Document 3JNLKnk0eyn8eRRpwoGOL1yBn

SECURITIES AND EXCHANGE COMMISSION Washington, D C 20549 FORM 10-K (Mark One) ^ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-1175 Cooper Industries, Inc. (Exact Name of Registrant as Specified m Its Charter) Ohio (State or Other Jurisdiction of Incorporation or Organization) 31-4156620 (IRS Employer Identification Number) 600 Travis, Suite 5800, Houston, Texas (Address of Principal Executive Offices) 77002 (Zip Code) 713/209-8400 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $5 par value Rights to Purchase Preferred Stock Name of Each Exchange on Which Registered The New York Stock Exchange Pacific Exchange The New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No 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 m Part HI of this Form 10-K or any amendment to this Form 10-K X The aggregate value of the registrant's voting stock held by non-affiliates of the registrant as of January 31, 2002 was $3,345,382,140 75 Number of shares outstanding of registrant's Common Stock as of January 31, 2002 - 93,851,135 DOCUMENTS INCORPORATED BY REFERENCE Cooper Industries, Inc Proxy Statement to be filed for the Annual Meeting of Shareholders to be held on April 5,2002 (Part III - Items 10, 11 and 12) SCF-ABEX-3400 i ABEX- 216.401 TABLE OF CONTENTS Page Parti Item 1 Item 2 Item 3 Item 4 Business ............ . Properties . .. . . ... Legal Proceedings. . ... ... . Submission of Matters to a Vote of Security Holders . -2 2 8 9 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Selected Financial Data .. . .11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12 Item 7A Quantitative and Qualitative Disclosures about Market Risk . . 24 Item 8 Financial Statements and Supplementary Data .. 24 Item 9 Changes m and Disagreements with Accountants on Accounting and Financial Disclosures ........................ .24 Part HI Item 10: Directors and Executive Officers of the Registrant................. . ... Item 11 Executive Compensation .. .. Item 12 Security Ownership of Certain Beneficial Owners and Management Item 13 Certain Relationships and Related Transactions........................ .... 24 24 24 24 Part IV Item 14 Exhibits, Fmancial Statements Schedules, and Reports on Form 8-K .. 25 PARTI ITEM 1. BUSINESS; ITEM 2. PROPERTIES GENERAL The term "Cooper" refers to the registrant, Cooper Industries, Inc , which was incorporated under the laws of the State of Ohio on January 8, 1919 Cooper operates in two busmess segments Electrical Products and Tools & Hardware Cooper manufactures, markets and sells its products and provides services throughout the world Cooper has manufacturing facilities m 21 countries and currently employs approximately 30,500 people On December 31, 2001, the plants and other facilities used by Cooper throughout the world contained an aggregate of approximately 20,192,100 square feet of space, of which approximately 72 percent was owned and 28 percent was leased The charts on the next page show the number of employees, square footage of facilities owned and leased and location of manufacturing facilities for each industry segment Certain equipment and production facilities have been financed by industrial revenue bonds issued by local government authorities and are subject to security arrangements customary in such financings 2 Square Footage o f Plants and Facilities N um ber and N ature o f Facilities____________ oo ooto Ooon^ v0V0oN^ VVOOo 00* 'tar oO or~ 'O o ooo VooO oS3 rmITo) VoOo VooO <N es ->a s .2 3 i--ai .Si * a.U (2 'O963* C C3 V <i <* <Aza 2 ON - I m OO f- 00 <N o^ -4Q^> sC Eg sS 2W o VO vo cn' <N o*T) VO vo" o <s oo o Oa * ot-l 'O H a, o $5 5s3 oOO4J>J 00 oO O H Vh d VO oo os O, O<0 <D T13> I C o O 13b <N c to^ 00 o' C0 m 13 C<DO O *73 o a CuO O Cl oi< 2 o3 Hs ao o hJ c+J a A js .y mE 5 Cp/} S tb| a w &2 i* O- jaa L*3" so W w 43 H H<u3 gua p c c aOJ. V4I) <N <N CN ON r- Tj" VO cO </> 2 ts o<u ^oa ; s-h W Ph <D S ^ o c3 HK Total CO Operations in the United States are conducted by unincorporated divisions and wholly-owned subsidiaries of Cooper, organized by the two business segments Activities outside the United States contribute significantly to the revenues and operating earnings of both segments of Cooper These activities are conducted m major commercial countries by wholly-owned subsidiaries and jointly-owned companies, the management of which is structured through Cooper's two busmess segments As a result of these international operations, sales and distribution networks are maintained throughout most of the industrialized world Cooper generally believes that there are no substantial differences m the busmess risks associated with these mtemational operations compared with domestic activities, although Cooper is subject to certain political and economic uncertainties encountered m activities outside the United States, mcludmg trade barriers, restrictions on foreign exchange and currency fluctuations As the U S dollar strengthens against foreign currencies at a rate greater than inflation in those countries, Cooper may experience lower segment revenues and operatmg earnings The five countries m which Cooper generates the most mtemational revenues are Canada, Germany, France, Mexico and the United Kingdom Cooper has operations in India and Malaysia and has several joint ventures with operations in China Investments m India, Malaysia and China are subject to 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 subsidiaries Financial information with respect to Cooper's industry segments and geographic areas is contamed in Note 15 of the Notes to Consolidated Financial Statements A discussion of acquisitions and divestitures is included in Notes 2, 3, 7 and 17 of the Notes to Consolidated Financial Statements With its two busmess segments, Cooper serves three major markets industrial, construction and electrical power distribution Markets for Cooper's products and services are worldwide, though the Umted States is the largest market Within the United States, there is no material geographic concentration by state or region Cooper experiences substantial competition in both of its busmess segments The number and size of competitors vary considerably dependmg on the product line Cooper cannot specify with exactitude the number of competitors m 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 price, quality, brand name and availability Cooper considers its reputation as a manufacturer of a broad lme of quality products and premier brands to be an important factor in its businesses Cooper believes that it is among the leadmg manufacturers m the world of electrical distribution equipment, wiring devices, support systems, hazardous duty electrical equipment, emergency hghtmg, lighting fixtures, fuses, nonpower hand tools and industrial power tools Cooper's research and development activities are for purposes of improving existmg products and services and ongmatmg new products During 2001, approximately $55 8 million was spent for research and development activities as compared with approximately $57 7 million in 2000 and $54 0 million in 1999 Cooper obtains and holds patents on products and designs in the United States and many foreign countries where operations are conducted or products are sold Although m the aggregate Cooper's patents are important m the operation of its busmesses, 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 spendmg or earnings during 2002 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 mto the environment Orders and decrees consented to by Cooper have contamed agreed-upon timetables for fulfilling reporting or remediation obligations or maintaining specified air and water discharge levels m 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 7 of the Notes to Consolidated Financial Statements 4 Approximately 54% of the United States hourly production work force of Cooper is employed in 49 manufacturing facilities, distribution centers and warehouses not covered by labor agreements Numerous agreements covermg approximately 46% of all hourly production employees exist with 24 bargaining units at 24 operations m the Umted States and with various unions at 30 mtemational operations During 2001, new agreements were concluded covermg hourly production employees at 7 operations in the United States Cooper considers its employee relations to be excellent Sales backlog at December 31, 2001 was approximately $308 million, all of which is for delivery during 2002, compared with backlog of approximately $456 million at December 31, 2000 Cooper's financial condition and performance are subject to various risks and uncertainties mcludmg, but not limited to (1) the condition of the domestic economy and European and Latin American markets, (2) spending on commercial and residential construction and by utilities, (3) worldwide energy-related project spending, (4) demand for products m the electronics and telecommunications markets, (5) raw material and energy costs, (6) mix of products sold, (7) realization of benefits of cost reduction programs, (8) competitive conditions, (9) the relationship of the U S dollar to the currencies of countries in which Cooper does business, and (10) mergers and acquisitions and their integration mto Cooper 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 on the table at the end of this Item. Information concerning market conditions, as well as information concemmg revenues and operatmg eammgs for each segment, is mcluded under "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations " Electrical Products The Electrical Products segment manufactures, markets and sells electrical and circuit protection products, mcludmg fittings, support systems, enclosures, wiring devices, plugs, receptacles, lighting fixtures, fuses, emergency lighting, fire detection systems and security products for use m residential, commercial and industrial construction, maintenance and repair applications The segment also manufactures, markets and sells products for use by utilities and m industry for electrical power transmission and distribution, mcludmg distribution switchgear, transformers, transformer terminations and accessones, capacitors, voltage regulators, surge arresters, pole lme hardware and other related power systems components The prmcipal raw material requirements mclude copper, tin, lead, plastics, insulating materials, pig iron, aluminum ingots, steel, aluminum and brass These raw matenals are available from and supplied by numerous sources located m the United States and abroad Demand for Electrical Products follows general economic conditions and is generally sensitive to activity in the construction market, industrial production levels, electronic component production and spending by utilities for replacements, expansions and efficiency improvements The segment's product lmes are marketed directly to original equipment manufacturers and utilities and to a variety of end users through major distributor chains, retail home centers and thousands of independent distributors Tools & Hardware The Tools & Hardware segment manufactures, markets and sells hand tools for industrial, construction and consumer markets, automated assembly systems for industrial markets, and electric and pneumatic industrial power tools for general industry, primarily automotive and aerospace manufacturers 5 The principal raw material requirements mclude flat and bar stock steel, brass, copper, tm plate, fiberglass, aluminum, iron castings, wood, plastic pellets and plastic sheet These materials are available from and supplied by numerous sources m the Umted States and abroad Demand for nonpowered hand tools, assembly systems and industrial power tools is driven by employment levels and industrial activity in major industrial countries and by consumer spending In addition, demand for industrial power tools is influenced by automotive and aerospace production The segment's products are sold by a company sales force, independent distributors and retailers 6 COOPER INDUSTRIES, INC. PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT Electrical Products Major Products and Brands* Arktite plugs and receptacles Arrow-Hart wiring devices AtLite indoor commercial lighting B-Line support systems, enclosures, fasteners Blessing, CSA, Pretronica and Univel emergency lighting and power systems Bussmann and Buss electrical and electronic fuses Cam-Lok electrical connectors Capri-Codec cable accessories and flexible conduits CEAG emergency lighting systems Champ and Hazard-Gard HID and fluorescent lighting Coiltronics inductors and transformers Combined Technologies current-limiting fuses Condulet fittings and outlet bodies Cooper Power Systems distribution transformers, power capacitors, voltage regulators, surge arresters, pole line hardware and SCADA master stations Cooper Wiring Devices circuit protective devices Corehte and Neo-Ray indirect lighting products Crompton lighting fixtures and specialty lamps Crouse-Hinds and CEAG electrical construction materials and Crouse-Hinds aviation lighting products DLS electrical wiring and control systems Eagle wiring devices, sockets and switches Edison and Edison Pro relays Eletromec DIN style fuses Emerald consumer recessed and track lighting EMSA power transformers EnKlosures electrical enclosures Envirotemp dielectric fluids Fail-Safe high abuse, clean room and vandal-resistant lighting fixtures Fulleon, Nugelec and Transmould fire detection systems Fusetron electric fuses and protectors Halo recessed and track lighting fixtures Ins lighting systems JSB, Lummox and Menvier emergency lighting and fire detection systems Karp, Edison, Mercury and B&S electrical fuses Kearney fuses, connectors, tools and switches Kyle distribution switchgear Low-Peak electric fuses Lumiere specification grade landscape lighting Magnum terminal strips and disconnect blocks McGraw-Edison and Lumark indoor and outdoor lighting Metalux fluorescent lighting Mini-Line molded-to-cable miniature connectors Molded Products connectors and systems MWS modular wiring systems Myers electrical hubs NOVA reclosers, sectionalizers and switches Optiance fiber optic lighting Portfolio architectural recessed lighting Posi-Lok electrical panel units Powerplus panel boards PowerStor carbon aerogel supercapacitors Regalsafe signaling and life savmg apparatus Regent security lighting systems Royer wiring devices, sockets and switches McGraw-Edison and RTE transformer components, cable accessories and fuses Scantronic and Menvier security systems Shaper specification and commercial grade lighting fixtures SpecOne controls, lighting, plugs and receptacles Streetworks outdoor lighting Sure-Lites and AtLite exit and emergency lighting Terminator metal clad cable connectors Thepitt electrical outlet and switch boxes TransX transient voltage protection devices UltraSIL surge arresters USL sports lighting WiUsher & Quick electrical enclosures Tools & Hardware Major Products And Brands* Airetool, Assembly Systems, Buckeye, Cleco, Cooper Automation, DGD, Doler, Dotco, Gardner-Denver, GardoTrans, Quackenbush, Rotor Tool and Recoules industrial power tools and assembly equipment Apex and Geta screwdriver bits, impact sockets and universal jomts Campbell chain products Crescent pliers and wrenches Diamond farrier tools and horseshoes Erem precision cutters and tweezers Kahnetics dispensmg systems KME industrial tools and machines Lufkin measuring tapes Master Power industnal air tools Metronix servos and dnve controls Nicholson files and saws Plumb hammers Utica torque measuring and controls Weller soldering equipment Wire-Wrap solderless connection equipment Wiss and H.K. Porter cutting products Xcehte screwdrivers and nutdnvers * Brand names appearing m bold type are registered trademarks in the United States or abroad of Cooper Industries, Inc or its subsidiaries, except the following which are unregistered trademarks Assembly Systems, AtLite, Blessing, B&S, Capn-Codec, Combined Technologies, Cooper Automation, Cooper Wiring Devices, Corehte, CSA, DLS, Edison Pro, EnKlosures, Geta, HazardGard, KME, Lummox, Metronix, Mini-Line, Molded Products, Myers, Neo-Ray, Nugelec, Optiance, Portfolio, Powerplus, PowerStor, Pretronica, Regalsafe, SpecOne, Streetworks, Terminator, Thepitt, Transmould, TransX, Univel, USL and WiUsher & Quick Gardner-Denver is a registered trademark of Gardner Denver Machinery Inc and is used by Cooper Industries under license 7 COOPER INDUSTRIES, INC. PRODUCTS, MARKETS AND DISTRIBUTION METHODS BY SEGMENT - (Continued) ELECTRICAL PRODUCTS Major Markets Fuses and circuit protection products are sold to end-users in the construction, industrial, automotive and consumer markets and to manufacturers m the electrical, electronic, telecommunications and automotive industries Lightmg fixtures are utilized m residential construction, industrial, institutional and commercial building complexes, shopping centers, parking lots, roadways, and sports facilities Electrical power products are used by utilities and significant commercial and industrial power users Electrical construction matenals are used m commercial, residential and industrial projects, by utilities, airports and wastewater treatment plants and in the process and energy industries Emergency lightmg, fire detection and security systems are installed m residential, commercial and industrial applications Support systems and enclosures are used in industrial, commercial and telecommunications complexes Wiring devices are used m the construction, renovation, maintenance and repair of residential, commercial, industrial and institutional buildings Principal Distribution Methods Products are sold through distributors for use m general construction, plant maintenance, utilities, process and energy applications, shoppmg centers, parking lots, sports facilities, and data processmg and telecommunications systems, through distributors and direct to manufacturers for use m 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 TOOLS AND HARDWARE Major Markets Power tools and assembly systems are used by general industrial manufacturers, particularly durable goods producers and original equipment manufacturers, such as those m the aerospace and automobile industries Hand tools are used in a variety of industrial, electronics, agricultural, construction and consumer applications Principal Distribution Methods Products are sold through distributors and agents to general industry, particularly automotive and aircraft, through distributors and wholesalers to hardware stores, home centers, lumberyards, department stores and mass merchandisers, and direct to original equipment manufacturers, home centers, specialty stores, department stores, mass merchandisers and hardware outlets ITEM 3. LEGAL PROCEEDINGS Cooper is subject to various suits, legal proceedings and claims that arise m the normal course of business While it is not feasible to predict the outcome of these matters with certainty, management is of the opmion that then ultimate disposition should not have a future additional material adverse effect on Cooper's financial statements. In October 1998, Cooper sold its Automotive Products business to Federal-Mogul Corporation ("Federal-Mogul") These discontmued businesses (including the Abex product lme obtained from Pneumo- 8 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 compames, including liabilities related to the Abex 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 and mdicated that Federal-Mogul may not honor the indemnification obligations to Cooper As of the date of this filing, Federal-Mogul had not yet made a decision whether to reject the 1998 Agreement, which includes the indemnification to Cooper If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of its future obligations under the 1998 Agreement, including specific indemnities relating to payment of taxes and certain obligations regarding insurance for its former Automotive Products busmesses To the extent Cooper is obligated to Pneumo for any asbestos-related claims arising from the Abex product line ("Abex Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for such claims Based on information provided by representatives of Federal-Mogul, from August 28, 1998 through December 31, 2001, a total of 75,152 Abex Claims were filed, of which 16,974 claims have been resolved leaving 58,178 Abex Claims pendmg at December 31, 2001, that are the responsibility of Federal-Mogul Since August 28, 1998, the average indemnity payment for resolved Abex Claims was $908 before insurance A total of $25 5 million was spent on defense costs for the period August 28, 1998 through December 31, 2001 Historically, existing insurance coverage has provided 50% to 80% of the total defense and indemnity payments for Abex Claims Since the October 1, 2001 bankruptcy filing by Federal-Mogul through December 31, 2001, a total of 3,541 Abex Claims have been filed With the assistance of independent advisors, Cooper has completed a thorough analysis of its potential exposure for asbestos liabilities m the event Federal-Mogul rejects the 1998 Agreement At this time, the manner m which this issue ultimately will be resolved is not known Based on Cooper's analysis of its contmgent liability exposure resultmg from Federal-Mogul's bankruptcy. Cooper concluded that an additional fourth-quarter 2001 discontinued-operations provision of $30 million after-tax, or $.32 per share, was appropriate to reflect the potential net financial impact of this issue This conclusion is based on a review of the Abex claims history, existmg insurance coverage, the contractual indemnities and other facts determined to date Cooper is preserving its rights as a creditor for breach of Federal-Mogul's indemnification to Cooper and its rights against all Federal-Mogul subsidiaries Cooper mtends to take all actions to seek a resolution of the indemnification issues and future handling of the Abex-related claims within the Federal-Mogul bankruptcy proceedings ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of the shareholders 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Cooper's Common Stock (symbol - CBE) is listed on the New York Stock Exchange and the Pacific Exchange Options for Cooper's Common Stock are listed on the American Stock Exchange As of January 31, 2002 there were 27,193 record holders of Cooper's Common Stock The high and low quarterly sales price for the past two years of Cooper's Common Stock, as reported by Dow Jones & Company, Inc , are as follows 2001 2000 High Low High Low 1 $47 6900 32 0000 $43 8125 29 3750 Quarter 2 $41 1700 31 6100 $37 7500 30 8750 3 $60 4500 33 6000 $37 5625 30 8750 4 $45 5700 34 5000 $47 0000 33 3125 Annual cash dividends declared on Cooper's Common Stock during 2001 and 2000 were $1 40 a share ($ 35 a quarter) On February 12, 2002, the Board of Dnectors declared a quarterly dividend of $ 35 a share (or $1 40 on an annualized basis), which will be paid April 1, 2002 to shareholders of record on March 1, 2002 10 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, 2001 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 INCOME STATEMENT DATA Revenues Income from contmumg operations Income from discontinued operations (Automotive Products), net of taxes Net mcome INCOME PER COMMON SHARE DATA Basic - Income from contmumg operations Income from discontinued operations (Automotive Products) Net mcome Diluted Income from continuing operations Income from discontinued operations (Automotive Products) Net income BALANCE SHEET DATA (at December 31) Total assets Long-term debt, excluding current maturities Shareholders' equity CASH DIVIDENDS PER COMMON SHARE 2001 $4,209 5 $ 261 3 C30 O') $ 231 3 Years Ending December 31, 2000 1999 1998 (in millions, except per share data) $4,459 9 $3,868 9 $3,651 2 $ 357 4 $ 3319 $ 335 9 -- $ 357 4 -- $ 331 9 87 1 $ 423 0 $ 2 78 ( 32) $ 2.46 $ 3 82 -- $ 3 82 $ 3 53 -- $ 3 53 $ 2 97 77 $ 3.74 $ 2 75 ( 31) $ 2.44 $ 3 80 -- $ 3.80 $ 3 50 -- $__ 3,50 $ 2 93 76 $ 3.69 $4,611 4 1,107 0 2,023 2 $ 140 $4,789 3 1,300 8 1,904 2 $ 140 $4,143 4 894 5 1,743 1 $ 1 32 $3,779 1 774 5 1,563 6 $ 132 1997m $3,415 6 $ 3100 84 6 $ 394 6 $ 2 64 72 $ 3.36 $ 2 57 69 $5,507 3 1,272 2 2,683 5 $ 1 32 (1) Includes the results of the Kirsch window treatment operation for the five-month penod ended May 30, 1997 Kirsch was sold to Newell Co on May 30, 1997 In October 1998, Cooper sold its Automotive Products segment for $1 9 billion m proceeds The financial information in the above table excludes the 1998 and 1997 results of the Automotive Products segment from income from contmumg operations The discontinued segment's results are presented separately m the caption, "Income from discontinued operations (Automotive Products), net of taxes " A $30 million charge, net of a $20 million mcome tax benefit was recorded m 2001 related to potential asbestos obligations associated with the Automotive Products segment See Note 3 of Notes to Consolidated Financial Statements 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, mcludes certain forward-looking statements The forward-looking statements reflect Cooper's expectations, objectives and goals with respect to future events and financial performance, and are based on assumptions and estimates which Cooper believes are reasonable Forward looking statements mclude, but are not limited to, statements regarding facility consolidations and costreduction programs, resolution of mcome tax matters, potential liability exposure resulting from FederalMogul Corporation's bankruptcy filing and any statements regardmg future revenues, earnings, cash flows and capital expenditures Cooper wishes to caution readers not to put undue reliance on these statements and that actual results could differ materially from anticipated results Important factors which may affect the actual results mclude, but are not limited to, the resolution of Federal-Mogul's bankruptcy proceedings, political developments, market and economic conditions, changes in raw material and energy costs, industry competition, the net effects of Cooper's cost-reduction programs, changes m financial markets including foreign currency rate fluctuations and changing legislation and regulations The forward-looking statements contained m this report are intended to qualify for the safe harbor provisions of Section 2 IE of the Securities Exchange Act of 1934, as amended Critical Accounting Policies and Estimates The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to management's discussion and analysis The preparation of financial statements m conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contmgent assets and liabilities Cooper believes the following critical accounting pohcies mvolve additional management judgement due to the sensitivity of the methods, assumptions and estimates necessary m determining the related asset and liability amounts Cooper recognizes revenues in accordance with invoice terms, typically when products are shipped and accmals 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, additional allowances may be required Cooper provides estimated inventory allowances for slow-moving and obsolete inventory based on current assessments about future demands, market conditions and related management initiatives If market conditions are less favorable than those projected by management, additional inventory allowances may be required Cooper has recorded a valuation allowance to reduce its deferred tax asset related to a capital loss carryforward on the sale of the Automotive Products segment Cooper limited the amount of tax benefits recognizable from this asset based on an evaluation of the amount of capital loss carryforward that is expected to be ultimately realized An adjustment to mcome could be required if Cooper determined it could realize this deferred tax asset m excess of the net recorded amount or it would not be able to realize all or part of its net deferred tax asset Pension assets and liabilities are determined on an actuarial basis and are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and discount rates Actual changes m 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 The postretirement benefits other than pensions liability is also determined on an actuarial basis and is affected by assumptions mcludmg the discount rate and expected trends in health care costs Changes m the discount rate and differences between actual and expected health care costs will affect the recorded amount of postretirement benefits expense Environmental liabilities are accmed based on estimates of known environmental remediation exposures The liabilities mclude accmals for sites owned by Cooper and third-party sites where Cooper was 12 determined to be a potentially responsible party Third party sites frequently mvolve 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 are adversely affected, Cooper's estimate of its environmental liabilities may change As discussed in Note 3 of the Notes to Consolidated Financial Statements, Cooper has accrued its best estimate of its potential liabilities in the event Federal-Mogul rejects the 1998 Purchase and Sale Agreement for the sale of the Automotive Products business, which includes certain indemnification obligations to Cooper The analysis of Cooper's contingent liability exposure for asbestos-related claims involving Abex products was conducted with assistance from independent advisors and assumes future resolution of the Abexrelated asbestos claims within the Federal-Mogul bankruptcy proceedmg Factors used m determining the liability mclude Abex claims history and existmg insurance coverage To the extent additional information arises or strategies change, it is possible that Cooper's estimate of its contmgent liability may change Results of Operations Revenues Electrical Products Tools & Hardware Total Revenues Year Ended December 31, 2001 2000 1999 (m millions) $ 3,485 5 724 0 $ 3,659 2 800 7 $ 3,060 9 808 0 $ 4,209 5 $ 4,459 9 $ 3,868 9 2001 vs 2000 Revenues Revenues decreased 6% m 2001 compared to 2000 Excludmg the effects of recent acquisitions and a 1% reduction m revenues due to foreign currency translation, revenues were down 8% from 2000 Weakemng global economies affected demand in virtually all of Cooper's busmesses. Electrical Products segment revenues, which represent 83% of 2001 total revenues, were 5% below 2000 Excludmg recent acquisitions and a 1% decline related to a stronger U S dollar, segment revenues were down 8% from 2000 Revenues m the hazardous-duty electrical products business improved modestly, reflecting mcreased capital spending in the energy and petrochemical sectors Sales of electrical and electronic circuit protection and telecommunications systems equipment were impacted by the significant slowmg m the telecommunications and electronics markets Weak industrial markets, coupled with inventory reduction programs in both distribution and retail market channels, and a slowdown in construction activity impacted all of the busmesses In addition, utility spendmg remamed cautious m light of the overall economic uncertainty The Tools & Hardware segment contributed 17% of total revenues m 2001 Revenues were 10% below the prior year as the slowdown m industrial, electronic and automotive markets reduced demand for the segment's products The impact of translation reduced revenues for 2001 by approximately 2% 13 2000 vs 1999 Revenues Revenues rose 15% in 2000 compared to 1999 Excluding the effects of acquisitions, revenues were slightly ahead of the prior year period Revenues, excludmg acquisitions and the impact of foreign currency translation, grew 2% compared to 1999 Electrical Products segment revenues represent 82% of 2000 revenues and rose 20% over 1999 Excludmg the impact of acquisitions, segment revenues were up 1% compared to 1999 By further excluding the impact of foreign currency translation, revenues for the Electrical Products segment grew 2% over 1999 Contmued strong demand for circuit protection and electronic power management products, along with solid growth m lighting products drove core busmess revenue gams compared to 1999, partially offset by declines in hazardous duty construction material sales which were impacted by delayed recovery m energy markets The Tools & Hardware segment contributed 18% of total revenues m 2000 Revenues were 1% below the prior year The impact of translation reduced revenues for 2000 by approximately 3% Segment Operating Earnings Cooper measures the performance of its busmesses exclusive of nonrecurring gains and charges and financing expenses All costs directly attributable to operating busmesses are included m segment operating eammgs Corporate overhead costs, including costs of centrally managed functions, such as treasury, are not allocated to the busmesses See Note 15 of the Notes to Consolidated Financial Statements Segment Operating Earnings (internal management reporting excludes nonrecurring charges) 2001 Year Ended December 31, 2000 (in millions) 1999 Electrical Products Tools & Hardware Total Segment Operating Earnings $ 437 0 68 6 $ 505 6 $ 585 0 97 7 $ 682 7 $ 516 7 97 9 $ 614 6 Nonrecurring Charges Electrical Products Tools & Hardware Continuing Segments Kirsch Total $ (24 0) - (24 0) - $ (24 0) $- $- $ (3 0) (4 3) (7 3) 28 $ (4 5) Segment Operating Earnings (generally accepted accounting principles - includes nonrecurring charges) Electncal Products Tools & Hardware Continuing Segment Operating Earnings Kirsch Total Segment Operating Eammgs $ 413 0 68 6 481 6 - $ 481 6 $ 585 0 97 7 682 7 - $ 682 7 $ 513 7 93 6 607 3 28 $ 6101 14 Historically, Kirsch was part of the Tools & Hardware segment Effective with the decision to divest this operation, its results were segregated from the continuing Tools & Hardware segment for mtemal management reporting 2001 Segment Operating Earnings Excluding Nonrecurring Charges vs 2000 Segment operating earnings decreased 26% to $505 6 million from $682 7 million m 2000 Excluding the impact of recent acquisitions, segment earnings decreased 27% from the prior year Electrical Products segment operating earnings declmed 25% to $437 0 million from $585 0 million in 2000 Excludmg the incremental effect of acquisitions, segment operating earnings were down 27% compared to the prior year The reduction m operatmg earnings reflects lower sales volume, competitive market conditions and manufacturing inefficiencies resulting from adjustmg production levels to match demand As a result, return on revenues was 12 5% m 2001 compared with 16 0% in 2000 Excludmg recent acquisitions, the return on revenues was 12 9% m 2001 compared with 16 0% in 2000 The Tools & Hardware segment operating earnings were $68 6 million compared to $97 7 million m 2000 Segment earnings for 2001 were impacted by lower revenues and related manufacturing inefficiencies Return on revenues was 9 5% m 2001 compared to 12 2% in 2000 2000 vs 1999 Segment Operating Earnings Excluding Nonrecurring Charges Segment operating earnings grew 11% to $682 7 million in 2000 compared to $614 6 million m 1999 Excluding the impact of acquisitions, segment earnings in 2000 were up 1% over 1999 The Electrical Products segment operatmg earnings rose 13% to $585 0 million from $516 7 million for 1999 Excludmg acquisitions, segment earnings were up 1% compared to 1999 The earnings increase was driven mainly by strong demand for circuit protection products from telecommunications and electronic markets and productivity improvements across most busmess units This mcrease was partially offset by the slower demand for hazardous duty construction materials Excludmg acquisitions, return on revenues for the Electrical Products segment was 17 0% m 2000 compared with 16 9% m 1999, reflecting Cooper's continued focus on cost reduction and efficiency improvements The Tools & Hardware segment operatmg earnings were $97 7 million compared to $97 9 million m 1999 Acquisitions contnbuted 2% to operatmg earnings in 2000 compared to 1999 Earnings for 2000 were impacted by shghtly lower revenues and expenses related to plant consolidations and other rationalization activities Excludmg acquisitions, return on revenues was 12 1% m 2000 as Cooper contmued to rationalize its Tools & Hardware operations Nonrecurring Charges During the fourth quarter of 2001, Cooper committed to the consolidation or closure of certain Electrical Products segment facilities and recorded a provision for severance and other related costs of these announced actions of $7 1 million In addition, the Company concluded during 2001 that various Electrical Products segment assets comprising $8 5 million of net book value provided no future benefit to Cooper and were therefore fully impaired Also during the 2001 fourth quarter, Cooper recorded a charge of $8 4 million to provide for the costs of assimilation of certain separate product lmes rendered partially duplicative as a result of previous Electrical Products segment business acquisition activities The 2001 fourth quarter nonrecurring charge for the Electrical Products segment totals $24 0 million During the fourth quarter of 2001, Cooper recorded a General Corporate nonrecurring charge of $50 1 million Cooper concluded that the net book values of certain software, hardware and other technology investments were impaired, m consideration of ongomg refinement and development of Company information and technology systems capabilities Also during the 2001 fourth quarter, Cooper provided for the costs associated with performing the Company's review of strategic alternatives 15 The nonrecurring charges for 2001 total $74 1 million, or $44 5 million after taxes ($ 47 per diluted share) Of the total $74 1 million, $35 2 million remams to be expended at December 31, 2001 Future cash expenditures agamst the accrual include severance and exit costs related to facility consolidations and costs associated with the Company's review of strategic alternatives A total of 77 salaried and 196 hourly positions will be eliminated in 2002 as a result of these planned consolidation actions It is anticipated that all expenditures will be incurred during the first half of 2002 During the fourth quarter of 1998, Cooper announced a voluntary and involuntary severance program and committed to consolidate several facilities While both the voluntary and involuntary severance programs were announced m 1998, the amount that could be accrued in 1998 was limited to severance relating to personnel actually severed in the fourth quarter and the severance provided by Cooper's written formal policies During the first quarter of 1999, Cooper completed the voluntary program and accrued an additional $5 8 million primarily representing the voluntary severance program premium over the severance provided under Cooper's established policies Cooper also accrued $15 million related to severance and other costs for facility closures announced during the first quarter of 1999 The additional accruals during 1999 totaled $7 3 million In addition, during 1999, Cooper reduced legal accruals by $2 8 million related to the favorable settlement of certain litigation concerning lead m mini-blinds and reassessment of the required reserve Cooper also reached agreement and received $0 8 million under an insurance policy related to the unsuccessful offer to acquire TLG pic m 1998 Smce the original charge related to the litigation was included as a nonrecurring item m the Tools & Hardware segment and the costs related to TLG pic were reflected as a nonrecurring corporate item, the reversal of the accrual and the reimbursement of the expenses were reflected as nonrecurring items The net nonrecurring items for 1999 resulted in a $3 7 million charge before income taxes and resulted m an after-tax charge of $2 4 million ($ 02 per diluted common share) The following table reflects activity related to the first quarter 1999 and fourth quarter 1998 employee reduction and facility consolidation plan Balance at December 31,1998 Voluntary Severance Program premium over normal severance Facility closings announced Employees terminated Cash expenditures Balance at December 31, 1999 Employees terminated Cash expenditures Balance at December 31,2000 Employees terminated Cash expenditures Balance at December 31,2001 No of Employees 1,635 - 249 (966) 918 (311) 607 (607) - Accrued Severance Facility Consolidation (in millions) $ 25 4 $ 58 12 78 03 (22 0) (3 4) 10 4 47 -- (5 3) 51 (1 7) 30 -- _______ !L_ $- (3 0) $- As of December 31, 2001 all employee reduction and facility consolidation actions related to the first quarter 1999 and fourth quarter 1998 employee reduction and facility consolidation plans were essentially completed and amounts accrued for these programs have been satisfied See Note 2 of the Notes to Consolidated Financial Statements for additional information on nonrecurring charges 16 Other Income and Expenses Segment Operating Earmngs(1) General Corporate Nonrecurring Charges (Gains) Expense Interest Expense, net Income from Continuing Operations Before Income Taxes Income Tax Expense Income from Continuing Operations Charge Related to Discontinued Operations Net Income Diluted Earnings Per Share Income from Continuing Operations Charge from Discontinued Operations Net Income (l) Includes segment nonrecurring charges Year Ended December 31, 2001 2000 1999 (in millions, except per share data) $ 481 6 $ 682 7 $ 610 1 50 1 30 4 84 7 3164 55 1 261 3 (30 0) $ 231 3 - 32 5 100 3 549 9 192 5 357 4 - $ 357 4 (0 8) 37 1 55 2 5186 186 7 331 9 - $ 331 9 $ 2 75 (31) $ 244 $ 3 80 $ 3 80 $ 3 50 $ 3 50 General Corporate Nonrecurring Charges and Gains See the "Nonrecurring Charges" section above and Note 2 of the Notes to Consolidated Financial Statements General Corporate Expense General corporate expenses decreased $2 1 million m 2001 compared to 2000 General corporate expenses decreased $4 6 million m 2000 compared to 1999 Reductions in personnel, cost reduction efforts and lower employee benefit related costs were the primary contributors to the reductions Interest Expense, net Interest expense, net decreased m 2001 by $15 6 million from 2000 The decrease resulted from significantly lower average mterest rates and lower average debt levels in 2001 versus 2000 Interest expense, net mcreased m 2000 by $45 1 million compared to 1999 primarily as a result of additional borrowings to fund acquisitions and stock repurchases, partially offset by increased capitalized interest Income Tax Expense The effective tax rate for 2001 was 34 5% before both nonrecurring charges and a $50 million tax benefit due to the reversal of reserves as a result of recent favorable Appellate level third party court decisions related to certain mcome tax return issues See Note 12 of the Notes to Consolidated Financial Statements This represented a 0 5 percentage pomt decrease from the 2000 effective tax rate The effective tax rate for 2000 was 35%, a 1 0 percentage pomt decrease from the 1999 rate of 36%, excluding nonrecurring items The decreases m the effective tax rate resulted from mtemational tax planning efforts 17 Charge Related to Discontinued Operations A $30 million charge, net of a $20 million income tax benefit, was recorded in 2001 related to potential asbestos obligations regarding the Automotive Products segment which was sold m 1998 See Note 3 of the Notes to Consolidated Financial Statements Diluted Earnings Per Share Diluted earnings per share from continuing operations, excludmg after-tax nonrecurring charges of $44 5 million and a $50 million tax benefit due to the reversal of reserves as a result of recent favorable Appellate level third party court decisions related to certain tax return issues, was $2 69 in 2001 compared to $3 80 in 2000 Diluted earnings per share, excludmg after-tax nonrecurring charges of $2 4 million, was $3 52 in 1999 Percentage ofRevenues Cost of Sales Selling and Administrative . Year Ended December 31, 2001 2000 1999 69 9% 67 7% 67 3% 17 3% 16 4% 16 6% 2001 vs 2000 Percentage ofRevenues Cost of sales, as a percentage of revenues, increased 2 2 points over 2000 The increase m the cost of sales percentage was due to lower manufacturing volumes and the resultmg costs of production inefficiencies from adjusting manufacturing capacity Selling and administration expenses, as a percentage of revenues, mcreased nine tenths of a pomt This increase resulted primarily from lower than anticipated revenues partially offset by cost-reduction efforts throughout the year 2000 vs 1999 Percentage ofRevenues Cost of sales, as a percentage of revenues, m 2000 mcreased four tenths of a point from 1999 This mcrease was primarily due to the impact of acquisitions Excludmg the effect of acquisitions, cost of sales as a percentage of revenues improved three tenths of a pomt to 67 0%, compared to 67 3% for 1999 Selling and administrative expenses, as a percentage of revenues, decreased two tenths of a pomt from 1999 due to lower general corporate expense and the impact of acquisitions Earnings Outlook The following sets forth Cooper's general busmess outlook for 2002, based on current expectations Comments on changes m segment operating earnings are based on 2001 operatmg earnings adjusted to eliminate goodwill amortization to be comparable to 2002 See "Impact of New Accounting Standards" m Note 1 of the Notes to Consolidated Financial Statements Cooper expects revenues and operatmg earnings for the Electrical Products segment to be relatively unchanged from 2001 and return on sales to be approximately 14 percent Revenues for the Tools & Hardware segment are expected to be near the prior year levels and operatmg earnings are projected to decrease approximately 20 percent Return on sales is expected to be approximately 8 5 percent The above statements are forward looking, and actual results may differ materially The above statements are based on a number of assumptions, risks and uncertainties The primary economic assumptions mclude, without limitation (1) slow growth m the domestic economy during the first part of the year and modestly improving growth thereafter, (2) modest growth m European and Latin American markets, (3) a gradual improvement m worldwide energy-related project spendmg, (4) no significant change m raw matenal or energy costs, (5) realization of benefits of cost-reduction programs with no major disruptions from those programs currently underway, and (6) no significant adverse changes m the relationship of the U S dollar to the currencies of countries in which Cooper does busmess The estimates also assume, without limitation, no significant change m competitive conditions and such other risk factors as are discussed from time to time m Cooper's periodic filings with the Secunties and Exchange Commission 18 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, m some cases, meaningful Each segment produces a family of products, within which there exist considerable variations m size, configuration and other characteristics It is Cooper's judgment that, excluding the year-to-year effects of acquisitions and divestitures, unit volume decreased in the Electrical Products segment and decreased m the Tools & Hardware segment m 2001 During the three-year period endmg in 2001, Cooper was unable to mcrease prices to fully offset cost increases m selected product offerings in both segments Cooper has been able to control costs through strategic sourcing efforts, manufacturing improvements and other actions during this period so that the inability to mcrease prices has not significantly affected profitability m the segments Effect ofInflation During each year, inflation has had a relatively mmor effect on Cooper's results of operations This is true primarily for three reasons First, m recent years, the rate of inflation m Cooper's primary markets has been fairly low Second, Cooper makes extensive use of the LIFO method of accounting for inventories The LIFO method results m current inventory costs being matched agamst current sales dollars, such that inflation affects earnings on a current basis Finally, many of the assets and liabilities mcluded in Cooper's Consolidated Balance Sheets are recorded m connection with busmess combinations that are accounted for as purchases At the tune of such acquisitions, the assets and liabilities are adjusted to fair market value and, therefore, the cumulative long-term effect of inflation is reduced Liquidity and Capital Resources Operating Working Capital Forpurposes ofthis discussion, operating working capital is defined as receivables and inventories less accounts payable Cooper's operatmg working capital decreased $19 million from $1,065 6 million m 2000 to $1,046 6 million m 2001 Operatmg working capital turnover declmed from 4 5 turns m 2000 to 4 0 turns m 2001 Excludmg the impact of recent acquisitions, operatmg working capital turnover m 2001 was 4 2 turns The decrease from 2000 primarily reflects the lower than expected revenues experienced in 2001 In 2000, operatmg working capital mcreased $149 million compared to an mcrease of $135 million m 1999 The mcrease m operatmg working capital for 2000 was due to acquisitions made durmg the year Operatmg working capital turnover for 2000 was 4 5 turns, declining from 4 6 turns m 1999, also primarily due to acquisitions In 1999, operatmg working capital mcreased $135 million A majority of the mcrease resulted from acquisitions Operatmg working capital turnover for 1999 of 4 6 turns declmed from 5 0 turns in 1998 Higher operatmg working capital levels to support consolidation and cost-reduction programs m several businesses and the impact of a new busmess system implementation at one of the electrical product businesses offset the benefits from ongoing improvement programs 19 Cash Flows Net cash provided by operating activities m 2001 totaled $422 million These funds, along with $41 million in cash received from employee stock plan activity, were used to fund capital expenditures of $115 million, dividends of $ 131 million, share repurchases of $42 million, and a net reduction of debt of $206 million Net cash provided by operating activities m 2000 totaled $503 million These funds, along with a net $404 million of additional debt, were used to fund acquisitions of $580 million, capital expenditures of $175 million, share repurchases of $39 million and dividends of $131 million Net cash provided by operating activities in 1999 totaled $402 million These funds, along with $149 million in cash received from the disposition of the Automotive Products segment, $31 million m cash received from employee stock plan activity and a net increase m debt of $ 182 million were used to fund capital expenditures of $166 million, acquisitions of $435 million, share repurchases of $44 million and dividends of $124 million In connection with accounting for purchase busmess combmations, Cooper records, to the extent appropriate, accruals for the costs of closmg duplicate facilities, severing redundant personnel and integrating the acquired businesses mto existing Cooper operations At December 31, 2001, Cooper had accruals totaling $39 3 million related to these activities Cash flows from operating activities for each of the three years m the period ended December 31, 2001, is reduced by the amounts expended on the various accruals established in connection with each acquisition Cooper spent $110 million, $3 5 million and $4 8 million on these integration activities m 2001, 2000 and 1999, respectively See Note 7 of the Notes to Consolidated Financial Statements for further information Cooper is contmumg to focus on initiatives to maximize cash flows These actions mclude reduced capital spending, elimination of discretionary spendmg and workforce reductions As a result. Cooper currently anticipates a continuance of its long-term ability to annually generate approximately $200 million m cash flow available for acquisitions, debt repayment and common stock repurchases Debt and Other Contractual Obligations Cooper relies on commercial paper markets as its principal source of short-term financing As of December 31, 2001 and 2000, Cooper's outstanding commercial paper balance was $342 million and $492 million, respectively The weighted average mterest rate on these borrowings was 2 54% and 6 89% at December 31, 2001 and 2000, respectively Cooper's practice is to back up its outstanding commercial paper with a combmation of cash and committed bank credit facilities As of December 31, 2001, the balance of these committed bank credit facilities was $990 million, $440 million of which mature on May 30, 2002 and $550 million of which mature on November 17, 2004 By May 30, 2002, Cooper anticipates replacmg a substantial portion of the $440 million of maturing committed bank credit facilities Outstanding commercial paper balances, to the extent not backed up by cash, reduce the amount of available borrowings under the committed bank credit facilities The credit facility agreements require that Cooper maintain certain financial ratios, including a prescribed limit on debt as a percentage of total capitalization Cooper is m compliance with all covenants set forth m the credit facility agreements Cooper's access to the commercial paper market could be adversely affected by a change m the credit ratmgs assigned to its commercial paper Should Cooper's access to the commercial paper market be adversely affected due to a change m its credit ratings, Cooper would rely on a combination of available cash and its committed bank credit facilities to provide short-term funding The committed bank credit facilities do not contain any provision which makes their availability to Cooper dependent on Cooper's credit ratings 20 In October 2000, Cooper issued Euro 300 million five-year bonds The bonds bear interest at 6 25% and mature m October 2005 The proceeds from the borrowing were primarily used to repay outstanding commercial paper debt During 1999, Cooper completed a shelf registration statement to issue up to $500 million of debt securities At December 31, 2001, all $500 million of the shelf registration was available to be issued The following table summarizes Cooper's contractual obligations at December 31, 2001 and the effect such obligations are expected to have on its liquidity and cash flows in future periods Contractual Obligations Total Long-Term Debt Short-Term Debt Noncancellable Operating Leases $ 1,167 9 132 9 111 8 $ 1,412 6 Less than One Year $ 60 9 132 9 31 1 $ 224 9 Payments Due One to Three Years (in millions) $ 434 0 - 39 8 $ 473 8 Four to Five Years $ 543 8 - 22 6 $ 566 4 After Five Years $ 129 2 - 18 3 $ 147 5 Other Commitments Cooper executes letters of credit, performance bonds and other guarantees m the normal course of busmess that ensure Cooper's performance or payments to third parties The aggregate notional value of these instruments was $112 0 million at December 31, 2001 Seventy-nine percent of these instruments have an expiration date within one year In the past, no significant claims have been made agamst 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 Capitalization During the first quarter of 2000, Cooper's Board of Directors authorized the repurchase of up to five million shares of common stock As of December 31, 2001, there were 4 2 million shares available for repurchase under this authorization Cooper has resumed its share repurchase program during 2002 Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and intends to utilize cash flows to maintain a debt-to-capitahzation ratio within this range. Excess cash flows are utilized to purchase shares of Cooper's Common stock or fund acquisitions At December 31, 2001, 2000 and 1999, Cooper's debt-to-total capitalization ratio was 39 1%, 44 4% and 38 4%, respectively Capital Expenditures and Commitments Capital expenditures on projects to reduce product costs, improve product quality, increase manufacturing efficiency and operating flexibility, or expand product capacity were $115 million m 2001, $175 million in 2000 and $166 million in 1999 Capital expenditures declined in 2001 as Cooper entered the completion phase of several significant projects and focused on maximizing cash generation from its operations Accordmgly, Cooper's businesses concentrated on completing open projects and mvestmg only m operationally necessary new projects Capital expenditures for 2000 included expenditures for a large manufacturing facility m Mexico Capital expenditures for 1999 mcluded significant expenditures for new system implementations Capital expenditures for 2002 are projected to be approximately 10% less than the 2001 level Projected expenditures for 2002 will focus on development of new products and the contmued construction of additional manufacturing facilities in low cost locations The 2002 anticipated capital spendmg represents approximately 61% for various cost-reduction and capacity-maintenance projects, 21 including machinery and equipment modernization and enhancement, toolmg and computer hardware and software projects, 19% for new product development, 12% for capacity expansion, 4% related to environmental matters, and 4% for other items Interest Rate and Foreign Currency Risk Changes in interest rates and foreign currency exchange rates affect Cooper's earnings and cash flows As a result of havmg 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 foreign exchange rate changes on its cash flows and earnings Cooper enters mto foreign currency forward exchange contracts to hedge significant foreign 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 financial instruments at December 31, 2001 that are sensitive to changes m interest rates The table presents principal cash flows by expected maturity dates and weighted average mterest rates for debt obligations Long-term debt Fixed rate Average interest rate Variable rate Average interest rate 2002 2003 2004 2005 2006 (in millions, where applicable) Thereafter Total $ 60 9 6 4% $2 6% $ 153 6 6 4% $2 6% $ 04 6 5% $280 0 2 6% $501 2 6 4% $ 24 7 2 6% $ 114 6 4% $ 65 2 3% $ 107 9 $ 835 4 6 4% 6 4% $ 21 3 $ 332 5 2 3% 2 6% The table below provides information about Cooper's foreign currency forward exchange contracts m excess of $5 million at December 31, 2001 The contracts mature during 2002 All amounts are presented m U S dollar equivalents. The table presents the notional amounts and the weighted average contractual exchange rates These notional amounts are used to calculate the contractual payments exchanged under the contracts U S Dollar Functional Currency Buy Euros / Sell U S Dollars Notional amount Average contract rate 2002 (m millions, where applicable) $ 74 0 8992 The table below provides information about Cooper's financial instruments at December 31,2000 that are sensitive to changes in mterest rates The table presents principal cash flows by expected maturity dates and weighted average mterest rates for debt obligations Long-term debt Fixed rate Average interest rate Variable rate Average mterest rate 2001 2002 2003 2004 2005 (in millions, where applicable) Thereafter Total $ 50 6 6 3% $ 05 6 7% $ 61 5 6 3% $ 05 6 7% $ 153 8 6 4% $ 05 6 7% $ 05 6 5% $400 5 6 7% $510 5 6 4% $ 25 7 5 7% $ 1195 6 5% $ 27 8 5 7% $896 4 6 3% $455 5 6 7% 22 Information about Cooper's foreign currency forward exchange contracts m excess of $5 million at December 31, 2000 is presented below The contracts matured during 2001 The notional amount is used to calculate the contractual payments exchanged under the contracts The notional amount represents the U S dollar equivalent U S Dollar Functional Currency Buy Pounds Sterling / Sell U S Dollars Notional amount Average contract rate Buy Euros / Sell U S Dollars Notional amount Average contract rate 2001 (in millions, where applicable) $ 17 6 1 476 $ 11 9 09020 The following transactions were implemented to partially align Cooper's interest rate exposure profile with its short term interest rate expectations m an economically efficient manner that is consistent with its tax position During 2001, Cooper sold at a premium U S Treasury securities due November 2002 Cooper obtained these securities pursuant to a repurchase agreement containing provisions that limit Cooper's interest rate exposure under this agreement to a maximum cost of $7 0 million The repurchase agreement will be settled immediately prior to the maturity of the securities Settlement of this transaction will not require any financing by Cooper and this transaction does not create an asset or liability, other than as described above The face amount of the securities was $10 billion Also during 2001, Cooper purchased at a discount Federal Home Loan Mortgage Corporation Notes due February 2003 and immediately transferred these notes pursuant to a securities loan agreement Subsequently, Cooper eliminated any potential cost under the securities loan agreement and realized a gam of approximately $19 million The securities loan agreement will be settled immediately prior to the maturity of the notes Settlement of this transaction will not require any financing by Cooper and this transaction does not create a liability The face amount of the notes was $480 million In 1999 Cooper entered mto a similar executory contract Upon settlement of the contract in 2000, Cooper realized a $7 3 million cost, its maximum exposure under the 1999 executory contract See Note 16 of the Notes to Consolidated Financial Statements for additional information regardmg the fair value of Cooper's financial instruments Euro Conversion On January 1, 2002, the introduction of the single European currency, the euro, was completed with the launch of euro bank notes and coins as legal currency within twelve of the fifteen member states of the European Union Businesses m participating countries will conduct transactions m the euro and must convert their financial records and reports to be euro based Cooper estimates that approximately 8% of its 2001 revenues, 7% of its 2000 revenues and 10% of its 1999 revenues came from countries that adopted the euro Cooper has assessed its information technology systems and the risk to its busmess of the euro conversion and does not expect the conversion will have a material effect on its results of operations 23 Recently Issued Accounting Standards See Note 1 of the Notes to Consolidated Financial Statements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is included under "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations " ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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-l through F-28 hereof (See Item 14 for Index ) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART IH ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is set forth under the captions "Election of Directors" and "Executive Officers" in Cooper's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with Cooper's 2002 Annual Meetmg of Shareholders (the "Proxy Statement") and is incorporated herem by reference ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth under the caption "Executive Management Compensation" in the Proxy Statement and is incorporated herem by reference ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth under the captions "Cooper Stock Ownership" and "Security Ownership of Management" m the Proxy Statement and is incorporated herem by reference ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Other Financial Data. Page Report of Management Report of Independent Auditors Consolidated Income Statements for each of the three years m the period ended December 31, 2001 Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Cash Flows for each of the three years m the period ended December 31, 2001 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2001 Notes to Consolidated Financial Statements F-l F-2 F-3 F-4 F-5 F-6 F-7 Financial information with respect to subsidiaries not consolidated and 50 percent or less owned entities accounted for by the equity method has not been mcluded because m the aggregate such subsidiaries and investments do not constitute a significant subsidiary 2 Financial Statement Schedules Fmancial statement schedules are not mcluded m this Form 10-K Annual Report because they are not applicable or the required information is shown m the financial statements or notes thereto 3 Exhibits 3 1 Twenty-Seventh Amended Articles of Incorporation of Cooper Industries, Inc (incorporated herein by reference to Exhibit 3 1 of Cooper's Form 8-K dated August 5, 1997) 3 2 Code of Regulations (By-Laws), as amended, of Cooper Industries, Inc (incorporated herem by reference to Exhibit 3 2 of Cooper's Form 10-K for the year ended December 31, 1997). 4 1 Rights Agreement, dated as of August 5,1997, between Cooper and First Chicago Trust Company of New York, as Rights Agent (incorporated herem by reference to Exhibit 4 1 to Cooper's Registration Statement on Form 8-A dated August 14, 1997) 4 2 Amendment to the Rights Agreement dated as of August 5, 1997, between Cooper and First Chicago Trust Company of New York, as Rights Agent, appomtmg EquiServe Trust Company, N A as successor Rights Agent effective November 1, 2001 4 3 Form of Indenture dated as of January 15, 1990, between Cooper and The Chase Manhattan Bank (National Association), as Trustee (incorporated herem by reference to Exhibit 4(a) of Registration Statement No 33-33011) 10 1 Cooper Industries, Inc Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10 2 of Cooper's Form 10-K for the year ended December 31, 1997) 25 10 2 Cooper Industries, Inc Directors Retirement Plan (incorporated by reference to Exhibit 10 3 of Cooper's Form 10-K for the year ended December 31, 1997) 10 3 Cooper Industries, Inc Executive Restricted Stock Incentive Plan (incorporated by reference to Exhibit 10 4 of Cooper's Form 10-K for the year ended December 31, 1997) 10 4 Cooper Industries, Inc Supplemental Excess Defined Benefit Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(m) of Cooper's Form 10-Q for the quarter ended September 30, 1998) 10 5 Cooper Industries, Inc Supplemental Excess Defined Contribution Plan (August 1, 1998 Restatement) (incorporated by reference to Exhibit 10(iv) of Cooper's Form 10-Q for the quarter ended September 30, 1998) 10 6 Management Incentive Compensation Deferral Plan (incorporated by reference to Exhibit 10 7 of Cooper's Form 10-K for the year ended December 31, 1997) 10 7 Crouse-Hinds Company Officers' Disability and Supplemental Pension Plan (incorporated by reference to Exhibit 10 8 of Cooper's Form 10-K for the year ended December 31, 1997) 10 8 Cooper Industries, Inc Amended and Restated Stock Incentive Plan (incorporated herein by reference to Appendix B to Cooper's proxy statement for the Annual Meeting of Shareholders held on April 24, 2001 10 9 Form of Incentive Stock Option Agreement for Cooper Industries, Inc Stock Incentive Plan (incorporated by reference to Exhibit 10 9 of Cooper's Form 10-K for the year ended December 31,2000) 10 10 Form of Nonqualified Stock Option Agreement for Cooper Industries, Inc Stock Incentive Plan (incorporated by reference to Exhibit 10 10 of Cooper's Form 10-K for the year ended December 31, 2000) 10 11 Form of Cooper Industries, Inc Executive Stock Incentive Agreement (incorporated herem by reference to Exhibit 10 12 of Cooper's Form 10-K for the year ended December 31, 1995). 10 12 Cooper Industries, Inc Amended and Restated Management Annual Incentive Plan (incorporated herem by reference to Appendix C to Cooper's proxy statement for the Annual Meeting of Shareholders held on April 24, 2001) 10 13 Cooper Industries, Inc Amended and Restated Directors' Stock Plan (incorporated herem by reference to Exhibit 10 13 of Cooper's Form 10-K for the year ended December 31, 2000) 10 14 Form of Directors' Nonqualified Stock Option Agreement for Directors' Stock Plan (incorporated herem by reference to Exhibit 10 18 of Cooper's Form 10-K for the year ended December 31, 1997) 10 15 Cooper Industries, Inc Directors' Retamer Fee Stock Plan (incorporated herein by referenced to Exhibit 4 3 of Registration Statement No 333-51439) 26 10 16 Form of Management Continuity Agreement between Cooper Industries, Inc and key management personnel which applies if there is a Change of the Control of Cooper (incorporated herein by reference to Exhibit 10(n) of Cooper's Form 10-Q for the quarter ended September 30, 1998) 10 17 Purchase and Sale Agreement between Cooper Industries, Inc and Federal-Mogul Corporation dated August 17, 1998 (incorporated herem by reference to Exhibit 10(i) of Cooper's Form 10-Q for the quarter ended September 30, 1998) 12 0 Computation of Ratios of Earnings to Fixed Charges for the Calendar years 1997 through 2001 210 List of Cooper Industries, Inc Subsidiaries 23 0 Consent of Ernst & Young LLP 24 0 Powers of Attorney from members of the Board of Directors of Cooper Industries, Inc Cooper will furnish to the Commission supplementally upon request a copy of any instrument with respect to long-term debt of 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, Inc Attn Corporate Secretary P O Box 4446 Houston, Texas 77210 (b) Reports on Form 8-K Cooper filed a report on Form 8-K dated October 16, 2001, which included a copy of a press release regardmg Cooper's expected third quarter results, the impact of potential asbestos liability arising from the Federal Mogul bankruptcy and the status of Cooper's review of strategic alternatives for maximizing shareholder value Cooper filed a report on Form 8-K dated October 23, 2001, which included Cooper's revised business outlook for 2001, a copy of a press release containing Cooper's financial results for the thud quarter of 2001 and "Sales Trends" information to be posted on Cooper's website Cooper filed a report on Form 8-K dated November 20, 2001, which furnished "Sales Trends" information to be posted on Cooper's website Cooper filed a report on Form 8-K dated December 18, 2001, which furnished "Sales Trends" information to be posted on Cooper's website 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized COOPER INDUSTRIES, INC Date February 20,2002 By /s/ H John Riley. Jr (H John Riley, Jr , Chairman, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated Signature Title Date /s/ H John Rilev. Jr (H John Riley, Jr) Chairman, President and Chief Executive Officer February 20, 2002 /s/D Bradley McWilliams (D Bradley McWilliams) Senior Vice President and Chief Financial Officer February 20, 2002 /s/Jeffrey B Levos (Jeffrey B Levos) Vice President and Controller and Chief Accounting Officer February 20, 2002 LINDA A HILL (Lmda A Hill) Director February 20, 2002 SIR RALPH H ROBINS (Sir Ralph H Robms) Director February 20, 2002 H LEE SCOTT (H Lee Scott) Director February 20, 2002 DAN F SMITH (Dan F Smith) Director February 20, 2002 GERALD B SMITH (Gerald B Smith) Director February 20, 2002 JAMES R WILSON (James R Wilson) Director February 20, 2002 By. /s/Diane K Schumacher (Diane K Schumacher, as Attorney-In-Fact for each of the persons mdicated) REPORT OF MANAGEMENT The management of Cooper Industries is responsible for the preparation, integrity and fan presentation of the accompanying Consolidated Financial Statements The Consolidated Financial Statements have been prepared m accordance with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management Management also prepared the other information mcluded in the Annual Report on Form 10-K for the year ended December 31, 2001, and is responsible for its accuracy and consistency with the Consolidated Financial Statements The Consolidated Financial Statements have been audited by an independent accounting firm, Ernst & Young LLP, which was given unrestricted access to all financial records and related data, mcludmg minutes of meetings of shareholders, the Board of Directors and committees of the Board Management believes that all representations made to the mdependent auditors during their audit were valid and appropriate Cooper maintains a system of mtemal control designed to provide reasonable assurance to Cooper's management and Board of Directors that assets are safeguarded against loss, transactions are authorized, executed and recorded in accordance with management's instructions, and accounting records are reliable for preparing published financial statements The system of mtemal control mcludes a documented organizational structure and division of responsibility, regular management review of financial performance and mtemal control activities, comprehensive written pohcies and procedures (mcludmg a code of conduct to foster a sound ethical climate) that are communicated throughout Cooper, and the careful selection, training and development of employees Cooper's mtemal audit department monitors the operation of the mtemal control system and reports findings and recommendations to management and the Audit Committee of the Board of Directors Prompt corrective action is taken to address control deficiencies and other opportunities for improving the mtemal control system The Audit Committee of the Board of Directors, which is composed entirely of directors who are not employees of Cooper, meets periodically with management, the mdependent auditors, and the director of mtemal audit to discuss the adequacy of mtemal control and to review accounting, reporting, auditmg and other mtemal control matters The mtemal and mdependent auditors have unrestricted access to the Audit Committee H John Riley, Jr Chairman, President and ChiefExecutive Officer D Bradley McWilliams Senior Vice President and ChiefFinancial Officer Jeffrey B Levos Vice President and Controller and ChiefAccounting Officer F-l REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Cooper Industries, Inc We have audited the accompanying consolidated balance sheets of Cooper Industries, Inc as of December 31, 2001 and 2000, and the related consolidated income statements and statements of shareholders' equity and cash flows for each of the three years m the period ended December 31, 2001 These financial statements are the responsibility of the Company's management Our responsibility is to express an opmion on these financial statements based on our audits We conducted our audits m accordance with auditing standards generally accepted in the United States Those standards requne 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 m the financial statements An audit also mcludes assessmg the accounting principles used and significant estimates made by management, as well as evaluatmg the overall financial statement presentation We believe that our audits provide a reasonable basis for our opmion In our opmion, the financial statements referred to above present fairly, m all material respects, the consolidated financial position of Cooper Industries, Inc at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years m the period ended December 31, 2001, in conformity with accounting principles generally accepted m the United States ERNST & YOUNG LLP Houston, Texas January 23, 2002, except for Note 20, as to which the date is February 13, 2002 F-2 COOPER INDUSTRIES, INC. CONSOLIDATED INCOME STATEMENTS Revenues . Cost of sales Selling and administrative expenses Goodwill amortization Nonrecurring charges . . Interest expense, net ... .. . .. Income from contmumg operations before mcome taxes Income taxes . ... Income from continuing operations Charge related to discontinued operations, net of mcome taxes Net mcome .. . Year Ended December 31, 2001 20001999 (in millions, except per share data) $ 4,209 5 2,943 9 729 7 60 7 74 1 84 7 3164 . 55.1 261 3 . (30 0) . $ 2313 $ 4,459 9 3,018 3 732 9 58 5 100 3 549 9 192 5 357 4 - $ 357 4 $ 3,868 9 2,603 4 640 9 47 1 37 55 2 518 6 186 7 331 9 - $ 331 9 Income per Common share Basic Income from contmumg operations Charge from discontinued operations Net mcome . Diluted Income from contmumg operations .. Charge from discontmued operations Net mcome. . . . . . . $ 2 78 $ 3 82 $ 3 53 (32) - - . $ 2 46 $ 3 82 $ 3 53 $ 2 75 $ 3 80 $ 3 50 _____ LLLL - - $ 244 $ 3 80 $ 3 50 Cash dividends per Common share . $ 140 $ 140 5; 132 The Notes to Consolidated Fmancial Statements are an integral part of these statements F-3 COOPER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS Cash and cash equivalents . Receivables . Inventories . Deferred mcome taxes and other current assets . Total current assets Property, plant and equipment, less accumulated depreciation Goodwill, less accumulated amortization Deferred mcome taxes and other noncurrent assets . . Total assets .. . .. LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt . Accounts payable Accrued liabilities . Current maturities of long-term debt . . . . . Total current liabilities .. Long-term debt . . .. Postretirement benefits other than pensions Other long-term liabilities . .. . .. Total liabilities. .. Common stock, $5 00 par value . . . . Capital in excess of par value . Retamed earnings . . .... Common stock held m treasury, at cost . Unearned employee stock ownership plan compensation . Accumulated other nonowner changes in equity . . Total shareholders' equity Total liabilities and shareholders' equity . ... December 31, 2001 2000 (in millions) $ 115 777 1 670 9 191 7 1,651 2 826 8 1,958 7 174 7 $ 4,611 4 $ 26 4 828 8 706 9 173 0 1,735 1 870 4 2,013 5 170 3 $ 4,789 3 $ 132 9 401 4 510 9 60 9 1,106 1 1,107 0 196 7 178 4 2,588 2 615 0 646 0 2,325 0 (1,435 0) (127 8) 2,023 2 $ 4,6114 $ 166 1 470 1 486 3 51 1 1,173 6 1,300 8 211 2 199 5 2,885 1 615 0 663 3 2,225.0 (1,470 0) (8 6) (120 5) 1,904 2 $ 4,789 3 The Notes to Consolidated Fmancial Statements are an integral part of these statements < F-4 COOPER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities Net income Plus charge related to discontmued operations Income from continumg operations Adjustments to reconcile to net cash provided by operatmg activities Depreciation and amortization Deferred income taxes Changes in assets and liabilities Receivables Inventories Accounts payable and accrued liabilities Accrued income taxes . Other assets and liabilities, net Net cash provided by operatmg activities . Cash flows from mvestmg activities Cash received from (paid for) acquired businesses Capital expenditures Proceeds from disposition of busmesses Proceeds from sales of property, plant and equipment Net cash used m mvestmg activities Cash flows from financing activities Proceeds from issuances of debt Repayments of debt Dividends Acquisition of treasury shares Activity under employee stock plans and other Net cash provided by (used m) financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) m cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Year Ended December 31, 2001 2000 1999 (in millions) $ 2313 30 0 261 3 $ 357 4 - 357 4 $ 3319 - 331 9 186 4 (35 1) 43 1 17 3 (315) - ______am 422 4 ' 174 4 98 8 (8 0) (51 1) 56 (52 3) (22 2) 502 6 98 (115 1) - 67 (98 6) (580 4) (174 9) - 16 4 (738 9) 136 9 (343 2) (131 3) (42 0) 410 (338 6) 878 5 (474 9) (130 6) (39 3) 19 235 6 (Oil . (14 9) 02 (0 5) 26 4 26 9 $ 11 5 $ 26 4 147 6 60 0 (47 5) (5 2) (25 9) 46 (61 401 9 (434 6) (165 8) 149 1 112 (440 1) 250 9 (69 0) (124 4) (44 0) 30 7 44 2 05 65 20 4 $ 26 9 (1) Net of the effects of acquisitions and translation The Notes to Consolidated Financial Statements are an integral part of these statements See Note 17 for supplemental cash flow information F-5 COOPER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Balance December 31,1998 .......................... Net income Minimum pension liability adjustment Translation adjustment $ Net income and other nonowner changes in equity Common stock dividends Purchase of treasury shares Stock issued under employee stock plans ESOP shares allocated Other activity Balance December 31,1999............................... , Net income Minimum pension liability adjustment Translation adjustment Net income and other nonowner changes in equity Common stock dividends Purchase of treasury shares Stock issued under employee stock plans ESOP shares allocated Other activity Balance December 31, 2000........................... Net income Minimum pension liability adjustment Translation adjustment Change in fair value of derivatives Net income and other nonowner changes in equity Common stock dividends Purchase of treasury shares Stock issued under employee stock plans ESOP shares allocated Other activity Balance December 31,2001 ............................ $ 615 0 615 0 6150 6150 Capital In Excess of Par Value $ 674 0 (16) (0 5) (0 2) 671 7 (4 9) (2 5) (10) 663 3 (16 6) (0 7) $ 646 0 Retained Earnings $ 1,790 0 331 9 Unearned Employee Stock Treasury Ownership Plan Stock Compensation (m millions) $(1,444 8) $ (40 6) Accumulated Nonowner Changes in Equity $ (30 0) 11 (40 5) (124 4) (44 0) 37 2 06 1,998 1 357 4 23 (1,449 3) 17 6 (23 0) (69 4) 01 (512) (130 6) (39 3) 15 7 01 2,225 0 231 3 29 (1,470 0) 14 4 (8 6) (120 5) (0 7) (6 3) (0 3) (131 3) (42 0) 74 4 $ 2,325 0 26 $ (1,435 0) $ 86 - $ (127 8) Total $ 1,563 6 331 9 11 (40 5) 292 5 (124 4) (44 0) 35 6 17 1 27 1,743 1 357 4 01 (512) 306 3 (130 6) (39 3) 10 8 11 9 20 1,904 2 231 3 (0 7) (6 3) (0 3) 224 0 (131 3) (42 0) 57 8 86 19 $ 2,023 2 The Notes to Consolidated Financial Statements are an integral part of these statements F-6 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles ofConsolidation: The Consolidated Financial Statements mclude the accounts of Cooper and its majontyowned subsidiaries Affiliated companies are accounted for on the equity method where Cooper owns 20% to 50% of the affiliate unless significant economic, political or contractual considerations mdicate that the cost method is appropriate Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates Cash Equivalents: For purposes of the consolidated statements of cash flows, Cooper considers all investments purchased with original maturities of three months or less to be cash equivalents Inventories: Inventories are earned at cost or, if lower, net realizable value On the basis of current costs, 61% and 64% of inventones at December 31, 2001 and 2000, respectively were earned on the last-in, first-out (LIFO) method The remammg inventones are earned on the first-in, first-out (FIFO) method Property, Plant and Equipment: Property, plant and equipment are stated at cost Depreciation is provided over the estimated useful lives of the related assets using pnmanly the straight-lme method This method is applied to group asset accounts, which m general have the following lives buildings -- 10 to 40 years, machinery and equipment -- 3 to 18 years, and toolmg, dies, patterns and other -- 3 to 10 years Goodwill: With minor exceptions, goodwill is amortized over 40 years from the respective acquisition dates At each balance sheet date presented, management reviews the carrying value of long-lived assets and goodwill at the lowest level feasible whenever events or changes m circumstances mdicate that the carrying amount may not be recoverable If this review indicates that the carrying amount will not be recoverable, as determined based on undiscounted cash flows over the remaining amortization periods, an impairment loss is recognized The impairment loss equals the excess of the carrying amount over the fair value of the asset The fair value of the asset is based on prices for similar assets, if available, or discounted cash flows Revenue Recognition: Cooper recognizes revenues m accordance with invoice terms, typically when products are shipped Accruals for sales returns and other allowances are provided at the tune of shipment based upon experience Shippmg and handling costs of $125 5 million, $124 6 million and $96 2 million in 2001, 2000 and 1999, respectively, are reported as a reduction of revenues m the consolidated mcome statements Research and Development Expenditures: Research and development expenditures are charged to earnings as incurred Research and development expenses were $55 8 million, $57 7 million and $54 0 million m 2001, 2000 and 1999, respectively Common Stock Based Compensation: Cooper follows the intrinsic value method of accountmg for stock based compensation plans as prescribed by Accountmg Principles Board Opmion No 25, Accountmgfor Stock Issued to Employees Impact ofNew Accounting Standards: In June 2001, the Financial Accountmg Standards Board issued Statements ofFinancial Accounting Standards No 141, Business Combinations ("SFAS No 141") and No 142, Goodwill and Other Intangible Assets ("SFAS No 142 ") SFAS 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 The adoption of this statement had no impact on Cooper's F-7 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) consolidated results of operations and financial position SFAS No 142 is effective for fiscal years beginning after December 15, 2001 Cooper will adopt the statement effective January 1, 2002 Under SFAS No 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests Other intangible assets will continue to be amortized over their useful lives In 2002, Cooper will perform the first step of the required two-step impairment tests of goodwill and mdefimte-hved intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on its consolidated results of operations and financial position In October 2001, the Financial Accounting Standards Board issued Statement of Fmancial Accounting Standards No 144, Accountingfor the Impairment or Disposal ofLong-Lived Assets The statement is effective for fiscal years beginning after December 15, 2001 Cooper will adopt this statement effective January 1, 2002 This statement establishes a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired Additionally, the statement expands the definition of a discontinued operation from a segment of busmess to a component of an entity that has been disposed of or is classified as held for sale and can be clearly distinguished, operationally and for reporting purposes, from the rest of the entity The results of operations of a component classified as held for sale shall be reported m discontmued operations in the period incurred. Adoption of this statement will not have a significant effect on Cooper's consolidated results of operations and financial position NOTE 2: NONRECURRING CHARGES During the fourth quarter of 2001, Cooper committed to the consolidation or closure of certain Electrical Products segment facilities and recorded a provision for severance and other related costs of these announced actions of $7 1 million In addition, the Company concluded during 2001 that various Electrical Products segment assets comprising $8 5 million of net book value provided no future benefit to Cooper and were therefore fully impaired Also during the 2001 fourth quarter, Cooper recorded a charge of $8 4 million to provide for the costs of assimilation of certain separate product lmes rendered partially duplicative as a result of previous Electrical Products segment busmess acquisition activities The 2001 fourth quarter nonrecurring charge for the Electrical Products segment totals $24 0 million. During the fourth quarter of 2001, Cooper recorded a General Corporate nonrecurring charge of $50 1 million Cooper concluded that the net book values of certain software, hardware and other technology investments should be fully impaired, m consideration of ongomg refinement and development of Company information and technology systems capabilities Also during the 2001 fourth quarter. Cooper provided for the costs associated with performing the Company's review of strategic alternatives The nonrecurring charges for 2001 total $74 1 million, or $44 5 million after taxes ($ 47 per diluted common share) During the first quarter of 1999, Cooper completed a previously announced voluntary severance program and accrued an additional $5 8 million primarily representmg the voluntary severance program premium over the severance provided under Cooper's established policies Cooper also accrued $15 million related to severance and other costs for facility closures announced during the first quarter of 1999 In addition, during 1999, Cooper reduced legal accmals by $2 8 irullion related to the favorable settlement of certain litigation concemmg lead m mim-blmds and reassessment of the required reserve Cooper also reached agreement and received $0 8 million under an insurance policy related to the unsuccessful offer to acquire TLG pic m 1998 Since the original charge related to the litigation was mcluded as a nonrecurring item m the Tools & Hardware segment and the costs related to TLG pic were reflected as a nonrecurring corporate item, the reversal of the accrual and the reimbursement of the expenses were reflected as nonrecurring items The net nonrecurring items for 1999 resulted m a $3 7 million charge before mcome taxes and resulted m an after-tax charge of $2 4 million ($ 02 per diluted common share) F-8 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) See "Nonrecurring Charges" in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information related to the 2001 and 1999 severance and facility consolidation charges mcludmg spendmg, number of employees terminated and remaining accrual balances See Note 20 of the Notes to Consolidated Financial Statements for a discussion concerning the Company's review of strategic alternatives NOTE 3: CHARGE RELATED TO DISCONTINUED OPERATIONS In October 1998, Cooper sold its Automotive Products busmess to Federal-Mogul Corporation ("FederalMogul") These discontinued businesses (mcludmg the Abex product lme obtained from Pneumo-Abex Corporation ("Pneumo") m 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, mcludmg liabilities related to the Abex product lme and any potential liability that Cooper may have to Pneumo pursuant to a 1994 Mutual Guaranty Agreement between Cooper and Pnuemo On October 1,2001, Federal-Mogul and several of its affiliates filed a Chapter 11 bankruptcy petition and mdicated that Federal-Mogul may not honor the indemnification obligations to Cooper As of the date of this filing, Federal-Mogul had not yet made a decision whether to reject the 1998 Agreement, which includes the indemnification to Cooper If Federal-Mogul rejects the 1998 Agreement, Cooper will be relieved of its future obligations under the 1998 Agreement, mcludmg specific indemnities relatmg to payment of taxes and certain obligations regarding insurance for its former Automotive Products businesses To the extent Cooper is obligated to Pneumo for any asbestos-related claims arising from the Abex product lme ("Abex Claims"), Cooper has rights, confirmed by Pneumo, to significant insurance for such claims Based on information provided by representatives of Federal-Mogul, from August 28, 1998 through December 31, 2001, a total of 75,152 Abex Claims were filed, of which 16,974 claims have been resolved leavmg 58,178 Abex Claims pending at December 31, 2001, that are the responsibility of Federal-Mogul Smce August 28, 1998, the average indemnity payment for resolved Abex Claims was $908 before insurance A total of $25 5 million was spent on defense costs for the period August 28, 1998 through December 31, 2001 Historically, existing insurance coverage has provided 50% to 80% of the total defense and indemnity payments for Abex claims. Smce the October 1, 2001 bankruptcy filing by Federal-Mogul through December 31, 2001, a total of 3,541 Abex Claims have been filed With the assistance of independent advisors, Cooper has completed a thorough analysis of its potential exposure for asbestos liabilities m the event Federal-Mogul rejects the 1998 Agreement At this time, the manner m which this issue ultimately will be resolved is not known Based on Cooper's analysis of its contingent liability exposure resultmg from Federal-Mogul's bankruptcy, Cooper concluded that an additional fourth-quarter 2001 discontinued-operations provision of $30 million after-tax, or $ 32 per share, was appropriate to reflect the potential net financial impact of this issue This conclusion is based on a review ofthe Abex claims history, existing insurance coverage, the contractual indemnities and other facts determined to date Cooper is preserving its rights as a creditor for breach of Federal-Mogul's indemnification to Cooper and its rights agamst all Federal-Mogul subsidiaries. Cooper mtends to take all actions to seek a resolution of the indemnification issues and future handling of the Abexrelated claims within the Federal-Mogul bankruptcy proceedmgs NOTE 4: ACQUISITIONS AND DIVESTITURES During 2001, Cooper received purchase pnce adjustments of $9 8 million net, primarily related to businesses acquired prior to 2001 In 2000, Cooper completed two large acquisitions and three small product-lme acquisitions in its Electrical Products segment and one small acquisition m its Tools & Hardware segment for an aggregate cost of $578 4 million, subject to adjustment as provided m the acquisition agreements A total of $378 2 million m goodwill was recorded, mcludmg an additional $23 2 million in 2001, with respect to the acquisitions In March 2000, Cooper acquired Eagle Electric for a total cost of $124 6 million Eagle Electric manufactures and sells electrical wiring devices F-9 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) including switches, receptacles, plugs and connectors, cords and other electrical accessories to the residential and commercial markets In May 2000, Cooper acquired B-Line Systems for a total cost of $430 6 million B-Line Systems manufactures and markets support systems and enclosures for electrical, mechanical and telecommunications/data applications In 1999, Cooper completed eight acquisitions m its Electrical Products segment and two small acquisitions in its Tools & Hardware segment for an aggregate cost of $443 8 million The acquisitions include two businesses m the United Kingdom and a business m France that expanded the product offerings of the Cooper European based division, three domestic hghtmg businesses and four other small product-lme acquisitions A total of $354 4 million m goodwill was recorded, including an additional $16 2 million m 2000, with respect to the acquisitions The acquisitions have been accounted for as purchases and the results of the acquisitions are included in Cooper's consolidated income statements smce the respective acquisition dates The pro forma net income and earnings per share for 2000 and 1999, assuming the acquisitions had been made at the beginning of each year, would not be materially different from reported net mcome and earnings per share On October 9, 1998, Cooper completed the sale of its Automotive Products segment for cash proceeds of $19 billion During 1999, Cooper received an additional $149 1 million representing reimbursement of Cooper's pre-closing cash funding of international operations and the additional cash mvested in the Automotive Products segment between March 31, 1998 and October 9, 1998 NOTE 5: INVENTORIES , Raw materials .... Work-in-process Finished goods Perishable tooling and supplies .. .. Excess of current standard costs over LIFO costs Net mventones . . December 31, 2001 2000 (m millions) $ 223 6 $ 230 1 132 2 134 6 . 374 0 404 5 21 4 20 5 751 2 789 7 (80 3) (82 8) $ 670 9 $ 706 9 F-10 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6: PROPERTY, PLANT AND EQUIPMENT AND GOODWILL Property, plant and equipment Land and land improvements Buildings Machinery and equipment Toolmg, dies and patterns All other Construction m progress Accumulated depreciation December 31, 2001 2000 (in millions) . .. $ 53 0 $ 51 5 . 428 1 408 9 812 7 816 0 .. 213 6 191 1 . 289 2 290 2 99 2 124 6 1,895 8 1,882.3 .. (1,069 0) (1,0119) $ 826 8 $ 870 4 Goodwill . Accumulated amortization . .. $ 2,477 7 $ 2,473 7 . (519 0) (460 2) $ 1,958 7 $ 2,013 5 NOTE 7: ACCRUED LIABILITIES Salaries, wages and employee benefit plans . Commissions and customer mcentives Product and environmental liability accruals Facility integration of acquired businesses . Other (individual items less than 5% of total current liabilities) December 31, 2001 2000 (m millions) $ 199 7 $ 207 9 . . 68 6 39 1 . . 35 7 40 9 39 3 37 5 167 6 160 9 $ 510 9 $ 486 3 At December 31, 2001, Cooper had accruals of $ 13 0 million with respect to potential product liability claims and $46 3 million with respect to potential environmental liabilities, including $23 6 million classified as a long-term liability, based on Cooper's current estimate of the most likely amount of losses that it believes will be incurred The product liability accrual consists of $3 2 million of known claims with respect to ongomg operations, $4 9 million of known claims for previously divested operations and $4 9 million which represents an estimate of claims that have been incurred but not yet reported While Cooper is generally self-insured with respect to product liability claims, Cooper has insurance coverage for individual 2001 claims above $3 0 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 mcludes $7 1 million related to sites owned by Cooper and $39 2 million for retamed environmental liabilities F-ll COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 It has been Cooper's consistent practice to mclude the entire product liability accrual and a significant portion of the environmental liability accrual as current liabilities, although only approximately 15-25% of the balance classified as current is normally spent on an annual basis The annual effect on earnings for product liability is essentially equal to the amounts disbursed In the case of the environmental liability, the annual expense is considerably smaller than the disbursements, smee the vast majority of Cooper's environmental liability has been recorded m connection with acquired companies The change m the accrual balances from year to year reflects the effect of acquisitions and divestitures as well as normal expensmg and funding Cooper has not utilized any form of discounting in establishing its product or environmental liability accruals While both product liability and environmental liability accruals mvolve estimates that can have wide ranges of potential liability, Cooper has taken a proactive approach and has managed the costs m 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 mvolved m the manufacturing process subject Cooper to unusual risks or exposures for product or environmental liability Cooper's greatest exposure to maccuracy m its estimates is with respect to the constantly changing definitions of what constitutes an environmental liability or an acceptable level of cleanup In connection with acquisitions accounted for using the purchase method of accounting, Cooper records, to the extent appropriate, accruals for the costs of closing duplicate facilities, severing redundant personnel and integrating the acquired business mto existing Cooper operations Significant accruals mclude plant shut-down and realignment costs The following table summarizes the accrual balances and activity during each of the last three years . Activity during each year: Balance, beginning of year Spendmg Acquisitions - initial allocation Acquisitions - final allocation adjustment Translation . Balance, end of year 2001 2000 (m millions) 1999 $ 37 5 $ 10 8 $ 15 6 (110) (3 5) (4 8) - 28 6 1 2 12 9 22 (0 3) . (0 1) (061 _____ (091 $ 39 3 $ 37 5 $ 10 8 Balance by category ofaccrual: Plant shut-down and realignment Other realignment and integration $ 38 8 05 $ 39 3 $ 36 5 10 $ 37 5 $ 95 13 $ 10 8 Plant shut-down and realignment mcludes the costs to terminate personnel, shut down the facilities, terminate leases and similar costs Other realignment and integration costs mcludes costs to exit product lines and miscellaneous costs Dining the three years ended December 31, 2001, accruals reversed to mcome were insignificant The annual spendmg was primarily related to downsizing and consolidating facilities The 2000 acquisitions-imtial allocation F-12 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) amount is related to the Eagle Electric acquisition and mcludes approximately $24 2 million for severance and related costs to terminate personnel and $4 4 million of one-time additional costs associated with shutting down manufacturing operations and vacatmg existing facilities Acquisitions-final allocation adjustment represents adjustments to goodwill for finalization of the purchase pnce allocations recorded in the previous year The 2001 acquisitions - final allocation adjustment amount includes additional severance and related costs to terminate personnel and facility shut-down costs in connection with the Eagle Electric and B-Lme Systems acquisitions NOTE 8: LONG-TERM DEBT AND LEASE COMMITMENTS 2 54%* commercial paper maturing at various dates through February 2002 6 41% - 6 97% second series medium-term notes, due through 2010 5 89% - 6 45% third senes medium-term notes, due through 2008 . 6 25% Euro bonds maturing in October 2005 . 3 76%* Pound Sterling notes payable maturing at vanous dates through 2005 . Other . . . Current matunties Long-term portion ... . .. . .. . December 31, 2001 2000 (m millions) $ 280 0 $ 400 0 302 1 302 1 250 0 300 0 270 2 279 4 26 3 27 4 39 3 43 0 1,167 9 1,351 9 (60 9) (51 1) $ 1,107 0 $ 1,300 8 * Weighted average interest rates at December 31,2001 The weighted average interest rates on commercial paper and Pound Sterling bank loans and notes were, 6 89% and 5 67%, respectively at December 31, 2000 Cooper has U S committed credit facilities of $990 million, $440 million of which mature m 2002 and $550 million of which mature m 2004 At December 31, 2001, Cooper had $648 million of its $990 million U S committed credit facilities available, after considering commercial paper backup At December 31, 2000, $547 9 million of its total $1,040 million U S committed credit facilities was available after considering commercial paper backup The agreements for the credit facilities require that Cooper maintain certain financial ratios, including a prescribed limit on debt as a percentage of total capitalization Retamed earnings are unrestricted as to the payment of dividends, except to the extent that payment would cause a violation of the prescribed limit on the debt-to-total capitalization ratio During 1999, Cooper completed a shelf registration statement to issue up to $500 million of debt securities At December 31, 2001, all $500 million of the shelf registration was available to be issued Interest rates on Cooper's commercial paper were generally 2 6% and 2 8% below the U S prime rate during 2001 and 2000, respectively Total mterest paid during 2001, 2000 and 1999 was $85 million, $96 million and $63 million, respectively Commercial paper of $280 million and $400 million at December 31, 2001 and 2000, respectively, was classified as long-term debt reflecting Cooper's intention to refinance these amounts during the twelve-month period following the balance sheet date through either contmued short-term borrowing or utilization of available credit facilities Maturities of long-term debt for the five years subsequent to December 31, 2001 are $60 9 million, $153 6 million, $280 4 million, $525 9 million and $17 9 million, respectively The future net minimum lease F-13 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) payments under capital leases are not significant Cooper has entered into various operating lease agreements, primarily for manufacturing, warehouse and sales office facilities and equipment. Generally, the leases mclude renewal provisions and rental payments may be adjusted for increases m taxes, insurance and maintenance related to the property Rent expense for all operatmg leases was $40 1 million, $37 1 million and $32 9 million during 2001, 2000 and 1999, respectively At December 31, 2001, minimum annual rental commitments under noncancellable operating leases were $311 million m 2002, $24 7 million m 2003, $15 1 million m 2004, $12 2 million m 2005, $10 4 million in 2006 and $18 3 million thereafter NOTE 9: COMMON AND PREFERRED STOCK Common Stock At December 31, 2001, 2000 and 1999, 250,000,000 shares of Common stock were authorized of which 93,761,587, 93,413,244 and 94,199,620 shares were issued and outstanding at December 31,2001, 2000 and 1999, respectively During the year ended December 31, 2001, Cooper purchased 1,000,000 shares of treasury stock at an average price of $41 95 per share and 1,348,343 shares were issued primarily m connection with employee stock plans During the year ended December 31, 2000, Cooper purchased 1,138,500 shares of treasury stock at an average price of $34 52 per share and 352,124 shares were issued primarily in connection with employee stock plans During the year ended December 31, 1999, Cooper purchased 800,000 shares of treasury stock at an average price of $54 99 per share and 750,869 shares were issued primarily m connection with employee stock plans At December 31,2001, Cooper had 14,728,631 shares reserved for the Dividend Reinvestment Plan, grants and exercises of stock options, performance-based stock awards and subscriptions under the Employee Stock Purchase Plan and other plans Under the terms of the Dividend Reinvestment Plan, any holder of Common stock may elect to have cash dividends and up to $24,000 per year m cash payments mvested m Common stock without incurring any brokerage commissions or service charges Under a Shareholder Rights Plan adopted by the Board of Directors m 1997, share purchase Rights were declared as a dividend at the rate of one Right for each share of Common stock. Each Right entities the holder to buy one one-hundredth of a share of Series A Participating Preferred Stock at a purchase price of $225 per one onehundredth of a share or, m certain circumstances Common stock having a value of twice the purchase price Each Right becomes exercisable only m certain circumstances constituting a potential change of control on a basis considered madequate by the Board of Directors The Rights expire August 5, 2007 and, at Cooper's option, may be redeemed prior to expiration for $ 01 per Right Preferred Stock At December 31, 2001 and 2000, Cooper was authorized to issue 1,340,750 shares of Preferred stock with no par value, 10,000,000 shares of $2 00 par value Preferred stock and 2,821,079 shares of $1 00 par value Preferred stock At December 31, 2001 and 2000, no Preferred shares were issued or outstanding NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN Under Cooper stock option plans, officers, directors and key employees may be granted options to purchase Cooper's Common stock at no less than 100% ofthe market pace on the date the option is granted Options generally become exercisable ratably over a three-year period commencing one year from the date of grant and have a maximum term of ten years The plans also provide for the granting ofperformance-based stock awards and restricted stock awards to certain key executives F-14 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A summary of the status of Cooper's fixed stock option plans for officers and employees as of December 31, 2001 and activity during the three years ended December 31, 2001 is presented below Outstanding at beginning of year Granted Exercised Canceled Outstanding at end of year Options exercisable at end of year Options available for grant at end of year Shares 2001 Weighted Average Exercise Price 3,810,497 $43 28 1,740,000 $45 19 (625,260) $42 33 (184,579) $44 09 4,740,658 $44 07 1,866,391 5,116,955 Shares 2000 Weighted Average Exercise Price 2,748,601 $45 94 1,425,800 $37 94 (6,500) $39 06 (357,404) $42 57 3,810,497 $43 28 1,608,117 1,916,174 Shares 1999 Weighted Average Exercise Price 2,144,104 $46 52 1,018,700 $43 52 (286,492) $39 82 (127,711) $50 13 2,748,601 $45 94 1,128,905 3,289,602 Range of Exercise Prices $34 84 - $37 94 $38 13 - $39 06 $43 13 - $46 10 $54 28 - $56 63 Options Outstanding Weighted Shares Average Outstanding Remaining At Contractual 12/31/01 Life 1,316,091 81 257,687 38 2,630,301 80 536,579 56 4,740,658 Weighted Average Exercise Price $37 61 $39 05 $45 24 $56 61 Options Exercisable Shares Exercisable At 12/31/01 311,031 255,020 765,428 534,912 1,866,391 Weighted Average Exercise Price $37 94 $39 06 $44 16 $56 62 During 2001, options to purchase 10,000 shares of common stock were granted to nonemployee directors at an exercise price of $33 66 and options for 4,000 shares were exercised at $42 13 to $49 03 per share During 2000, options to purchase 9,000 shares of Common stock were granted to nonemployee directors at an exercise price of $3 5 19 and options for 4,000 shares were exercised at $ 17 31 per share During 1999, options to purchase 11,000 shares of Common stock were granted to nonemployee directors at an exercise price of $49 03 and options for 4,000 shares were exercised at $14 69 per share At December 31, 2001, options under the director plans for 23,000 Common shares were exercisable at $42 13 to $63 78 per share, and 129,100 shares were reserved for future grants Participants in the Employee Stock Purchase Plan receive an option to purchase Common stock at a price that is the lesser of 85% of the market value on the offering date or 85% of the market value on the purchase date On September 10, 2001, a total of 311,452 shares were sold to employees at $44 63 per share At December 31, 2001, subscriptions for 915,876 shares of Common stock were outstanding at $34 07 per share or, if lower, 85% of the average market price on September 8, 2003, which is the purchase date At December 31, 2001, an aggregate of 2,423,976 shares of Common stock were reserved for future issuance Cooper follows the intrinsic value method of accounting for stock-based compensation plans as prescribed by Accounting Principles Board Opmion No 25, Accounting for Stock Issued to Employees, and related interpretations Accordmgly, no compensation expense is recognized under Cooper's fixed stock option plans or Employee Stock Purchase Plan Compensation expense of $2 7 million, $5 1 million and $6 1 million was recognized m the consolidated financial statements during 2001, 2000 and 1999, respectively for the performance-based and restricted stock awards If compensation expense for all of Cooper's stock-based compensation plans was recognized using the alternative fan value method of accounting under Statement of Financial Accounting Standards No 123, Accounting for Stock-Based Compensation, net mcome and earnings per share would have decreased by approximately 2 0% in 2001, 2 1% in 2000 and 2 3% in 1999 The fan value was estimated on the date of grant, F-15 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants m 2001, 2000 and 1999 respectively dividend yield of 3 5%, 3 5% and 3 0%, expected volatility of 27 5%, 26 4% and 26 4%, risk free interest rates of 5 1%, 6 7% and 5 0% and expected lives of 7 years for 2001, 2000 and 1999 NOTE 11: ACCUMULATED NONOWNER CHANGES IN EQUITY Balance December 31,1998 Current year other nonowner changes in equity Balance December 31,1999 Current year other nonowner changes m equity Balance December 31,2000 Current year other nonowner changes in equity Balance December 31,2001 Minimum Pension Liability $ (3 9) 11 (2 8) 01 (2 7) (0 7) $ (3 4) Loss On Cumulative Derivative Translation Instruments Adjustment (in millions) $- - - - (0 3) $ (0 3) $ (26 1) (40 5) (66 6) (512) (117 8) (6 3) $ (1241) Total $ (30 0) (39 4) (69 4) (51 1) (120 5) (7 3) $ (127 8) Before Tax Amount 2001 Tax (Expense) Benefit Net Amount Minimum pension liability adjustment $ (1 1) Change in fair value of derivatives (10) Reclassification to earnings 05 (0 5) Translation adjustment (9 7) Other nonowner changes m equity $ (11 3) $ 04 04 (0 2) 02 34 $ 40 $ (0 7) (0 6) 03 (0 3) (6 3) $ (7 3) Before Tax Amount 2000 Tax (Expense) Benefit (m millions) Net Amount Before Tax Amount 1999 Tax (Expense) Benefit $ 01 $ - $ 01 $ 19 $ (0 8) _ _ (78 8) _ _ 27 6 _ _ (512) _ _ (62 3) _ 21 8 $ (78 7) $ 27 6 $ (51 1) $ (60 4) $ 21 0 Net Amount $ 11 _ _ (40 5) $ (39 4) F-16 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12: INCOME TAXES Components of income from continuing operations before income taxes U S operations Foreign operations Income from continuing operations before income taxes Year Ended December 31, 2001 2000 1999 (in millions, except for percentages) $ 2119 104 5 $ 3164 $ 433 7 1162 $ 549 9 $ 390 7 127 9 $ 518 6 Components of income tax expense Current U S Federal U S state and local Foreign Deferred U S Federal U S state and local Foreign Income tax expense Total income taxes paid $ 60 8 62 23 2 90 2 (43 9) 25 63 (35 1) $ 55 1 $ 100 8 $ 640 13 28 4 93 7 72 8 194 66 98 8 $ 192 5 $ 132 3 $ 84 3 62 36 2 126 7 48 0 104 16 60 0 $ 186 7 $ 132 5 Effective tax rate reconciliation U S Federal statutory rate State and local income taxes Foreign statutory rate differential Nondeductible goodwill Foreign Sales Corporation Tax credits Reduction in tax reserves Other Effective tax rate attributable to contmuing operations 35 0% 14 (3 5) 43 (14) (0 2) (15 8) (2 4) 17 4% 35 0% 22 (1 2) 24 (0 8) (14) (1 2) 35 0% 35 0% 19 (1 5) 23 (0 7) (0 3) (0 7) 36 0% A $50 million U S Federal tax benefit was recorded m 2001 as a result of recent favorable Appellate level third party court decisions related to certain income tax return issues These court decisions have validated Cooper's tax return treatment of similar transactions executed m 1997 and prior years that are bemg contested by the Internal Revenue Service In light of the Fifth Circuit Court decision, issued m December 2001, Cooper concluded that the tax reserve related to these transactions is no longer required F-17 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Components of deferred tax assets and liabilities Deferred tax assets Postretirement and other employee welfare benefits Accrued liabilities Minimum pension liability Capital loss carryforward(1) . Other . Total deferred tax assets . Valuation allowance(1) . .. . Deferred tax liabilities Property, plant and equipment and intangibles Inventories . Employee stock ownership plan . Pension plans . . . Other .. . . Total deferred tax liabilities........................... .. Net deferred tax asset . .. December 31, 2001 2000 (m millions) $ 66 4 153 1 22 54 9 58 5 335 1 (47 0) $ 80 1 134.0 18 59.1 55 1 330 1 (47 0) (126 9) (24 9) (24 3) (32.4) (0 1) ... (208 6) . $ 79 5 (107 0) (18 9) (21 8) (34 2) (22 3) (204 2) $ 78 9 ^ Cooper incurred a capital loss on the sale of the Automotive Products segment Cooper limited the amount of tax benefits recognized based on an evaluation of the amount of capital loss carryforward that is expected to be realized The capital loss carryforward is available to offset capital gains through 2003 The U S Federal portion of the above provision mcludes U S tax expected to be payable on the foreign portion of Cooper's income before mcome taxes when such earnings are remitted Cooper's liabilities at December 31, 2001 and 2000 include the additional U S tax estimated to be payable on substantially all unremitted earnings of foreign subsidiaries NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS Cooper and its subsidiaries have numerous defined benefit pension plans and other postretirement benefit plans The benefits provided under Cooper's various postretirement benefit plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescriptions and life insurance, with medical care accounting for approximately 90% of the total Current employees, unless grandfathered under plans assumed in acquisitions, are not provided postretirement benefits other than pensions The vast majority of the annual other postretirement benefit expense is related to employees who are already retired F-18 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Change in benefit obligation Benefit obligation at January 1 Service cost Interest cost Benefit payments Settlements Actuanal (gam) loss Acquisitions Other Benefit obligation at December 31 Change in plan assets Fair value of plan assets at January 1 Actual return on plan assets Employer contributions Benefit payments Settlements Acquisitions Other Fair value of plan assets at December 31 Funded status Unrecognized actuanal (gam) loss Unrecognized pnor service cost Other Net amount recognized Pension Benefits Other Postretirement Benefits 2001200020012000 (m millions) $ 584 3 16 2 42 5 (44 4) - 23 1 06 622 3 $ 565 3 14 9 41 0 (27 6) (25 7) (5 9) 25 5 (3 2) 584 3 $ 1122 02 82 (13 3) - 34 0 01 1414 $ 1165 01 88 (13 6) - (0 6) 22 (1 2) 1122 616 1 (3 6) 54 (44 4) (3 1) 570 4 (519) 85 2 29 04 $ 36 6 615 3 10 7 76 (27 6) (25 7) 39 1 (3 3) 616 1 31 8 74 01 06 $ 39 9 13 3 (13 3) - - - (141 4) (53 5) (1 8) - $ (196 7) 13 6 (13 6) - - (112 2) (96 0) (3 0) - $ (2112) Amounts recognized in the balance sheet consist of Prepaid benefit asset Accrued benefit liability Intangible asset Accumulated other non-owner changes in equity Net amount recognized $ 103 2 (73 4) 12 56 $ 36 6 $ 105 4 (715) 15 45 $ 39 9 $(196 7) - - $ (196 7) $(211 2) - - $ (211 2) The projected benefit obligation and accumulated benefit obligation for Cooper's unfunded defined benefit pension plans were $69.6 million and $65 2 million as of December 31, 2001, and $69 0 million and $64 4 million as of December 31,2000, respectively F-19 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of unrecognized transition (asset) obligation Amortization of prior service cost Recognized actuarial (gain) loss Settlement/curtailment Net periodic benefit cost Pension Benefits Other Postretirement Benefits 2001 2000 1999 2001 (m millions) 2000 1999 $ 162 42 5 (49 7) $ 14 9 41 0 (52 1) $ 154 38 1 (50 7) $ 02 82 - $ 01 88 - $ 02 104 - 02 03 21 $ 11 6 02 (2 0) (3 6) $ (16) (1 5) 01 (0 8) 01 $ 07 - (1 2) (8 5) - $ (13) - (1 4) (9 3) - $ (18) - (15) (7 5) - $ 16 Net periodic pension benefit costs includes a $3 6 million settlement gam in 2000 primarily resultmg from the 1999 voluntary severance program (Note 2) Weighted average assumptions as of December 31 Discount rate Expected return on plan assets Rate of compensation increase Pension Benefits_________________ 2001 2000 2001 Other Postretirement Benefits 2000 6 00%-7 25% 7 00% - 8 50% 3 00% - 4 50% 6 00%-7 75% 7 00% - 8 50% 3 00% - 4 50% 7 25% - 7 75% - For other postretirement benefit measurement purposes, a 10 0% annual increase m the per capita cost of covered health care benefits was assumed for 2002 The rate was assumed to decrease gradually to 5 3% for 2007 and remam at that level thereafter A one-percentage-point change m the assumed health care cost trend rates would have the following effects Effect on total of service and mterest cost components Effect on the postretirement benefit obligation 1-PercentagePoint Increase 1-PercentagePomt Decrease (in millions) $ 05 $ (0 5) $ 86 $ (7 8) During 2001, 2000 and 1999, expense with respect to domestic and foreign defined contribution plans (primarily related to various groups of hourly employees) totaled $16 4 million, $17 6 million and $17 5 million, respectively NOTE 14: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS All full-tune domestic employees, except for certain bargammg unit employees, are eligible to participate in the Cooper Retirement Savings and Stock Ownership Plan ("CO-SAV") Under the terms of the Plan, employee savmgs deferrals are partially matched with contributions by Cooper of Common stock consisting of either an allocation of shares m Cooper's Employee Stock Ownership Plan ("ESOP") or treasury shares issued to the ESOP F-20 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The ESOP purchased Cooper Common stock which was financed through external borrowings and loans from Cooper The external ESOP debt matured m July 1999 and was frilly repaid The purchases funded by loans between the ESOP and Cooper were treated as eliminated intercompany loans for financial statement purposes These intercompany loans were paid m full durmg 2001 Cooper made annual contributions to the ESOP to fund the payment of principal and interest As the debt was repaid, unallocated shares were allocated to CO-SAV participants to satisfy Cooper's matchmg obligation or to replace dividends on allocated shares with Cooper Common shares m years prior to 2000 Dividends paid on unallocated ESOP shares of $0 1 million, $0 5 million and $10 million durmg 2001,2000 and 1999, respectively, were used to reduce the amount of cash requned to fund principal and interest payments on ESOP debt Dividends paid on allocated ESOP shares of $3 8 million durmg 1999 were used to pay additional principal and mterest payments m order to allocate shares equivalent to the dividend amount to participants m the CO-SAV plan Cooper contributed an additional $8 4 million, $9 6 million and $13 5 million m cash to the ESOP durmg 2001, 2000 and 1999, respectively, to fund principal and mterest payments on ESOP debt The number of allocated, committed to be allocated, and unallocated ESOP shares at December 31, 2001 and 2000 is summarized below Allocated to CO-SAV participant accounts Committed to be allocated Unallocated . . . Shares Purchased Pnor to 1994 2001 2000 2,950,973 2,783,473 1,111 166,389 Shares Purchased In 1994 2001 2000 928,837 928,837 Shares purchased by the ESOP pnor to 1994 are accounted for in accordance with Statement of Position 76-3, Accounting Practicesfor Certain Employee Stock Ownership Plans and Emerging Issues Task Force Issue 89-8, Expense Recognitionfor Employee Stock Ownership Plans Compensation expense is equal to Cooper's COSAV matchmg obligation, adjusted for the difference between the fair market value and cost of the shares committed to be allocated Compensation expense is reduced by the amount of dividends paid on unallocated ESOP shares available for future matchmg All shares issued to the ESOP are considered outstanding for purposes of computing earnings per share Shares purchased by the ESOP m 1994 are accounted for m accordance with Statement of Position 93-6, Employers' Accountingfor Employee Stock Ownership Plans ("SOP 93-6") SOP 93-6 was effective for fiscal years beginning after December 15, 1993. Compensation expense is recognized at the fan value of the shares committed to be allocated which is equal to the amount of Cooper's CO-SAV matchmg obligation Unearned employee stock ownership plan compensation is credited as shares are committed to be allocated based on the cost of the shares to the ESOP The difference between the fan market value and cost of the shares committed to be allocated is recorded as an adjustment to capital m excess of par value Dividends paid on unallocated shares are recorded as a reduction of ESOP debt, accmed mterest or accrued employee benefits Unallocated shares are not treated as outstanding m the earnings per share computation Compensation expense for the CO-SAV plan and the ESOP was $23 0 million, $20 2 million and $18 6 million m 2001, 2000 and 1999, respectively F-21 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15: INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION Industry Segments Cooper's operations consist of two segments Electrical Products and Tools & Hardware Markets for Cooper's products and services are worldwide, with the United States being the largest market The Electrical Products segment manufactures, markets and sells electrical and circuit protection products, including fittings, support systems, enclosures, wiring devices, plugs, receptacles, lighting fixtures, fuses, emergency lighting, fire detection systems and security products for use m residential, commercial and industrial construction, maintenance and repair applications The segment also manufactures, markets and sells products for use by utilities and in industry for electrical power transmission and distribution The Tools & Hardware segment manufactures, markets and sells hand tools for industrial, construction and consumer markets, automated assembly systems for industrial markets and electric and pneumatic industrial power tools for general industry, primarily automotive and aerospace manufacturers The performance of businesses are evaluated at the segment level and resources are allocated among the segments The Cooper executive responsible for each segment further allocates resources between the various division operating units that compose the segment and, in international markets, determines the integration of product lines and operations across division operating units The accounting policies of the segments are the same as those descnbed m the summary of significant accounting policies m Note 1 Cooper manages cash, debt and income taxes centrally Accordingly, Cooper evaluates performance of its segments and operatmg units based on operatmg earnings exclusive of financing activities and income taxes Nonrecurring and unusual items are excluded from the evaluations The segments are managed separately because they manufacture and distribute distinct products Intersegment sales and related receivables for each of the years presented were insignificant Fmancial information by industry segment was as follows Electrical Products Tools & Hardware Total management reporting Segment nonrecurring and unusual items Net segment operatmg earnings General Corporate Nonrecurring gains (charges) Expense Interest expense, net Consolidated income from continuing operations before income taxes Corporate assets Consolidated assets Revenues ______________________ Operating Earnings_________ Year Ended December 31, Year Ended December 31, 2001 2000 1999 2001 2000 1999 (in millions) Total Assets Year Ended December 31, 2001 2000 1999 $ 3,485 5 724 0 $ 4,209 5 $ 3,659 2 800 7 $ 4,459 9 $ 3,060 9 808 0 $ 3,868 9 $ 437 0 68 6 505 6 $ 585 0 97 7 682 7 $ 516 7 97 9 614 6 $ 3,482 9 816 3 4,299 2 $ 3,660 9 844 8 4,505 7 $ 2,969 5 897 8 3,867 3 (24 0) 481 6 - 682 7 (4 5) 610 1 (50 1) (30 4) (84 7) (32 5) (100 3) 08 (37 1) (55 2) $ 3164 $ 549 9 $ 5186 312 2 $ 4,611 4 283 6 $ 4,789 3 276 1 $4,143 4 F-22 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2001 Depreciation Goodwill amortization Nonrecurring charges Capital expenditures Investment in unconsolidated affiliates 2000 Depreciation Goodwill amortization Capital expenditures Investment in unconsolidated affiliates 1999 Depreciation Goodwill amortization Nonrecumng gains Nonrecurring charges Capital expenditures Investment m unconsolidated affiliates Geographic Information Electrical Products Tools & Hardware Corporate (in millions) Consolidated Total $ 91 9 51 5 24 0 80 8 17 0 $ 29 6 92 25 3 - $ 42 - 50 1 90 - $ 125 60 74 115 17 $ 83 1 49 1 128 9 22 2 $ 30 7 94 26 8 - $ 21 - 19 2 - $ 115 58 174 22 $ 69 6 37 7 30 1175 11 4 $ 29 4 94 15 36 5 - $ 15 - 08 11 8 - $ 100 47 0 4 165 11 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 United States Germany United Kingdom Canada Mexico Other foreign countries 2001 $ 3,240 9 218 8 224 6 149 9 141 1 234 2 $ 4,209 5 Revenues_______________ ___________Long-Lived Assets 2000 1999 2001 2000 (m millions) 1999 $ 3,500 4 180 0 232 6 158 5 150 4 238 0 $ 4,459 9 $ 2,944 5 223 1 179 4 133 5 120 8 267 6 $ 3,868 9 $ 2,254 4 121 3 367 7 25 126 0 88 3 $ 2,960 2 $ 2,319 2 135 0 404 8 34 100 8 91 0 $ 3,054 2 $ 1,912 6 149 5 443 9 44 79 0 87 4 $ 2,676 8 F-23 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) International revenues by destination, based on the location products were delivered, were as follows by segment Electrical Products Tools & Hardware . 2001 $ 856 1 360 7 $ 1,216 8 International Revenues 2000 (m millions) $ 881 0 300 9 $ 1,1819 1999 $ 775 9 351 0 $ 1,126 9 NOTE 16: FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS Derivative Instruments and Hedging Activities On January 1, 2001, Cooper adopted Statement of Financial Accounting Standards No 133, Accountingfor Derivative Instruments and Hedging Activities ("SFAS No 133"), as amended SFAS No 133 requires that all derivatives be recognized as assets and liabilities and measured at fair value For derivative instruments that are not designated as hedges, the gam or loss on the denvative is recognized m earnings currently If the derivative is designated as a fan value hedge, the gam or loss on the denvative and the offsetting loss or gam on the hedged asset, liability or firm commitment is recognized m earnings For denvative instruments designated as a cash flow hedge, the effective portion of the gam or loss on the derivative instrument is reported as a component of accumulated nonowner changes in equity and reclassified mto earnings m the same penod that the hedged transaction affects earnings The ineffective portion of the gam or loss is immediately recognized m earnings The cumulative effect of adopting the new standard was not material to Cooper's 2001 consolidated results of operations, financial position or cash flows Cooper enters mto foreign currency forward exchange contracts and commodity futures contracts to reduce the risks of adverse changes m foreign exchange rates and commodity prices Cooper does not enter mto speculative denvative transactions As a result of havmg sales, purchases and certain intercompany transactions denominated m currencies other than the functional currencies used by Cooper's busmesses, Cooper is exposed to the effect of foreign exchange rate changes on its cash flows and earnings Cooper enters mto foreign currency forward exchange contracts to hedge significant foreign currency denominated transactions for periods consistent with the terms of the underlying transactions Contracts generally have maturities that do not exceed one year Foreign currency forward exchange contracts executed to hedge a recognized asset, liability or firm commitment are accounted for as fair value hedges The net gain on contracts designated as fair value hedges was not material during 2001 Foreign currency forward exchange contracts executed to hedge forecasted transactions are accounted for as cash flow hedges The net gam on contracts designated as cash flow hedges was not material m 2001 Cooper also enters mto certain foreign currency forward exchange contracts that are not designated as hedges These contracts are mtended to reduce cash flow volatility related to intercompany financing transactions Cooper enters mto commodity futures contracts to reduce the volatility of price fluctuations on a portion of its forecasted annual raw material purchases These instruments are designated as cash flow hedges The net loss on commodity futures contracts was not material m 2001 F-24 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Gams or losses on derivative instruments are reported m the same lme item as the underlying hedged transaction in the consolidated statements of mcome At December 31, 2001, Cooper expects to reclassify $0 3 million of net losses on derivative instruments designated as cash flow hedges from accumulated nonowner changes m equity to earnings during the next twelve months The amount of discontinued cash flow hedges during 2001 was not material The table below summarizes, by currency, the U S dollar equivalent contractual amounts of Cooper's forward exchange contracts at December 31, 2001 and 2000 _______ December 31, 2001 2000 (m millions) British Pound Sterling . . $ 08 $ 17 6 Euro . 85 15 1 Mexican Peso .. 44 22 Swiss Franc Australian Dollar .. . .. . 29 27 - 22 Norwegian Krone .. . 1 5 - Other .. 20 1 2 $ 20 1 $ 41 0 Other Instruments In the normal course of business, Cooper executes letters of credit, performance bonds and other guarantees that ensure Cooper's performance or payment to third parties that are not reflected m the consolidated balance sheets The aggregate notional value of these instruments was $112 0 million and $1119 million at December 31, 2001 and 2000, respectively. 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 losses to occur m connection with these instruments The following transactions were implemented to partially align Cooper's mterest rate exposure profile with its short term mterest rate expectations in an economically efficient manner that is consistent with its tax position During 2001, Cooper sold at a premium U S Treasury securities due November 2002 Cooper obtained these securities pursuant to a repurchase agreement containing provisions that limit Cooper's mterest rate exposure under this agreement to a maximum cost of $7 0 million The repurchase agreement will be settled immediately pnor to the maturity of the securities Settlement of this transaction will not require any financing by Cooper and this transaction does not create an asset or liability, other than as described above The face amount of the securities was $10 billion Also during 2001, Cooper purchased at a discount Federal Home Loan Mortgage Corporation Notes due February 2003 and immediately transferred these notes pursuant to a securities loan agreement Subsequently, Cooper eliminated any potential cost under the securities loan agreement and realized a gam of approximately $1 9 million The securities loan agreement will be settled immediately pnor to the matunty of the notes Settlement of this transaction will not require any financing by Cooper and this transaction does not create a liability The face amount of the notes was $480 million In 1999 Cooper entered into a similar executory contract Upon settlement of the contract m 2000, Cooper realized a $7 3 million cost, its maximum exposure under the 1999 executory contract F-25 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Concentrations ofCredit Risk Concentrations of credit risk with respect to trade receivables are limited due to the wide variety of customers as well as their dispersion across many different geographic areas with no one customer receivable exceedmg 4 8% of accounts receivable Fair Value ofFinancial Instruments Other than Derivatives Cooper's financial instruments other than derivative instruments, consist primarily of cash and cash equivalents, trade receivables, trade payables and debt instruments The book values of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values Cooper had approximately $ 1 3 billion and $ 1 5 billion of debt instruments at December 31, 2001 and 2000, respectively The book value of these instruments was approximately equal to fair value at December 31, 2001 and 2000 NOTE 17: SUPPLEMENTAL CASH FLOW INFORMATION Assets acquired and liabilities assumed or incurred From the acquisition of busmesses Fan value of assets acquired . . Liabilities assumed or incurred . . . ... Cash used to acquire busmesses, net of cash acquired .. Year Ended December 31, 2000 1999 (m millions) S 684 0 (103 6) $ 580 4 $ 522 9 (88 3) $ 434 6 NOTE 18: NET INCOME PER COMMON SHARE Basic Diluted Year Ended December 31, Year Ended December 31, 2001 2000 1999 2001 2000 1999 ($ in millions, shares in thousands) Income from continuing operations Charge from discontinued operations $261 3 (30 0) $ 357 4 - $ 331 9 - $261 3 (30 0) $ 357 4 - $ 331 9 - Net income applicable to Common stock $231 3 $ 357 4 $ 331 9 $231 3 $ 357 4 $ 331 9 Weighted average Common shares outstanding Incremental shares from assumed conversions Options, performance-based stock awards And other employee awards Weighted average Common shares and Common share equivalents 94,008 93,524 94,046 94,008 93,524 94,046 869 94,877 626 94,150 896 94,942 Options and employee awards are not considered m the calculations if the effect would be antidilutive F-26 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 19: UNAUDITED QUARTERLY OPERATING RESULTS Revenues Cost of sales Selling and administrative expenses Goodwill amortization Nonrecurring charges Interest expense, net Income from contmumg operations before income taxes Income tax expense (benefit) Income from contmumg operations Charge related to discontinued operations Net income Income per Common share Basic Income from contmumg operations Charge from discontinued operations Net income Diluted Income from contmumg operations Charge from discontinued operations Net mcome _____________ 2001 (by quarter)______________ 1_____ 2 3 ____ 4 (in millions, except per share data) $1,095 1 768 9 199 5 14 8 25 1 $ 1,073 0 744 7 186 0 15 3 22 4 $ 1,051 8 730 5 175 3 153 18 8 $ 989 6 699 8 168 9 153 74 1 18 4 86 8 104 6 111 9 13 1 30 4 36 6 37 6 (49 5) 56 4 68 0 74 3 62 6 -- - (30 0) $ 56 4 $ 68 0 $ 74 3 $ 32 6 $ 60 - $ 60 $ 60 - $ 60 $ 72 - $ 72 $ 72 - $ 72 $ 79 - $ 79 $ 78 - $ 78 $ 67 (32) $ 35 $ 66 (32) $ 34 Revenues Cost of sales Selling and administrative expenses Goodwill amortization Interest expense, net Income before mcome taxes Income taxes Net mcome Income per Common share Basic Diluted 2000 (by quarter) 1 234 (in millions, except per share data) $ 1,038 9 701 7 176 4 13 4 183 $ 1,168 2 794 5 189 4 14 7 26 6 $ 1,145 8 773 1 188 2 154 28 6 $ 1,107 0 749 0 178 9 15 0 26 8 129 1 45 2 143 0 50 1 140 5 49 1 137 3 48 1 $ 83 9 $ 92 9 $ 91 4 $ 89 2 $ 89 $ 89 $ 1 00 $ 99 $ 98 $ 97 $ 95 $ 95 F-27 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 20: OTHER EVENTS On August 1, 2001, Danaher Corporation ("Danaher") announced it had made an unsolicited proposal to Cooper for a merger through a stock and cash transaction valued by Danaher at $54 to $58 per Cooper share, subject to conducting due diligence procedures On August 8, 2001, Cooper's Board of Directors unanimously rejected Danaher's proposal and authorized management to explore all strategic alternatives that would maximize shareholder value mcludmg mergers, sales, strategic alliances, acquisitions or other similar strategic alternatives On Februaiy 13, 2002, Cooper announced that it completed its strategic alternatives review process After careful review of all the available alternatives with management and its financial advisors, Cooper's Board of Directors concluded that it is m the best interests of Cooper's shareholders to move forward with its plan to reincorporate m Bermuda, as previously announced on June 11, 2001 Cooper's announcement noted that the strategic alternatives review process was very careful, deliberate and complete m analyzing how best to maximize shareholder value, however, as a result of intervening circumstances including the tragic events of September 11, 2001, the bankruptcy of Federal-Mogul and a very difficult business environment. Cooper received no definitive proposals to acquire the Company as a whole or m parts Under its plan to change its place of incorporation from Ohio to Bermuda, Cooper Industries, Ltd , a newly formed Bermuda corporation, will become the parent holdmg company of Cooper Industries, Inc Upon completion of the reorganization, each share of Cooper Industries, Inc common stock will automatically convert mto a share of Cooper Industries, Ltd common stock and will have substantially the same attributes as Cooper Industries, Inc common stock Cooper Industries, Ltd shares will be listed on the New York Stock Exchange under the "CBE" symbol, the same symbol under which the Company's common stock currently trades A special meetmg of the shareholders of Cooper Industries, Inc will be called to vote on the proposed transaction F-28