31, 2010
and changes during the year then ended is presented below:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The weighted-average grant-date fair value of performance-based shares granted during the
years ended December 31, 2010, 2009 and 2008 was $45.47, $28.89 and $43.87, respectively. Total
performance-based shares vested were 251,410 in 2010, 423,440 in 2009 and 472,734 in 2008.
As of December 31, 2010, total unrecognized compensation expense related to nonvested
performance-based shares was $18.1 million. This expense is expected to be recognized over a
weighted-average period of 2.0 years. The total fair value of performance-based shares vested
during the years ended December 31, 2010, 2009 and 2008 was $11.6 million, $17.6 million and $16.5
million, respectively.
A summary of the status of Cooper’s nonvested restricted stock units as of December 31, 2010,
and changes during the year then ended is presented below:
The weighted-average grant-date fair value of restricted stock units granted during the
years ended December 31, 2010, 2009 and 2008 was $50.21, $30.53 and $41.74, respectively. Total
restricted stock units granted were 302,081 in 2010, 75,200 in 2009 and 146,650 in 2008.
As of December 31, 2010, total unrecognized compensation expense related to nonvested
restricted stock unit compensation arrangements was $18.0 million. This expense is expected to be
recognized over a weighted-average period of 4.8 years. The total fair value of restricted stock
units vested during the years ended December 31, 2010, 2009 and 2008 was $5.5 million, $2.3 million
and $2.3 million, respectively.
Cash received from stock option exercises during the years ended December 31, 2010, 2009 and
2008 was $81.4 million, $20.1 million and $17.1 million, respectively. The actual tax benefit
realized for the tax deductions from option exercises totaled $20.3 million, $9.7 million and $12.8
million during the years ended December 31, 2010, 2009 and 2008, respectively. Cash used to settle
equity instruments granted under all share-based payment arrangements during the years ended
December 31, 2010, 2009 and 2008 was immaterial in all periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 16: INCOME TAXES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Generally, Cooper provides for income taxes that would be imposed on the repatriation of
earnings of its foreign operations that are not considered indefinitely reinvested overseas. As of
December 31, 2010 and 2009, income taxes have not been provided on approximately $9.8 million and
$20 million, respectively, of undistributed earnings that are expected to be permanently
reinvested. Income taxes have not been provided on earnings that are planned to be reinvested
indefinitely and the amount of such taxes that may be applicable is not readily determinable given
the various tax planning alternatives Cooper could employ should it decide to repatriate these
earnings.
The effective tax rate was 16.3% for 2010, 14.3% for 2009 and 23.7% for 2008. Cooper reduced
income tax expense by $5.6 million, $12.7 million and $23.2 million during 2010, 2009 and 2008,
respectively, for discrete tax items related to statute expirations, tax settlements and other
discrete items. In 2010 Cooper also reduced income tax expense by $40.8 million to recognize the
discrete tax effects related to the contribution of net assets to the Tools joint venture as
discussed in Note 2. Excluding the discrete tax items and the loss on the net asset contribution
to the Apex Tool Group joint venture in 2010, Cooper’s effective tax rate for 2010, 2009 and 2008
was 20.0%, 17.0% and 26.6%, respectively. The increase in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Cooper’s 2010 effective tax rate
compared to 2009, excluding the discrete tax items and Tools loss, is primarily related to the
increase in 2010 earnings without a corresponding increase in tax benefits.
The Internal Revenue Service (IRS) has completed its
examinations of Cooper’s 2007 and 2008
Federal Tax Returns and has issued notices of assessment in the
amounts of
$16 million and $14 million, respectively. The IRS has
challenged Cooper’s intercompany pricing with a foreign
affiliate. Cooper has filed
its protests for these assessments and continues to work with the IRS
to resolve these matters. While
the outcome of the proceedings with the IRS cannot be predicted with certainty, management believes
that it is more likely than not that its tax position will prevail.
In June 2008 the German Tax Authorities issued a proposed audit finding related to a 2004
reorganization that was treated as a non-taxable event. In December 2009 at Cooper’s request, the
German taxing authorities finalized and issued a notice of assessment for €62.8 million, inclusive
of €5.7 million of interest, related to this matter. In order for Cooper to continue to challenge
the German tax authorities finding, Cooper paid the assessment in December 2009 for approximately
$90 million and filed a suit to challenge the notice of assessment. Cooper continues to believe
that the reorganization was properly reflected on its German income tax returns in accordance with
applicable tax laws and regulations in effect during the period involved and will challenge the
assessment vigorously. Although the outcome of the proceedings with the German Tax Authorities
cannot be predicted with certainty, management believes that it is more likely than not that its
tax position related to the 2004 reorganization will prevail. As such, Cooper has recognized the
€62.8 million tax payment, including interest, in other noncurrent assets in the accompanying
balance sheets. The German tax payment will be available as a foreign tax credit in the United
States.
Cooper is under examination by various United States State and Local taxing authorities, as
well as various taxing authorities in other countries. Cooper is no longer subject to U.S. Federal
income tax examinations by tax authorities for years prior to 2009 and, with few exceptions, Cooper
is no longer subject to State and Local, or non-U.S. income tax examinations by tax authorities for
years before 2000. Cooper fully cooperates with all audits, but defends existing positions
vigorously. These audits are in various stages of completion. To provide for potential tax
exposures, Cooper maintains a liability for unrecognized tax benefits, which management believes is
adequate. The results of future audit assessments, if any, could have a material effect on
Cooper’s cash flows as these audits are completed.
Cooper and its subsidiaries have both non-U.S. and United States State operating losses
available to carry forward to future tax years. These losses generally have a carry forward period
of either 15 or 20 years from the date created, except as discussed below. If unused, the losses
are set to expire throughout the period 2011 to 2027, with the most significant portion of these
losses expiring during the period 2018 through 2022.
At December 31, 2010 and 2009, Cooper has a foreign deferred tax asset of approximately $1.1
billion and $1.3 billion, respectively, relating to a net operating loss carryforward that was
approved by a foreign jurisdiction in September 2009. Although this net operating loss
carryforward has an indefinite life, a corresponding valuation allowance for the same amount was
recognized because management believes at this time it is more likely than not that the deferred
tax asset will not be realized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Cooper has unrecognized tax benefits of $35.1 million and $35.0 million at December 31, 2010
and 2009, respectively. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
Approximately $30.2 million of unrecognized tax benefits, if recognized, would favorably
impact the effective tax rate. Cooper believes it is reasonably possible that additional tax
benefits in the range of approximately $4.0 to $9.0 million could be recognized during the next 12
months as audits close and statutes expire.
Cooper recognizes interest and penalties accrued related to unrecognized tax benefits in
income tax expense. During the years ended December 31, 2009 and 2008, Cooper recognized a net
reduction to income tax expense of $1.1 million and $0.9 million in interest and penalties,
respectively. In 2010 there was no net reduction to income tax expense related to interest and
penalties. Cooper had $9.5 million and $9.5 million in interest and penalties accrued at December
31, 2010 and 2009, respectively.
NOTE 17: PENSION AND OTHER POSTRETIREMENT BENEFITS
Cooper and its subsidiaries have numerous defined benefit pension plans and other
postretirement benefit plans. The vast majority of Cooper’s defined benefit pension plans no
longer provide future benefit accruals. Cooper recognized a curtailment loss in the third quarter
of 2008 as a result of ceasing future benefit accruals for two defined benefit plans in the United
Kingdom. 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 83% 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. The measurement date for all plan
disclosures is December 31.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The funded status of defined benefit pension plans segregated between plans with plan assets
(“Funded Plans”) and without plan assets (“Unfunded Plans”) consist of:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets
of defined benefit pension plans with accumulated benefit obligations in excess of plan assets were
$620.7 million, $619.8 million and $503.5 million, respectively as of December 31, 2010 and $689.0
million, $678.2 million and $510.8 million, respectively at December 31, 2009.
Net periodic benefit cost in 2011 is expected to be $9.3 million for pension benefits and
$(1.5) million for other postretirement benefits. The estimated net loss and prior service cost
credit for the defined benefit pension plans that will be amortized from accumulated other nonowner
changes in equity into net periodic benefit cost over the next fiscal year are $19.8 million and
$(2.7) million, respectively. The
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) estimated net gain and prior service credit for the other
postretirement plans that will be amortized from
accumulated other nonowner changes in equity into net periodic benefit cost over the next
fiscal year are $(3.2) million and $(2.0) million, respectively.
Cooper’s overall pension investment strategy is to maximize the total rate of return
(income and appreciation) after inflation, within the limits of prudent risk taking and the Prudent
Man Rule of ERISA. The investments of the various pension plans shall be adequately diversified
across asset classes to achieve an optimal balance between risk and return and between income and
growth of assets through capital appreciation. Pension assets will be structured to consider
growth objectives, funded status, liability duration and short-term liquidity requirements.
Overall, Cooper’s pension plans target an asset allocation mix of approximately 65% in equity
portfolios which are invested primarily in index funds expected to mirror broad market returns for
equity securities or in assets with characteristics similar to equity investments. The remaining
assets in the portfolio are primarily invested in corporate and government bond index funds with
maturities similar to the duration of the pension liability.
Cooper’s overall expected long-term rate of return on assets assumption is based upon (i) a
long-term expected inflation rate, (ii) long-term expected stock and bond market risk premiums over
the expected inflation rate and (iii) a target allocation of equity and fixed income securities
that will generate the overall expected long-term rate of return.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The fair value measurements of Cooper’s pension assets at December 31, 2010 are as follows:
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COOPER INDUSTRIES PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The fair value measurements of Cooper’s pension assets at December 31, 2009 were as foll | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||