Houston-based Cooper Industries Ltd. announced that it has reassessed its year-end 2003 accrual for discontinued operations and, as a result, for the year ended Dec. 31, 2003, has recorded an after-tax discontinued operations charge of $126.0 million, or $1.34 per diluted share. The company concluded the additional charge was required in order to adjust its accrual for contingent liability exposure related to the Federal-Mogul Corporation bankruptcy.
Cooper Industries sold its automotive products business to Federal-Mogul Corporation in October 1998 and was indemnified for liabilities related to the divested business, pursuant to a purchase and sale agreement. On Oct. 1, 2001, Federal-Mogul and several of its affiliates filed a Chapter 11 bankruptcy petition and indicated that Federal-Mogul may not honor its indemnity obligations to Cooper.
In the fourth quarter of 2001, with the assistance of independent advisors, Cooper completed a thorough analysis of its potential exposure for asbestos liabilities in the event Federal-Mogul decided to reject the terms of the 1998 purchase and sale agreement. The analysis included a review of the 20-year history of asbestos claims; the average indemnity payments for resolved claims; the jurisdictions in which claims had been filed; the independent advisors’ data on the incidence of asbestos exposure and diseases in various industries; existing insurance coverage and contractual indemnities.
Cooper’s fourth-quarter 2001 analysis of contingent liability exposure assumed that the liabilities would be settled within the Federal-Mogul bankruptcy proceedings. This analysis also assumed that representatives of Federal-Mogul, its bankruptcy committees and future claimants (the “Representatives”) would reach similar conclusions regarding potential future liabilities and insurance recoveries as Cooper did based on the independent advisors’ analysis.
Based on the status of recent negotiations, Cooper has now concluded that it is probable that Federal-Mogul will not honor the terms of the 1998 purchase and sale agreement. Cooper has also concluded that the Representatives would require any negotiated settlement through the Federal-Mogul bankruptcy to be at the higher end of the independent advisors’ liability analysis and reflect lower insurance recovery assumptions and somewhat higher administrative costs than originally anticipated.
During late February and early March 2004, Cooper reassessed its accrual related to this matter based on the current status of the negotiations with the Representatives. Cooper also reassessed the liability and insurance receivable that would be required to be recorded if this matter is not settled within the Federal-Mogul bankruptcy.
As a result, Cooper has concluded that resolution within Federal-Mogul’s proposed asbestos trust would likely be within the range of the liabilities, net of insurance recoveries, that Cooper would accrue if this matter were not settled within the Federal-Mogul bankruptcy. Accordingly, Cooper recorded a $126.0 million after-tax discontinued operations charge, net of a $70.9 income tax benefit, in the fourth quarter of 2003.
Cooper is continuing negotiations with the Representatives and, at this time, the exact manner in which this issue will be resolved is not known. However, the additional charge was required in order to adjust the existing accrual to an amount that will be within the likely range of outcomes. At Dec. 31, 2003, the accrual for potential liabilities related to the 1998 sale of the company’s automotive products business and the related Federal-Mogul bankruptcy was $252.5 million.
After giving effect to the charge, the company had a fourth-quarter 2003 net loss of $51.3 million, or $.54 per diluted share. For the full year 2003, net income was $148.3 million, or $1.58 per diluted share. The charge does not impact 2003 consolidated revenues, income from continuing operations or cash flows previously reported by the company on Jan. 22, 2004. Also, the company’s outlook for 2004 earnings per share from continuing operations remains unchanged.
Cooper Industries Ltd., with 2003 revenues of $4.1 billion, is a global manufacturer of electrical products and tools and hardware.
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